Andrew Holmes 2-5-7 Formula

[Corey Robinson]

Hi Guys!

I was listening to "The Rental Income Podcast" with Dan Lane and one of his guests Andrew Holmes spoke on a way to build a great foundation for your portfolio when you're starting out and how to pay it down in 7 years.  Here's the formula:

Andrew’s investment strategy adheres to what he calls the “2-5-7” formula. In 2 years, the goal is to accumulate a minimum of 5 properties and pay them off in 7 years. Andrew said, “The formula doesn’t change, it’s just the number of properties, how much cash flow you want to create, and you scale based on that.”

http://rentalincomepodcast.com/his-simple-formula-...

So my first question is has anyone heard of this method and implemented it? 

My second question is can this work with Turnkey properties?

Thank you in advanced!

[Nick C.]

I've never heard of it. My strategy is to buy anything that makes sense and pay it off when it makes sense. The market changes, your situation may change, my opinion is that it's best to be fluid and flexible. It's definitely easier to market a formula for guru purposes, it doesn't make sense to rigidly adhere to it. 

[Account Closed]

I have heard his basic pitch and this is how it works: (its not a new concept but rather a debt payoff model he's molded for real estate) Also, he's claiming to have the hookups at banks basically claiming that you can buy distressed property with an investor ('which of course hell hook you up) or yourself at a discount then go to a commercial bank and the bank will give you 75% of appraised value so your maxing you the equity but get back the money to reuse to pay off a property or use the money to buy another? He's claiming that if you get a property for 50K spend 20K get a bank to appraise it at 125K then cash out and reuse the money you get 100k refi and get to keep the 30k as an example.  The only issue I have now is your property equity is worthless and now your mortgage is maxed at 100K so lets say the property is making $1400 a month in rent.  After mortgage and expenses your at a break even point.  So your basically getting your money upfront as opposed to monthly spread out again sounds like a finance numbers game with same results could I be wrong? And is the appraisal really the possible sale value down the road? Or is the appraisal overvalued?

With that being said I will say his 2-5-7 program is an old marketing scam they used to sell. I think it was called make Debt into Millions. Basically, if you owe say 10 credit cards and your minimum is $10 dollars pay the minimum on all the cards except for 1. Now take say $100 pay the one down when you free up that old minimum payment you apply it to the second credit card so you see now your paying $20 on the second card after you pay that off you pay $30 on the third and so on. This idea is not new so he saying you pay off all your property in 7.4 years if all conditions were perfect . I have a problem with this where is the monthly cash flow? Great your paying off the properties but you have to wait 7+ years to get the money back I have a issue with the numbers here?

If I make $1000 a month ($12K ann.) that's 84K over 7 years he's saying the sweet spot is not over $125k properties or so. Basically, your paying of your property own it free in clear but never been able to spend a dollar in 7 years (hope I don't get run over by a bus on year 7). So now in year seven you free up about $6-700 a month and you still have taxes (3-400) and expenses so your adding 700 to that total of 84K over 7 years fast forward say 10 years. So if you look at the numbers if you pay nothing down over 10 years you make $120k if you pay it off over 7 years never touch a dime you make $145K. Do you think waiting 7 years to see income is a good idea can never spend it so keep driving your yugo? I'm not sure about that if you doing it as a investor. Basically, you made $25K more in ten years. And the numbers work the same no matter how many you have so his idea of owning 60-90 properties and whos gonna manage them sounds a little ridiculous. I would personally rather have the $120k and get to use it or save it and let the bank carry the note. Anyone have any thoughts on this? Love to hear them please.  I like constructive feedback. ( I did post thisi on another post because I'm going to the 3 day class to see what that's all about.

[John Thedford]

Sounds like pie in the sky. I would also consider the other investors that suggest taking the longest mortgage possible, using the least down, and buying as many properties as  possible. The two ideas seem to be at opposite. There is no EASY FAST WAY to wealth. It builds over time if you use solid planning and ideas. I would suggest buying one, get it stabilized, put away money for reserves (I just put an A/C in a unit--and now a TWO roofs this month alone are being replaced), and the buying another one. BTW--lower end units may be more work have more turnover, etc. RE is a job...not just thousands in the mail box each month. Be ready because you WILL have vacancies, broken water heaters, non-paying tenants, evictions, roofs that need replacing, and more. I LOVE what I do...have had some success...but it is STILL A JOB...and is not just money money money.

[Corey Robinson]

@Account Closed

Thank you for your input guys!!! My idea was to reinvest the cashflow back into the business.  I already make good money so I'm planning more for the option of early retirement.  I love what I do now but it's always a good feeling knowing that one day you won't have to clock in for a paycheck.  I know I can scale up pretty fast but don't want over leverage.  Ideally I want to a buy property, save six months business expenses then buy another property and repeat this number until I get to 5 then focus on paying them down even if it takes a little bit longer than expected.  

[Account Closed]

I think that's a smart play for the long term if you make money it's good to keep investing it pays more than a 401k remember anything that make more than a 10 year treasure note is a better investment.

[Andrew Holmes]

@Account Closed

In response to your post. 

1. If you are buying a property for $ 50 K and fixing for $ 20K never a good idea to refi more than you have in the property. I have never ever refied more than what we have spend. Refinancing more and keep refinancing equity out is what get you in trouble. 

2. You PITI including management cannot be more than 75% of all debt collected. Or ideally even better a debt coverage ratio of 1.5 or more.

3. Any property you buy should be bought with equity. I have always been 100% against ever considering high appraisals. 

Everything I have ever said has been be as humanly conservative as possible and pay off debt on your properties. Where you have come to the conclusion that I have ever promoted risk I am totally confused. 

My point has always been if you need $ 5000 to live on if each rental property makes let's say $900 per month if it is paid off then you buy 7 or 8. 

Each property must have 25% equity

Must have min or $ 350 to $ 400 in net cash flow after expenses with a loan

Use the entire cash flow from all to pay off property 1 and then attack #2 so forth. 

The money you need to live on should never be played with. 

Once you reach that you can be as aggressive as possible. 

Over the past 5 years radio and every meeting I have been conservative and believe you should be debt free. 

I don't just talk about it. I have the record to prove it 165 rental here in chicago all in good areas and all with equity. 

Please if you quote me all i ask it listen to the entire thing understand where I am coming from and put constructive criticism. I am sure there are way of improving what we do. But please don't say I have said thing that are financially risky.  

[Corey Robinson]

@Account Closed

Thank you clarifying! Sent you a PM!

[William S.]

@Andrew Holmes

I like this strategy a lot. I do have a question though. How do you run your numbers to get $350-$400 net cash flow? Everyone runs there's so differently.

1. Vacancy
2. Maintenance
3. CapEx
4. PM
5. Lease Fee

Mortgage, taxes, insurance depend on the property, but the above varies on who you talk to.

[William S.]

@Andrew Holmes

Here is how I run my numbers

• Vacancy = 1/months rent (i know you use two year leases)
• $50/m (light due to rehab, this is for basic calls such as leaky faucet, door not working, etc)
• $200/m (30-year breakdown of major items, however I have thought of re-investing this capital into the next deal)
• $42/m ($500 per new lease once a year)

My plan is to have $10,000 in reserves per property upfront. All major items have been fixed (roof, etc) Reinvest the CapEx budget for 5 years or so. Once I hit my growth target, re-evaluate my CapEx budget and set aside $X/month.

I'm considering two approaches:

1. 3 paid off properties or

2. 3 properties with a very conservative use of leverage (30% or more down) + 2 properties paid off

[Austin Drew]

@Andrew Holmes I'm a little confused on where you're getting the Equity to buy 2nd and so on houses? Are you putting 20% down on the first house then once you have 25% equity in that house you refinance to buy the 2nd house and so on? Also as far as the cash flow goes for the houses in the process of acquiring the 5 houses are you just saving it or are you also using it towards the down payment?