How to leverage $200K to acquire 20 units that makes 6K a month

Question

Scenario:  You have $200K to invest. You'd like to acquire a portfolio of approximately 20 rental units that kicks off about $300 of free cash flow per unit, per month. How would you go about deploying that money? BRRR is an attractive option but fixer uppers are WAY overpriced in the DFW market and you have no interest in going more than an hour outside your local market. Any suggestions would be greatly appreciated. TIA!

Anthony Dooley · Answer

$200K would allow you  to purchase up to $800K in property. At an 8% cap rate, that would produce $64,000 of net operating income before debt service. That would get you about $16,000 of net cash flow. I think you are over estimating the income production of $200K.

Shiloh Lundahl · Answer

@Rose Nielsen 6k in monthly passive income may be hard to do with 200k.

Here is how the numbers would play out: 6k x 12 = 72k per year. 72k/200k x 100 = 36% return on your money. That is a hard return for passive income. You can make that with active income. If you flip 2 houses a year without using hard money you may be able to get that return. Or maybe 3 or 4 flips using hard money. You may be able to get those returns doing that but that becomes more of an active job.

It is more realistic to get 10% - 12% which would be more like $1800 - $2000 per month unless you get lucky or employ more advanced strategies.

Anthony Dooley · Answer

If you could find a 20 unit deal that cash flowed like that, it would be well over a million dollar deal. You would need to put down at least 25% for a commercial loan.

Mike Dymski · Answer

Without flipping or adding value, time is the only thing that will get you there...cash flow, principal pay down, and appreciation over a long time.

Laura George · Answer

@Rose Nielsen

We have a trailer park under contract. 16 lots and 15 trailers.  Rents are over 500$ a month and are low. That’s 5k a month net. Purchase price 295k.  I think that is close or surpasses your expectations.

Laura George · Answer

@Rose Nielsen

Rose.  We do deals like this all of the time. It’s not unreasonable. Especially where we live in the Midwest.  The thing is that it takes cash money and a good title company to get the deals done. I could tie up 100 deals in a month if I had the cash flow. Don’t let people make you believe that you’re being unrealistic.  Just because they cannot do something doesn’t mean that you can’t. Dig.  Dig deeper.

Erik W. · Answer

Become a drug dealer and sell to your tenants... ;-)

Joking.  If it's cash flow you want, what you're looking for is the "Class C" market in the Midwest.  I define my Class C units as "clean, safe, and functional."  They are often older bungalow style, 2-bed houses with 1960's-70's avocado green fridges and harvest gold ovens in the kitchen that still work.  You buy/fix them for 50x or less the monthly rent "all in" (purchase + rehab + closing costs + holding).  For example, a $30,000 all in property that rents for at least $600/month.  A $40,000 property rents for $800. Etc.  No land lord paid utilities.

$200K would get you a portfolio loan of $800,000 (80 LTV) on a book of twenty units (SFH's) costing $1 M. If you can find the right lender, they could amortize over 25 years on a portfolio like that at 5%.  Houses like this typically consume 40% of the rent in operating expenses, and you self-manage to capture the 10% management fee yourself.

20 houses @$50K each = $1 M.

Rents of $1,000 x 20 = $20,000/month.

Operating Expenses (40%) = $8,000/month.

NOI = $12,000.

Debt service = $4,700.

Cash flow = $7,300 / month.

We exceeded your goal by $1,300 / month.  So you could still hire out basic management tasks for 10% ($2,000) and get close to your goal at $5,300 / month.

To make this magic happen, keep in mind you're constantly shopping insurance quotes, appealing property taxes, and aggressively negotiating labor rates from contractors.  You also have to find what I call "little ATMs" that will rent for 2% or more of the "all in" cost, and that can be challenging and take time.  Best bet would be to find a retiring land lord who will sell you a package deal so you can get a discount.

I hope that helps.

Rose Nielsen · Answer

Thank you so much everyone for all the wonderful advice. I truly appreciate it.  I am sitting down with our relator and a few lenders this week and will definitely take your advice to heart. And yes, it is an aggressive goal but it's not written in stone. On our first few deals we were just trying to get our feet wet and now I'm trying to be much more strategic about how we deploy our resources and matching that with our ultimately financial goals. So it was great to see the different options mentioned and some of the challenges that you've mentioned. THANK YOU again!

How to leverage $200K to acquire 20 units that makes 6K a month

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