What is my biggest risk buying 3 properties

Buying & Selling Real Estate
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What is my biggest risk buying 3 properties

Orlando Goodon
Member since 2018 · 125 posts · 21 votes

I'm new at this. I've done a spreadsheets to break down numbers. I'm searching loop.net, grabbing the listed gross income, maintenance and tax figures. Then go to mortgage calculator and calculate mortgage with fees. Net incomes (minus mortgage)average  $2000-$3000/month. I plan to pay off these mortgages in 6 years by dumping all the money back into houses+$1000. Will take $3000-$4000/month to reach my goal. Keep in mind will be putting aside money each month for maintenance.

If I plan to hold these properties as long as possible, what is my biggest risk? They would only be slightly under value due to light work needed like paint, so a housing crash would hurt fast (Only $30k down on each). However why should I care? I'm not after appreciation. I'm after equity and net worth and soon, rental income without mortgage, so $5000/month.

Only think I can think of is:

-Housing crash and each property looses up to $20k in value (so what? No flip)
-Recession and tenants leave and rents go down ( I loose $200 per unit so $1400/month less so now I have to pay about $800 ($1800 total now to stay on target) more per month (Fine unless my income goes down by more than $30,000/year)
-All 3 have roof/plumbing issues at same time (should not matter; each house has a separate maintenance budget to cover this)
-All three need work that far exceeds the maintenance budget (Would need loan perhaps, but this is highly unlikely to have an extreme situation with all 3...BUT....it COULD happen)

Would LOVE your thoughts! I've even heard people saying paying mortgage fast is not good? Why would that be? You build equity fast to resist depreciation and skyrocket your profits fast...AND OWN 3 properties in less than 10 years AND livable INDEPENDENT/PASSIVE wages well before retirement age!

Seems too easy! :)
 

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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
6y

Buying and holding is the least risky exit strategy in real estate. As long as they are cash flowing, you can't lose money. Housing "crash" is the least of your worries.

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  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    6y

    Buying and holding is the least risky exit strategy in real estate. As long as they are cash flowing, you can't lose money. Housing "crash" is the least of your worries.

    1Reply
  • Orlando Goodon
    OP
    Member since 2018 · 125 posts · 21 votes
    6y
    Originally posted by @Anthony Dooley:

    Buying and holding is the least risky exit strategy in real estate. As long as they are cash flowing, you can't lose money. Housing "crash" is the least of your worries.

    So do you know why some people might advise against it? Perhaps because rapid pay off limits leverage based opportunities? Meaning the money I use to pay mortgage fast means I can't do other things. I mean it won't stop me from building my 3 property portfolio but of course I could have more options if I was not paying so much. I'm very much limiting the market because my budget is focused on existing mortgages. I can't see why else.

    I think the fundamental would be where does my money have the highest return. Racing to mortgage completion or investing in other things/properties?

    I get the feeling most investors or at least most of the TYPE of investing that get the attention is appreciation based. "paid $200k and sold for $400k 5 years later!!". Maybe this is why I don't hear people talking about doing what I want to do?

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  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    6y

    @Orlando Goodon who is advising against it? How many properties do they own? zero. Paying off the mortgage fast is fine. It's a choice. You don't have to do it, but paid off assets cash flow better than leveraged ones. Keep in mind, most people on BP are rookies. They are saying the text book answer, but experienced investors would rather have a paid off rental than 95% leverage. There are few risks to buying and holding. Even if you over pay, at some point in the future, you will have zero money in the deal.

    1Reply
  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    6y

    Remember that, depending on the area, the taxes may change substantially when it is sold and that the maintenance costs shown to you are likely no where near what your costs will really be.  Know if they are doing the maintenance in house, by contract, etc.  Talk to renters about what is wrong with their unit, there could be lots of deferred maintenance.

    1Reply
  • Brent Paul
    Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
    6y

    If it cash flows after all expenses are paid I don't see any reason you wouldn't do ok.  In the last market crash it only made finding rentals very competitive.  I never saw rents go down in price.  Unless you are buying in D areas or on the edge of war zone areas.  Even during the market crash people still need a place to live.

    I think it's always a good idea to have a few backup plans just in case things don't go the way you had hoped.  And believe me there will be times that happens.

    What if instead of paying down those properties you pooled that cash and put it into more properties.  That would also increase you cash flow and net worth.  

    1Reply
  • Frank Geiger
    Rental Property Investor · NC · Member since 2018 · 776 posts · 776 votes
    6y

    Your biggest risk by far is going to be inexperience. Things come up where tenants don't pay rent and it takes a while to evict; hurting your income if you only have 3 properties. Or you underestimate the cost of a repair and it takes more than you have saved up in the maintenance account. And much, much more.

    Using debt to scale a portfolio isn't always a bad thing. If three properties is all you want, that's great you hit your goal. But you have much more risk exposure if one is vacant and you loose 33% of your income for a month or two. 

    1Reply
  • Orlando Goodon
    OP
    Member since 2018 · 125 posts · 21 votes
    6y
    Originally posted by @Frank Geiger:

    Your biggest risk by far is going to be inexperience. Things come up where tenants don't pay rent and it takes a while to evict; hurting your income if you only have 3 properties. Or you underestimate the cost of a repair and it takes more than you have saved up in the maintenance account. And much, much more.

    Using debt to scale a portfolio isn't always a bad thing. If three properties is all you want, that's great you hit your goal. But you have much more risk exposure if one is vacant and you loose 33% of your income for a month or two. 

    These are multi families. So we are talking 6-7 units.

    0Reply
  • Orlando Goodon
    OP
    Member since 2018 · 125 posts · 21 votes
    6y
    Originally posted by @Brent Paul:

    If it cash flows after all expenses are paid I don't see any reason you wouldn't do ok.  In the last market crash it only made finding rentals very competitive.  I never saw rents go down in price.  Unless you are buying in D areas or on the edge of war zone areas.  Even during the market crash people still need a place to live.

    I think it's always a good idea to have a few backup plans just in case things don't go the way you had hoped.  And believe me there will be times that happens.

    What if instead of paying down those properties you pooled that cash and put it into more properties.  That would also increase you cash flow and net worth.  

     Goo ideas

    0Reply
  • Orlando Goodon
    OP
    Member since 2018 · 125 posts · 21 votes
    6y
    Originally posted by @Lynnette E.:

    Remember that, depending on the area, the taxes may change substantially when it is sold and that the maintenance costs shown to you are likely no where near what your costs will really be.  Know if they are doing the maintenance in house, by contract, etc.  Talk to renters about what is wrong with their unit, there could be lots of deferred maintenance.

    Great ideas doing research on the units.

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    6y

    I see it as a perfect plan with the least risky plan. By doing that do you maximize your DTI ratio ? I did an almost a similar thing but only with one rental property. How much is the monthly ROI from one property ?

    0Reply
  • Orlando Goodon
    OP
    Member since 2018 · 125 posts · 21 votes
    6y
    Originally posted by @Carlos Ptriawan:

    I see it as a perfect plan with the least risky plan. By doing that do you maximize your DTI ratio ? I did an almost a similar thing but only with one rental property. How much is the monthly ROI from one property ?

     I think I need to review my calculations book. lol

    0Reply
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