Small multifamily investor looking for the next step

[JR Hinds]

Like most of you, I read Rich Dad, Poor Dad years ago and it opened my eyes. Around 8 years ago, I played Cashflow 101 and wondered why I wasn't investing in real estate. I was particularly attracted to growing a cash flow machine using multifamily properties.

Over the last 7 years, I've purchased 1 triplex and 2 duplexes. My wife is in nursing school, and I'm paying for it so that we don't have any loans when she graduates in 2 years. We're not planning to buy anything else until she graduates and starts making a good income (but I'm still contributing 15% of my income into my real estate investment account). One she starts working, we should be able to direct all of her income into our real estate investments.

Our target is to have 100 rental doors generating a net of at least $100 a month each. We don't intend to retire when we reach that goal, but $120,000 of passive annual income will certainly give us more financial freedom. We're hoping to hit our target in 7-10 years. Once we hit that target, we'll be able to set our next target. But for now, that's our main focus in real estate.

When I set up this target, my idea was to get 7-10 doors pretty quickly, and get some experience with small multifamily. After my wife's graduation, I planned to acquire a 25-35 door property (so that I could have on-site management). I figured that I could acquire 2 more 25-35 door properties in the years afterwards, and the last property would get us close to that 100-door target.

I don't have the knowledge or resources to flip or use any time-intensive real estate strategies right now. I realize that this limits my options, but I'm being realistic about my time.

I have a small business that takes 40 hours a week for 8 months of the year and 80-100 hours a week for the other 4 months of the year. I don't have the ability to dedicate much time to my real estate investments for those 4 months of the year, so I'm trying to create a machine that can work without a lot of attention.

So far, my plan is working well. I have property managers for those 3 properties and I just review the numbers once a month and chat with the property managers every month or two.

Since I started on this track, I've read as many books as I could find on the subject of creating passive income using multifamily properties. I've spent time on BP and I'm starting to be more active in the forums. I'm listening to a bunch of podcasts to learn more.

I'd like to ask the community what you think of my plan. Does it make sense? What holes can you punch in it? Where else can I gain knowledge and get an education?

Also, if I stay on track, my next leap will be a big one. What do I need to do to be ready to purchase a 25-35 unit property? Are there people on BP who have a plan like mine?

I'd love to chat with other people who are focused on multifamily. If you're reading this and you haven't pulled the trigger on your first investment property, I'm happy to help out. Please don't hesitate to reach out to me. If you're reading this and you're ahead of me, I'd love to pick your brain and learn from you.

[David Greene]

Hey JR,

You're plan is very similar to mine. Feel free to PM me if you'd like to talk more.  A few things I can tell you that are going to become headaches and time intensive in the future as you continue to expand.

1) Great job using a property manager. A good one is worth their weight in gold.  Most people underutilize their PM's in my opinion. Don't just use them to manage the property, take advantage of their experience and expertise when it comes to acquiring properties. I use mine as a second level of protection before I make an offer. If all the numbers work out and the deal looks good, I run it by my PM to make sure it's in an area they want to manage. Making their job easier will make yours easier, and if you're trying to scale up to the level you said, making things easy is going to be crucial. Explain to your PM what  you are looking for and run any deals by them to make sure it meets the criteria you expect.

2) Insurance. I have no idea why in 2016 insurance is so insanely time wasting and complicated, but it is. Policies get cancelled all the time, even with impound accounts set up. Insurance companies communicate horribly.  If you scale up big, consider getting one blanket policy over several properties to save you time. Ask Brandon Turner about this one. I'm sure he'll second the motion.

3) Get a handyman that is good, reliable, and reasonable. Treat him like your best friend. With the number of properties you're talking about you're going to be getting weekly phone calls for repairs. Not all of them will be something you should be doing. You need someone that can not only get out and fix the big stuff right away, but that can also tell it's not something you should be spending your money on and tell the tenant no. Trust is going to be huge in this relationship. you won't even have much time to check the invoices for every job to make sure you're not overpaying, so you really want someone who will appreciate the steady work and not take advantage of your distance.

4) Resist the temptation to get awesome returns by investing in sketchy neighborhoods. You literally will not be able to handle the work and time it takes for multiple turnovers/evictions and repairs. Buy B and C+ class properties, get a better class of tenant, and put systems in place so your repair guys know what work to do to make rent ready every single time.

5) Consider doing what I did and taking the first couple years rent on each property to store up 6 months of reserves for each property, and to upgrade the features of the property. Not only will this increase the value of your property, in the long run you'll just get overall better tenants.

6) Set your mortgages up for direct withdrawal and your rent checks up for direct deposit. You don't want to be going to the bank several times a month just to move money around or writing checks everyday. Impound accounts clean everything up nicely.

7) Keep track of your properties values, and the loan balance as it's decreasing. Knowing which properties have the most equity, and what your return on equity for each property is, will let you know which ones are best suited to refinance or sell in order to acquire new properties and increase your return.

8) avoid properties with pools or intense landscaping. You want a concrete garden if possible. Pools become headaches as well as legal liabilities and landscaping issues can be the same.  Also make sure your tenants are paying their own electricity and water if at all possible. Many tenants will continue making rent payments but stop paying for utilities because you're not allowed to turn them off and if you do they will benefit in court during the eviction. Try to keep as much of it our of your hands as possible. 

That's all I can think of for now. As you grow in scale it gets much more fun but also much more time consuming. These are some things I've learned along the way to help make my job much easier.  You'll find that 90% of the work for a property is done during acquisition, once you get past that phase it's usually pretty smooth sailing if you bought right.

Good luck!