1 Million in equity over 20 Single Family Homes - Then what?

Question

Full disclosure, this is not my current situation, but in the 10 year plan, and I'm actively taking steps toward it.

So my wife and I have been basically setting aside much of our savings, and acquiring a couple single family residences each year.  Even estimating on the low end, with little to no appreciation, we should have about 1 Million dollars in equity spread over 20 single family homes.  My question is - what then?  Realizing many things could change in the next 10 years, I'm always wondering about the future.

I've thought of our options after reaching this point.  Perhaps someone can shine some light on these options, or open up new ideas on what to do in this situation, or rethink our "acquire 2 SFH per year" strategy.  But since right now that is what we are doing, 10 years down the road, I see options as this:

1. Become a hard money lender.  ~15% interest on 1 million certainly surpasses our "freedom number"

2. Sell the SFHs and invest in commercial real estate - worry about one building instead of 20 scattered about.

3. Sell SFHs and buy one big multi-family unit, for same reasons as above.

4. Continue investing in SFH.  We're currently self managing these homes, but would turn it over to a management company as we grew our portfolio.

5. Focus on flipping a few houses a year without the need to borrow money.

Or perhaps a path a never thought of...  Ideally, I would like to have a passive income stream that allowed me to travel frequently.

Thank you for any input.

Mike Dymski · Answer

Option #6 - Invest in commercial syndications (apartments, self-storage, mobile home parks, retail, industrial).  With your SFR experience, you would know how to pick good opportunities and operators.

Selling or exchanging 20 SFRs for a single property is impractical...would likely have to involve a portion of the portfolio (or a discount to a single buyer).

Many investors would consider having a 3rd party PM handling 20 SFRs to be a limited amount of work on your part.

Dave Foster · Answer

@Ben Kirchner, This is way esoteric for all the gang wanting to give you specific direction.  But Heed the words of Hippocrates - "First do no harm".  You need a line in the sand beyond which you vow to never go backward.  Before you cross that line risk and boldness are required.  Once you get past that line - maybe the double comma line of @Steve Vaughan or whatever you determine.  It's the point at which you stop growing to get somewhere.  You've arrived and growth is not never pursued at the risk of going back over the line.  Poker players call it rat holing.

Everyone of your choices is incredibly valid and incredibly wrong depending on the market.  10 years is probably way into another market.  So instead of trying to pick a sector that may be the absolute wrong or right call - learn to read macros and invest defensively where ever you find yourself when that magic moment occurs.  I see a lot of people getting themselves stuck in pursuit of a particular strategy when that strategy is what's in vogue at the moment or was the right thing a year ago but not now.

The market will talk to you.  You need only listen.  meanwhile one step at a time.  And be ready.

Steve Vaughan · Answer

One day you'll look up after doing a PFS for a lender or someone and see double commas.  Congrats! Overall I imagine it's not the get ready to order fancy drinks on the beach forever moment we dreamed of. But it is a big deal and something to strive for.

As you mature in the buy and hold game, your tolerance for drama and problem properties reduces. The best thing I did was say 'I will miss you' to problem tenants and houses.  LLing doesn't follow the Pareto principal of 80/20, more like 93/7. Cut that 7% out of your life for sanity. It takes a conscious effort.

I guess what I'm saying is it isn't a sell all or keep slogging question, but hitting double commas is a great time to review.  The beauty of RE vs MFs or annuities is you don't have to sell the golden geese to get the eggs. You can have both, especially if you are mindful of your heartburn levels and tax consequences.  Nothing sadder than to see someone sell all in 1 calendar year only to get hammered the following April.  Or to 1031 blindly i to something out of state that deosn't work out or worse.  It took a long time to build at 2-3 per year. Transitioning slowly with purpose is what I'm doing. Good discussion!

Joe Splitrock · Answer

@Ben Kirchner I am curious why you focused on the equity number? Are you paying all cash for the properties or do you intend to have them paid off in 10 years? Equity by itself doesn't do anything unless you cash out and redeploy as you mentioned.

A more important question is what is your monthly cash flow projected to be on those 20 homes in 10 years? Assuming that number surpasses your freedom number, then there is no reason to do anything.

@Jeff Smith is right that there is a tipping point where self managing becomes difficult. Size gives you economy of scale, whether that is more houses or multifamily.

Steve K. · Answer

I agree totally with @mike dymski

Steven Gesis · Answer

Ben Congratulations! Seeing and setting your goal is halfway to achieving your goal, as you think about the future, much will change and your goals may shift. Below are some answers to your questions as you move forward:

1. Hard Money Lending is its own game, fairly saturated market, but sure why not --- 15% is strong

2. Worrying about (1) building rather than (20) scattered site sounds sexy, as long as the return is the same as the (20) - Multifamily comes with its own challenges, in my experience multi-family tenants stay shorter durations than single family homes, but this is also said with some reservation as it depends on the location of your multifamily. As the market heats up, as do the prices on multifamily and cap rates seem to go lower and lower. In your particular segment of building type you defined as 20 unit, this is a segment not targeted by large investors, so you may be able to squeeze one out from an owner-operator looking to unload.

3. As you scale the size of the multifamily, your risk tends to move in parallel with it, especially if you only plan on having (1) property site, as with anything else true scale is risk spread over a plethora of property.

4. Why not continuing to bet on the horse that's getting you to the finish line and winning the race for you at this time?

5. Flipping is another animal, in my experience, it requires more heavy lifting, larger capital exposure, longer duration and much more risk - personally use to love flipping, not so much anymore....... its exciting but I prefer the cash flow over time and the fact that it is recurring, flip you may earn a "phat stack" but thats it, now back in the hunt..... ????

Steve Vaughan · Answer

Forgot what I am doing to make my cashflow earn it's keep. For now I'm  paying off my 2 remaining seller financed apt bldg mortgages. They are at 6 & 6.5%.  When those are gone I'll actually have to apply myself and 50% more of it. Guaranteed and hassle-free, tax-free 6-6.5% COC return is good enough for me anymore.

Thomas S. · Answer

Your options 1-5 are not passive.

Best option if you want to retire is to sell and re deploy the equity in a vehicle that will return a fairly consistent income. ROI in real estate will be much lower than something like a income fund. Low to moderate risk should return a fairly consistent return of 8-10%. That is a good return to live off of for retirement although you would be safer with 2M invested..

Good income with no work and no responsibilities beyond meeting periodical with your financial advisor.

Omar Khan · Answer

@Ben Kirchner Great points raised by @Jeff Smith

It all depends on what you plan on doing (and knowing that 10 years in advance is difficult, if not impossible). For instance, you could stick with SFRs but move to a higher quality property i.e. potential for more capital appreciation.

Alternatively, instead of selling your SFR portfolio, you could take your earnings and start investing commercial real estate on the side. This way you would get more exposure to MF investments before the 10 year mark. You will set yourself up better that way as you be more exposed to the business side of things.

After a certain level, it's hard to scale a SFR portfolio or gain appreciable economies of scale. Hence, why a lot of successful folks either move to MF or skip SFR and go directly for MF.

Jeff Smith · Answer

Hey Ben, I have a similar thought pattern to you about the 10 year plan. I spoke with a friend of mine who started in the single-family and then kept with it and got to the tune of over 100 single-family homes. What he realized is that there is a critical mass point in working so many houses that it becomes too burdensome to manage all of them, but it's not profitable to hire a management company either. He had to pick up about 50 in a single year in order to make the numbers work and build his own property management company with himself as the sole customer. Apparently it was a very difficult endeavor, but he isn't the first one to have done it either.

My personal plan is to 1031 my houses (once I hit about 15 homes) into a single multi-family property as an IRO. At that point, your return on investment should be much higher as you are deferring the taxes which allows your wealth to grow faster.

Of course, this is all a guess, and I imagine by the time 10 years arrives, you and I will have dramatically changed our approach! I hope more people will post to this topic with their experiences.

1 Million in equity over 20 Single Family Homes - Then what?

Most Popular Reply