How did you buy your second investment property?

[Thomas W.]

A lot of people talk about how they got the downpayment for their first property, whether it was by saving their money, working with an HML, getting it from friends and family, but once you get your first rental property and it's cash flowing say, $500/month where do you get the cash for a downpayment on your next property.

By my math, even a good cash flowing property that's getting it's mortgage paid down would still take 2-3 years until you could refinance for a down payment on a second property. Is there something I'm missing when I hear about people buying "6 investment properties in one year"?

[Jim K.]

My second investment property was a free and clear tax foreclosure bought at the local sheriff's sale. And I bought my third investment property a month later and my fourth investment property eight months after that.

@Thomas W.

There's an unspoken assumption in what you write that most even moderately successful RE investors start from zero cash reserves, save money from their regular jobs and make money through wholesaling and flips with OPM, and then fund their property acquisitions out of their flipping and wholesaling. That's not usually how it works in the real world. It's nice when it does, sure, but in most cases it takes years of saving and investing LOTS OF YOUR OWN MONEY to start.

Once you have some cash in the game there's plenty of stuff you can do to generate more money, like BRRRR, selling properties that have appreciated, more targeted flips done with your money to raise more money, working with hard-money lenders using your real estate as security, and the list gets longer and longer the more properties you have and the more experienced you become.

But the number of people who get into this at first through wholesaling and flipping and successfully make money at these two no-money-down strategies, enough to move on to buying investment properties with the cash their business generates, is really quite small in most markets. Wholesaling is far and away the most difficult way to make money in this game and takes the most hard-won knowledge to do successfully again and again. Flipping requires a number of quality relationships right from the start to be profitable from the get-go.

This is what happens all too often: people go to guru seminars and then get out and try to go through lots of houses to find a great wholesale deal, only to fall flat on their faces, because they underestimate how difficult, risky, and expensive it can be. They also don't understand that the main purpose of the guru seminar they went to was to recruit cheap bird dogs and milk their personal networks for the guru's more established pals.

Sooner or later, though, the burgeoning REIs DO happen on what they feel is a good flip opportunity. At that point, they decide they want to turn flipper out of desperation, like a losing gambler upping his bets as he gets deeper in the hole, steaming hard into complete financial ruin.