Is there a wrong road to success in real estate?

Question

So long story short i own a 4plex property and i did it with the help of a mentor thankfully. So before and after all I've done is listen, learn and read about REI everyday that my fiancee said i talk about it in my sleep..like seriously having conversations lol

But because I'm learning so much from my mentor, reading and of course BP (god sent) i have so many questions that i seem to get ahead of myself. My mentor gives me information little by little as i go, which is more than fine, but with all the new found information i want to know more. My mentor has owned several properties in CA for the last 20 years, so he knows his stuff and for that i don't question him or his proven method. But i do question if its the best and/or only method for me? He instructs me to purchase my first 4 unit owner occupied (which i have) raise the rents (which i have) and complete maintenance issues (also done), then refinance after a year of owning. Then take a good amount of the equity and go purchase another 4 unit owner-occupied and repeat the same process. He did this same process himself, but he also owns commercial property as well. He hasn't yet explained how he went from residential 4 unit properties to commercial 5+ units and I'm sure he will tell me, but my inquisitive side wants to know how so i can see the light at the end of the financial freedom tunnel. Im just unsure how one achieves financial freedom from just buying 4 units as it would seem all your money is going into buying properties. Can anyone help me understand please?

Mark Weinmann · Answer

lol @Brent Coombs no iim certainly not ready for that...NOT YET!

Jim D. · Answer

If your goal is just to get the largest return possible and build the most total wealth, then your focus just needs to be on making sure your equity is being placed where it will give you the highest total return. That may or may not be accomplished by doing a 5+ unit. Don't look at the number of units--look at the ROI on your money invested. If in your area you can make a higher ROI on 4-plexes than 10 units, then there wouldn't be much reason for you to even go there (and vice versa).With the little information given, it sounds like he's guiding you through a very efficient strategy for someone starting out without a ton of capital. It sounds like you're doing 3.5 or 5% down owner-occupied loans, which for folks with limited capital is a fantastic strategy. To do a 5+ unit deal, you'll need a minimum of 20-25% down, so you won't be able to do that until you've built up some more equity or funds. If you have 20% down and reserves available to do a 5+ unit now, then go for it. But my guess is that will be the major hurdle and he's probably getting you to that point as quickly as possible.

Dustin Frank · Answer

Possibly a little off direction but as far as wrong ways to invest I can offer this ..keep your business separate from your personal finances and don't get into the wrong partnership with somebody. I had a business partner file for bankruptcy and since I personally guaranteed all of our debts, guess who now owed his defaulted balances? I'm still recovering and will be for a few more years.

Jim D. · Answer

All joking aside, need to know what you're trying to accomplish in order to assess your strategy.

Ron Flatt · Answer

There is no one way. You have to find what works for you. Some people buy one and pay for it and buy the next one.Some Will buy everytime they have a new down payment.Some will keep everything mortgaged to close to 70% or greater, using this cash to buy more properties.It depends on your level of risk. My personal choice is to keep everything mortgaged up to a point that rents will cover all expenses, payments, etc @ 80% occupancy. I consider anything above by 80% to be my profit. It will not build as fast as some, but it is also riskier than others prefer. The key is what is your risk level, I agree with your mentor that money pulled in a re finance has to be put back into more property, (otherwise you are eating your seed). You plant your seed, you eat the extra you may have from rents. Hope that helps.

Brent Coombs · Answer

@Mark Weinmann, there's plenty of "wrong roads" that still lead to success. But, some of them don't!ie. Don't be looking for wrong roads!Your mentor is guiding you on a RIGHT road to success. If you insist on turning into a commercial road instead, know that your commercial Lender WILL charge a higher Interest Rate, and WILL demand a much higher deposit, and WILL demand that the loan be paid off quicker than your FHA-approved owner-occupier Lender! Ready for that? Cheers...

Mark Weinmann · Answer

ok @James Marshall i didn't really look at it that way. Ive assumed commercial was the way to go to increase cashflow exponentially. Yes i am doing owner occupied 3.5% down strategy which i know is a good method and will work. I think all the success stories on BP of folks gaining so many units in a few years has me a little too excited.Thanks @Ron Flatt for the post greg scott makes a very valid point

Mark Weinmann · Answer

Yea @Harrison Liu he mentions to me all the time how expensive the property is now and also that dreaded rent control smh. but i will continue to steadfast on the residential units

Mark Weinmann · Answer

wow @Dustin Frank i definitely will be cautious w/partnerships. good luck

Ron Flatt · Answer

Here is his post Greg Scott Investor from Metro Detroit, Michigan replied about 2 hours ago Antonio:Feel free to contact me and I can help you get started moving into apartments.For me the simple answer to your question is to do a cash-out refi on your existing properties. Personally, I never want to pay off my properties because that hurts your total returns.* Use the cash-out as your down payment.* People have been trained to pay off mortgages, but it is really a terrible idea in rental real estate. Try this simplified model:Pay cash for a $100K property that rents for $1000 per month. Let say it has $4000/yr in insurance, taxes and repairs every year. You just made $8000 on $100K investment or 8%. Depreciation on this property is about $3K per year so you pay income taxes on $5KNow, lets say you borrow 50% of the property value at 5% interest, but instead of buying one of these properties, you buy two.Now you have $200K in real estate that rents for $2000 per month. You have $8K/yr in insurance taxes and repairs plus $5K in interest payments. That means you made $11K on your $100K in cash or 11%. Even better, you now get $6K in depreciation so more than 1/2 of your income is sheltered from the government.Do the math again at higher levels of leverage and the numbers get better and better.