How to build an Rental Empire within 15 months

Multi-Family and Apartment Investing
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How to build an Rental Empire within 15 months

Duriel Taylor
Realtor · FL · Member since 2013 · 372 posts · 83 votes

Hello BP Family,

I need advice from everyone with experience in the following plan(s). In the next 15 months, starting in October 2016 I would like to purchase 4ea. fourplexes for investment rental purposes. The first purchase I would like to use the FHA program, thus allowing me to only put down 3.5% for the property then rent out the other three units. I know the area of pompano well, for a 2/1 you can get up to 1,200 per month with section 8. Numbers will be as follows. In order to get the down payment funds, I will take a loan out of 10k, which will give me a 176 monthly payment for 60 months (5 yrs). These numbers are approximately and based on financial institutions that I contacted and gave me quotes.

1. 220k x 3.5%= $7700 down

tenants pay: 1200 x 3= 3600

mortgage: 1387 (tax, PMI, etc included)

water: 170

cap x: 200 (appliance depreciations, repairs, etc)

loan: 176 (10k loan; my personal loan obligation)

PROFIT: 1,667 mon. (20,004 yr) **I could save 6 mons from the profits and pay off the 10,560 from the personal loan.

Property 2; I would write and notarize a contract up between me and a relative or close friend that will state that if they apply and qualify for a 30k loan which their monthly payments will be 528, I will pay them 10k over 12 months (834 per. mon). I would also pay for their debt for the next 5 yrs (60 months, or even sooner).

2. 220k x 20%= 44k (I will put the money in 3 months after the first purchase, most banks require to have funds in your account for 90 days)

tenants pay: 1200 x 4= $4800

mortgage: 1055 (tax, PMI, ext included)

water: 170

cap x: 200

property mgn: 288

loan payment: 528 (loan for 30k to the institution)

loan payment: 833 (loan for 30k to someone for 12 mons, totaling 10k)

Profit: 1726 mon. (20,712 per yr)

I would repeat number 2 for property 3 and 4. My goal is to quit my 9-5, which I been at 10 yrs and create a six figure income thus I can focus on my desires to form a construction business. I would like to purchase these four properties by the end of 2017 then quit a few weeks shy of 2018. Please give me all the feedback and concerns that may interfere with the above plans. I look forward to communicating with you all. Thank you in advance.  

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Jason V.
Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
10y

One note of caution: if you're going to be borrowing money for down payments, you do need to be mindful of where that money comes from - especially for an FHA loan.

FHA guidelines allow using collateralized loans (i.e. your 401(k), stocks, bonds, life insurance deposits, other real estate) but not anything that would increase your monthly obligation - so private loans, signature loans, etc. are all out for FHA.

For non-FHA loans, many banks will allow secured loans to be acceptable for down payments, as long as the monthly obligation is factored into the mortgage calculations.

Now what is legal, and what is common are two different things - you make your own mind up about how to get loans. But concealing information to obtain a mortgage runs the risk of becoming a felony (multiple posts on BP about this) and I personally have no interest in that.

A couple of other notes:

1. I'm very, very skeptical about getting Property Management for 6% unless you have a couple of hundred doors (or more.) 10% is the stated norm for most of us, which is often more like 12-13% after lease-up fees, maintenance surcharges, etc. My skepticism becomes absolute when you say you plan on taking those units Section 8. Many PM companies won't touch them, and the ones who do them well definitely aren't charging 6% in my experience.

2. 4% for Cap Ex isn't going to cut it. You should be using a real number based on the property, but for early evaluation purposes, I use 7-12% for multi-family properties, based on initial condition. I would double that for Section 8.

3. You're not accounting for Vacancy. 8.3% (1 month) is a pretty standard number. 10% and up would be safer for Section 8

4. I would plan on 12% for Property Management

5. You're not accounting for Maintenance. Depending on the property 5-15% is reasonable. Could be 15% or much higher with Section

6. You're not accounting for Landscaping that I see. I estimate $1,000/year (but that includes snow in the winter. Yours may be lower.)

If you know your area and you're experienced with Seciton 8, you may know firsthand that the numbers aren't as bad as I make them out to be. But it would not at all surprise me if they were, and if I use my numbers to analyze this property, I see it making around an 8% Cash on Cash return (with a 3.5% Down Payment.) This may be great to you, but I personally wouldn't be interested, especially putting all the units on vouchers.

Section 8 can be awesome, but when it's bad, it's a horror story. You might get through a couple of years without any issues, and then have 1 or 2 in a row that costs you tens of thousands of dollars with every single unit turn. I'm talking stealing appliances, destroying everything in sight, the works. I've seen people steal cabinet doors and plumbing fixtures from Section 8 units.

I'm not saying I'm 100% right. And if I'm wrong, I'm wrong, but hopefully I at least helped you flesh out your analysis a little bit :-)

Best of luck!

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  • Colton S.
    Investor · Wendell, NC · Member since 2014 · 189 posts · 54 votes
    10y

    @Duriel Taylor, that does sound like a good put together plan. Unfortunely there is one error that I see, and this will come from personal experience.

    On your property, for the down payment normally they will not allow you to take out a loan for this, especially for an FHA loan.

    When you have water in here, is that for just yourself or all the units in the complex?

    Also, do you plan to self manage or use a property manager? A property manager normally will charge 10%.

    Lastly, does the job your currently hold have enough income to allow you to purchase the properties and maintain your debt ratio on below 50%? You cannot normally count the rent as income on a mortgage for two years.

    I do give you credit for thinking a lot of this out though!

    0Reply
  • Colton S.
    Investor · Wendell, NC · Member since 2014 · 189 posts · 54 votes
    10y

    oh, another thing I did not see in here is closing costs, inspections, and the general costs to buy the property. Ours costed about 5K with everything, and I would assume the price would be a bit higher on a fourplex

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  • Duriel Taylor
    OP
    Realtor · FL · Member since 2013 · 372 posts · 83 votes
    10y

    @Colton S.

    thank you for your prompt feedback. From my understanding, you can take a FHA loan out on a fourplex or less (ie triplex, duplex, SFH). In the past I took out a FHA loan on a duplex and the water bill at max was 130 per month, I recently sold that property. On the potential FHA loan property I will manage that one but the other potential three I will like to get property management services. Here in FLA most, property management companies require 6% of the collected rent. Unfortunately, my current employment will not cover the additional properties but with the tenants' rent I could pay for all said expenses. I understand the debt to income ratio concerns, I was thinking maybe I could place them under a LLC or INC and or not be too worried about that if I am in the six figure bracket. My credit score is highly important to me however I could eventually pay all my debts off in a matter of 10 years along with substantial income. Also, understand the two-year requirement of the income limitations. Thank you again for your feedback, I welcome more. I look forward to hearing from you soon.

    0Reply
  • Colton S.
    Investor · Wendell, NC · Member since 2014 · 189 posts · 54 votes
    10y

    @Duriel Taylor, you can certainly take out an FHA loan on a four-plex, however, my concern is with the 10k loan you plan on taking out. FHA loans tend to air on the side of caution when it comes to down payments and they will investigate where the money came from, and the money cannot be tied up into a loan that you will have to pay back or you will be denied for the loan. The money has to be yours or in your account for quite some time (they went back 12 months on my down payment).

    On to the debt to income ratio. The reason i mention this is because you most likely will not be approved for the loans on property 2-4 unless your current job can provide the income to keep your debt to income ration below 50%. Property one, shouldn't be a problem if you have enough income but once you start looking at the second property it might put your over this threshold and cause you to no longer be approved for another mortgage unless you used a hard money lender of some kind. The tenants rent will/should cover all of your expenses you would incure during your ownership, just the banks will not see this as income on your behalf and it cannot be used to purchase another property.

    To speak on the LLC/Corp. This would not prevent your debt to income ratio from being too high, because the mortgage would initially be in your name the banks will still view this the same.

    Lastly, the six figure bracket is not always as easy as it seems in real estate because things will come up that you completely did not expect and take a huge chunk out of what you're expecting. For example when purchasing my primary residence we had it inspected, basic repairs, the whole nine yards. Within 9 months of ownership we have already replaced the roof, hot water heater, remodeled the entire living room due to a cockroach infestation inside of the walls. All this, after we had professionals inspect everything before purchase, just some things are impossible to see without opening walls and more. What I'm trying to say in a long winded way is the little things will come up and bit you before you know it, especially in multifamily homes.

    0Reply
  • Tyler Huntington
    Long Beach, CA · Member since 2016 · 20 posts · 7 votes
    10y

    Just a quick note on the $10k loan for the down payment. Of course you can do that secured or unsecured. The funds will need to be seasoned in a bank account for 90 days or 3 monthly bank statements. The mortgagee will only ask you for two months statements. So long as the $10k deposit was done 90 days in advance, should be in the clear. Obviously you will have to qualify with the $10k loan payment.

    0Reply
  • Duriel Taylor
    OP
    Realtor · FL · Member since 2013 · 372 posts · 83 votes
    10y

    @Colton S.

    thank you again for the feedback. In prior purchase, I used a PNC personal loan and I had some reserve thus, I used that PNC 8k loan and my 5k and made my duplex purchase. I also used an FHA loan, with the PNC unsecured loan I placed the funds in my personal account for 90 days and then I went to wells fargo and purchased my property. I completely understand your concerns with the debt to income ratio, however, I have seen several podcasts (on BP) to were people have done the exact same thing. Of course, they do not say exactly how they did this but they usually say; "we/i with conventional loan after I used creative funding." This tells me they had multiple mortgages under their name and or businesses. There was one guest BP's podcast (sarah prickett) who mentioned she had several mortgages under her name and her debt to income was awful but she had the desired income she wanted along with working for the US government as on a reserve status. Any further comments and or concerns please do not to make communicate. I will make contact with bankers all this coming week to see who can help me, I could keep you updated if you would like to use this same strategy.

    PS. with my 1st rental all the repairs you mentioned are the same that I dealt with. I changed a water heater, huge leak in one of the units, electrical issues, and I even had to dig a 3 foot hole under the house and personally fix a pipe. A plumber told me he will charge me $500 just to come out or I could youtube it and do it myself.  

    0Reply
  • Duriel Taylor
    OP
    Realtor · FL · Member since 2013 · 372 posts · 83 votes
    10y

    @Tyler Huntington

    Thank you for the feedback. I have to agree with you, I did the exact same thing you said with PNC bank. I took a loan out of 8k and used 5k I had for in my bank account to purchase my first duplex. Did you have any concerns and or additional feedback on my investment rental strategies? I look forward to hearing from you soon. 

    Regards, 

    0Reply
  • Tyler Huntington
    Long Beach, CA · Member since 2016 · 20 posts · 7 votes
    10y

    Your strategy looks great on paper and so does my fantasy football team but we all know how that goes. Keep your head up, stay positive and you can achieve great things.

     I am a newbie on BP but I've been a mortgage consultant the past decade so that's all I can really chime in about. 

    0Reply
  • Duriel Taylor
    OP
    Realtor · FL · Member since 2013 · 372 posts · 83 votes
    10y

    @Tyler Huntington  

    LOL I completely agree with your analogy. All plans start in the head then on paper, then we have a huge advantage with BP; we can ask questions and or suggestions about our plan. Once the days come closer and I get adequate feedback I will keep everyone posted about my journey. Good luck with your fantasy football league, players and your personal favorite team(s) this football season. Take care. 

    0Reply
  • Jason V.
    Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
    10y

    One note of caution: if you're going to be borrowing money for down payments, you do need to be mindful of where that money comes from - especially for an FHA loan.

    FHA guidelines allow using collateralized loans (i.e. your 401(k), stocks, bonds, life insurance deposits, other real estate) but not anything that would increase your monthly obligation - so private loans, signature loans, etc. are all out for FHA.

    For non-FHA loans, many banks will allow secured loans to be acceptable for down payments, as long as the monthly obligation is factored into the mortgage calculations.

    Now what is legal, and what is common are two different things - you make your own mind up about how to get loans. But concealing information to obtain a mortgage runs the risk of becoming a felony (multiple posts on BP about this) and I personally have no interest in that.

    A couple of other notes:

    1. I'm very, very skeptical about getting Property Management for 6% unless you have a couple of hundred doors (or more.) 10% is the stated norm for most of us, which is often more like 12-13% after lease-up fees, maintenance surcharges, etc. My skepticism becomes absolute when you say you plan on taking those units Section 8. Many PM companies won't touch them, and the ones who do them well definitely aren't charging 6% in my experience.

    2. 4% for Cap Ex isn't going to cut it. You should be using a real number based on the property, but for early evaluation purposes, I use 7-12% for multi-family properties, based on initial condition. I would double that for Section 8.

    3. You're not accounting for Vacancy. 8.3% (1 month) is a pretty standard number. 10% and up would be safer for Section 8

    4. I would plan on 12% for Property Management

    5. You're not accounting for Maintenance. Depending on the property 5-15% is reasonable. Could be 15% or much higher with Section

    6. You're not accounting for Landscaping that I see. I estimate $1,000/year (but that includes snow in the winter. Yours may be lower.)

    If you know your area and you're experienced with Seciton 8, you may know firsthand that the numbers aren't as bad as I make them out to be. But it would not at all surprise me if they were, and if I use my numbers to analyze this property, I see it making around an 8% Cash on Cash return (with a 3.5% Down Payment.) This may be great to you, but I personally wouldn't be interested, especially putting all the units on vouchers.

    Section 8 can be awesome, but when it's bad, it's a horror story. You might get through a couple of years without any issues, and then have 1 or 2 in a row that costs you tens of thousands of dollars with every single unit turn. I'm talking stealing appliances, destroying everything in sight, the works. I've seen people steal cabinet doors and plumbing fixtures from Section 8 units.

    I'm not saying I'm 100% right. And if I'm wrong, I'm wrong, but hopefully I at least helped you flesh out your analysis a little bit :-)

    Best of luck!

    2Reply
  • Duriel Taylor
    OP
    Realtor · FL · Member since 2013 · 372 posts · 83 votes
    10y

    @Jason V.

    Thank you for the feedback. In my prior deal, I used a PNC loan to make the payment which was an FHA loan as well. I will never do anything illegal to gain financial security. I was quoted by several property management companies that will accept 6% of the rent collected. In the past, I have had section 8 tenants and they never gave me issues, the state of Florida is a great rental state thus must section 8 voucher holders do not want to risk their voucher. I will rethink my cap x rate of 4%, thank you for pointing that out, along with the vacancy rate. With the landscaping, I typically go for properties with light landscape. One property I had before had no trees, just hedges, and grass. The grass and hedges trim cost me $80 per month. If I stay in the pompano beach area, I would use the same landscaping firm. Not to mention we dont have snow here in Florida. I completely appreciate your feedback and your thoughts gave me additional concerns. If you have any further details and or suggestions surely keep me in mind. Take care.

    Regards, 

    0Reply
  • Jason V.
    Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
    10y
    Originally posted by @Duriel Taylor:

    @Jason V.

    Thank you for the feedback. In my prior deal, I used a PNC loan to make the payment which was an FHA loan as well. I will never do anything illegal to gain financial security. I was quoted by several property management companies that will accept 6% of the rent collected. In the past, I have had section 8 tenants and they never gave me issues, the state of Florida is a great rental state thus must section 8 voucher holders do not want to risk their voucher. I will rethink my cap x rate of 4%, thank you for pointing that out, along with the vacancy rate. With the landscaping, I typically go for properties with light landscape. One property I had before had no trees, just hedges, and grass. The grass and hedges trim cost me $80 per month. If I stay in the pompano beach area, I would use the same landscaping firm. Not to mention we dont have snow here in Florida. I completely appreciate your feedback and your thoughts gave me additional concerns. If you have any further details and or suggestions surely keep me in mind. Take care.

    Regards, 

     Ok - don't mind me getting all preachy on you - I'm just used to folks on here who don't have much experience with what they're asking about. Sounds like you know exactly what you're proposing, so I look forward to seeing how it all works out for you. Feel free to give me/us an update once you get the ball rolling. 

    And I'm all sorts of jealous about 6% PM fees! No way I could get that where I am - If I could, I would totally hand it off. And I'm not against Section 8 at all - it's just that people who aren't experienced with it often aren't prepared for the particular challenges of that segment. I'm in a rural area, so our Section 8 is probably a little different (worse) from where you are. 

    And don't even get me started on Florida versus New York weather!

    Best of luck bud!

    0Reply
  • Duriel Taylor
    OP
    Realtor · FL · Member since 2013 · 372 posts · 83 votes
    10y
    Jason V. Thank you for the feedback. I will surely keep you and everyone interested posted as things development for me. Currently, I'm seeking funding opts along with fourplexes that has not been combed over by everyone on the MLS. I understand your issues with NYC rental market, not to mention the taxes up there. Take care. Regards,
    0Reply
  • Account Closed
    Investor · TX · Member since 2015 · 119 posts · 40 votes
    10y

    @Duriel Taylor You've got the plan and projections together. 

    Now whats your next actionable step ! ?

    0Reply
  • Duriel Taylor
    OP
    Realtor · FL · Member since 2013 · 372 posts · 83 votes
    10y
    Noe Perrin Thank you for the feedback. My next step find properties that fits my investment scope/projections. I will be aggressive with my search in the coming weeks. If you have any off market leads please keep me in mind. Take care. Regards,
    0Reply
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