Business Plan developed - thoughts?

Question

So over the past month, I've been soaking up as much information as I can.  I've read 4 real estate books, watched the BP free course videos, listened daily to the BP podcast, etc.  I'm just trying to build a good foundation.  I knew I wanted to invest in real estate, but I was trying to determine the HOW.  The end goal is to have a substantial amount of passive income as well as build equity, to have additional security for my family in case something were to ever happen to myself or my job.

After what I have learned to this point, my plan is to invest in single family homes.  I have a decent amount in savings, but I would like to build additional investment capital before I purchase my first single family home.  The way that I am planning on doing this is purchasing and selling vacant land (method mentioned on BP podcast #39 where buying at deep discount).  This will require capital to start purchasing vacant land, but it would be significantly smaller than a down payment on a house.  After doing this for about a year and raising enough capital for a downpayment on a home, I plan on purchasing my first single family home.  I will continue to seek out vacant land opportunities.

For the single family home, I'm shooting for something with 1% rent to purchase price around the $150k mark.  I'd like to self-manage the first rental as a learning experience but would eventually plan to transition to a management company, so the numbers have to make sense to cover this expense.  I would then use the net rental profits from this home towards the down payment for a 2nd rental property (along with proceeds from any vacant land deals).  Based on my projections, I would be able to purchase the 2nd rental after 3 years.

I would then continue to use this plan (saving all rental income towards down payments) to purchase additional single family rentals around a similar price point of $150k.  I'm approximating that I would be able to acquire my goal of 10 rentals by year 10.  At this point, I would use all rent payments to pay down the loan balances of the 10 homes (1 house at a time) with the goal of having all the homes completely paid off by year 20.

Any thoughts or comments on this plan?  I live in SC.  I'm somewhat conservative from a risk standpoint (especially since I've never invested in real estate to this point), which is why the goal is to eventually own all the rental properties outright.  I would be open to investing in higher rent/higher value homes depending on how everything goes, but this is my plan for now.  Thanks.

Paul Stout · Answer

@Jacob Nunn It is nice to see your obvious excitement about real estate.  I am not going to offer advice on what you should invest in.  You will get plenty of that.  Only you will know what is right.  Your ideas will most likely change multiple times before you fall on your definite purpose.  I can offer you the advice to keep the drive and the passion you feel now no matter what happens and no matter what anyone says.  That is what is important.  A lot of people make a lot of money a lot of different ways.  Nobody becomes highly successful without drive, focus, and without taking action.  Everything else will fall into place.

Mark Gibbs · Answer

@Jacob Nunn I like your plan and your idea to start with land to initially grow your income is appealing. Another avenue you might want to consider is tax deed land sales that start coming up toward the end of the year. A lot of times there are vacant parcels and there seems to be less competition on the land at tax sales. Definitely do your due diligence on the parcels so that you understand why they are in the tax sale. One of the upsides I am finding is that those vacant parcels sometimes have mobile homes on them, but they will appear as vacant land in the tax sale because the home hasn't been tied to the property. Instead it is listed as personal property and may have an owner completely different than the owner of the land. In this situation you have a built in tenant to start collecting rent from. You need to be sure the home is actually live able/occupied though or you may have bought yourself a  rehab project and there is often a redemption period so you don't want to be rehabbing a trailer on a property that someone can redeem.

Mike Messersmith · Answer

@Jacob Nunn - sure thing - couple additional adds:

- like the idea of being smart on getting rolling - you can never pay retail or above pricing and be a super successful investor.  if your local area is super competitive, might be best to adapt an alternate strategy until you can invest at better value.

- on portfolio loan strategy - great BP blog post here:  https://www.biggerpockets.com/renewsblog/2015/04/0...

Thought this might be interesting for you based on the longer term vision you have.  If you are thinking about the long term business plan, thinking about how to build bigger wealth through the aggregation of your assets and using that leverage to get bigger, faster might be a good idea.  You will also run up against some of the limits of conventional lending when you get to ~10 properties and commercial portfolio lending might be a way around that.  Good to think about and put away as a followup now as you get rolling.

Good luck!

Mike Messersmith · Answer

hey @Jacob Nunn - like a lot of aspects of the plan - sounds like you have been busy on soaking up all the knowledge.

two thoughts from my POV for what it is worth:

1 - would be careful on tying up too much cash in the distressed land aspect.  Would be great to clear some capital if you had a good exit strategy there, but you might be able to get going on the primary goal even faster if you could go with a low money down approach like an FHA Loan or House Hack.  Want to avoid potential pitfalls in the overall journey before you even get started.

2 - love the idea of water falling all your profits and cash flow into future purchases and down payments.  If you are disciplined, you can build a great portfolio over time.  You might want to consider investigating ability to get a portfolio loan on revised assessed value with a commercial lender or try a 1031 exchange on some of your initial properties to be able to accelerate your plan as you get into years 5+ of the journey.

good luck!

Jacob Nunn · Answer

@Mike Messersmith Thanks for sharing that blog post.  That was a very good summary on portfolio lending.  I did notice that the post said most portfolio loans have a higher interest rate typically than what you'd get with a conventional lender, and that they are usually shorter in term or have a balloon payment.

Based on my personal situation, I shouldn't have much of an issue getting conventional financing for the first few properties.  Does it make sense to go the traditional path until you get capped at a specific number of properties and then switch to a portfolio lender (just given the more favorable terms most likely with conventional)?  Or is it more advantageous to start off with a portfolio lender that will work with you so you have the benefit of having an established relationship with the lender so when you get to 10+ properties, they're more willing to work with you if the numbers make sense?

I'm trying to get into real estate with as low risk as possible, and to me one thing that will help with that is low interest rate and 30 years of payments, which gives me the smallest monthly loan payment.  That way, I can at least afford on my own to cover the mortgage payment if the property is vacant for an unexpectedly long time.

Business Plan developed - thoughts?

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