How to build an Rental Empire within 15 months

Question

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.

Jason V. · Answer

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!

Account Closed · Answer

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

Now whats your next actionable step ! ?

Duriel Taylor · Answer

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.

Duriel Taylor · Answer

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.

Jason V. · Answer

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!

Duriel Taylor · Answer

@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,

Duriel Taylor · Answer

@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.

Tyler Huntington · Answer

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.

How to build an Rental Empire within 15 months

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