How to scale from a few properties to many?

Question

I've listened to the BiggerPockets podcasts and what always seems to evade me is how people go from their first investment (or first few) to the next handful.

I've followed much of the advice (bought my primary residence in Denver, CO in 2012 for $320,500 and have rented out the basement consistently since then effectively living for free - yay house hacking!).

Two years later, in 2014, I bought a $91,000 condo for ~$20,000 down of my own cash, rented it for 2 years, making ~$200 a month.  In a growing market, I sold it 2.5 years later in 2017 and did a 1031 to buy a 3 unit apartment building in Rhode Island for $274,000, with about $8,000 of my own money down.

In 2015, I bought a 4 br/2ba house for $200,000 with a $35,000 HELOC on my primary residence and $15,000 of my own money.

In 2018, I bought a 5 br/2ba house for $335,000 and put about $50,000 into renovating it (including adding a 3rd bathroom).  I used a HELOC on my primary residence for the down payment and renovation costs and brought in a 5% partner.  I'm in the middle of refinancing it now, although won't get out a TON of cash, some, but not a life-changing amount.  I'm creatively renting this place by the room, and making ~$4,000 in rent a month, which I know isn't the 2% rule, but cash flows about $1,500 a month, so I'm happy with that, which I liken to house hacking, but for an investment property.

Here's my question - I've got 4 properties (including my primary residence), which is wonderful, but I feel that I've leveraged the majority of my equity, until I'm able to pay down more of my existing HELOC.  I've inquired about getting a HELOC on my 2015 investment property (my interest rate is 3.875% so a cash-out refinance doesn't make sense), but HELOCs on investment properties are ~Prime + 4.5%, which is pricey.  I love hearing how quickly people have been able to take one property and transfer it into a small portfolio of 10+ properties, but I'm a bit befuddled as to how to move beyond where I am right now, other than aggressively paying off my HELOC to free up those funds for another down payment.

Bill Plymouth · Answer

Have you considered partnering or raising private money?

Matt H. · Answer

@Erin Onsager sounds to me like you are doing pretty darn good. The first couple are just the harder and it is a grind. But then at some moment, as others have pointed out, it gets easier. Whether you continue on solo, partner, or raise, you will get there. Keep on keeping on. It took me years to get to 30 units. But somehow this year we’ve already added 150.

Grant Rothenburger · Answer

@Erin Onsager Most find a partner with money, or I know some that wholesale/flip along with buy and hold to keep the cash coming in.

Albert Bui · Answer

After doing many deals on my own and financing many deals as a mortgage broker I'll have to say that if you want to acquire quickly and ramp up those unit counts and ultimately get at the cashflow number sooner it mostly boils down to the question on how much equity can you create that can be leveraged?

Once you go into a deal and force enough new value in a property, the difference between your current loan up to 70-80% of the ARV is your new leverageable equity available. That extra spread is what allows you to keep scaling as you can use this incremental capital (debt) to acquire more.

The difficult part that I see for most investors is balancing this leverageable equity and acquisitions while maintaining or improving the cashflow as you acquire more and more.

Sometimes you hit your equity numbers but you went into areas with less and less rent to value ratios so your cashflow is actually incrementally going down. There are of course other factors at play too like interest rates, rental market supply/demand, and how fast the prices are appreciating in your surround area. These fluctuating factors are in a constant state of flux and having a well balanced strategy to tackle both is key differentiator from growing a portfolio based on solid foundations versus quicksand.

If you can balance most importantly the leverageable equity growth and your equity being optmized across the entire portfolio of properties along with your cashflow you can go from annual 2-3x up to 10-20-30x which is what one member mentioned above how it took him years to get to 30 but then he recently added 150.

Best of Luck,

Erin Onsager · Answer

@Matt Hoyt - thanks!!  I have a feeling you're right.  It just feels overwhelming and unattainable at certain points along the path of weath creation... but I know you're right.

Nate Marshall · Answer

You need to leverage private money or look at doing a 506(C) capital raise. It's not as hard as it sounds and is quite inexpensive. Don't use your money. Use OPM!

You have a lot of options but keep in mind you are selling a security if it's a capital raise and you have investors and not a loan. So you should look at Regulation D 506(C) as a vehicle to be compliant and attract Accredited Investors.

Good Luck!

Justin Kane · Answer

BRRR

Erin Onsager · Answer

@Anthony Thompson, Thanks!!  It is a good start, but definitely a bit slower going than it seems every guest on the podcast does it...  Alas, maybe that's why they're guests and I'm just a listener.  :-P

Anthony Thompson · Answer

@Erin Onsager one solution I've used, and I know some other local investors have used here in Rhode Island (and likely all over), is to try to find off market deals where you can do creative seller financing, which is often at better rates/terms than you can get from banks.

An alternate strategy is to try to raise private money from friends and family, again this is often at better terms than banks. Even if you don't think you know people with such funds, often people will have old retirement accounts from previous jobs that can be rolled over to self-directed IRAs, allowing you to set up a win-win scenario - you get good rates and favorable lending terms, they get a better return secured by local real estate and managed by someone they know.

Lastly, I've noticed a lot of increased activity in the syndication space, which is a variation of private financing but expanding beyond friends and family. It's a big topic, and definitely something to research (particularly regarding SEC/investment laws), but I do know people who have gone that route to raise big funds for big deals. I'd probably recommend starting with a few private loans from friends and family though, since syndication can be a bit complex.

And of course, congratulations on acquiring your four properties. I know you want to keep growing, but just getting to that point is quite an accomplishment!

Erin Onsager · Answer

@Marci Stein, correct.  I put ~$80K from my 1031 in plus an additional ~$8K of my own money.

I think private money is good advice... I admittedly lack experience in convincing friends and family to invest!  But I guess you don't know if you don't try.

How to scale from a few properties to many?

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