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Updated over 9 years ago, 03/26/2015
I have 30 units, but I want to build an empire
Hi guys,
Last time I posted on here I had an affiliate marketing campaign that was generating me over $1000 per day. Times have changed and traffic has dried up. I now have only a $500-1000 trickle of online income per month. But it's OK! Because I saved every penny of what I made, and having bought my first rental in January of 2014, I finished the year with about 30 units, most of them duplexes. Half are cash purchases, half are financed at 25-30% down, with 4% fixed rate 30-yrs.
I took a load off and did some minor traveling domestically for a few months. I quit my job. It was an amazing time. But I found that I love investing and business and owning income-producing assets, and the income that my properties are producing, about $5000 per month net, while it beats the hell out of my old W-2 income, was not enough to build an empire. I am 29, and would just feel like I wasted my potential if I didn't use this moment to strike while the anvil is hot.
So after my break I went out and got ANOTHER job working for the man. This one, however, pays a ton and is in the oil/gas industry. The lifestyle is terrible, as I am in the field in remote locations in a trailer, working 12+ hours usually on a night shift in cold weather. But the money is unlike anything any other employer would ever offer me. I am making about 12k a month gross from the job, and I have no state income tax and substantial deductions. I am also trying to use what little free time I have to experiment with a much less lucrative remote job so that I can boost my income after I leave the industry.
I have done very little with my life except for working, and I would like to travel the world and become more knowledgeable/worldly. I have barely been out of the American Midwest and it kills me. So I plan to REALLY retire once I get to an acceptable income level and go take off around the world for 2-3 years, then reassess. At that point, to be honest, I'll probably start a semi-active/semi-passive business activity like owning franchises (I've been looking at Sport Clips in particular), since I'll be bored.
My goal is $10-15,000 per month after all taxes. I pay no FICA or state on real estate income, and then of course we have all the deductions for a good chunk of federal.
I am trying to think of the quickest way to get to my goal. I am estimating this will take 2-3 years in the oilfield, at which point I'll be 32.
I sold my house and moved into an RV, so my monthly expenses including fun and entertainment are under $1000 a month. Between the job and the real estate I should be getting 15k a month after taxes, so 14k net after expenses.
I will start purchasing again in June, using my last 5 conventional mortgages. I will be able to buy about 5 in a 6 month period, as I usually buy duplexes for 45-60k with 30% down, with rents of 1100 or so per month. That takes us to the end of 2015.
In 2016, I will buy 7 more properties conventionally financed with a partner whom I already own 3 properties with, thus maxing him out as well. This will probably take 4 months.
I am conservatively estimating I can get $200/door out of these, and they will be duplexes, so 5*200*2 + 7*200 (since I own half) = $3400 a month for a total of $8400/month net cashflow once my conventional mortgages are maxed out.
It's at this point where I am not sure where to go next. Should I buy properties in cash to deleverage at that point? I would consider my current level of leverage, in light of my ridiculously low expenses, not to be excessive, so I would be tempted to do some more 30-40% down financed deals. At this point, I am assuming I would have to go with some sort of portfolio ARM, or buy a larger property with a commercial loan?
I will still have 20 months of at LEAST 15k a month coming in (probably much more) if I stay the full 3 years. So at my average unit cost of about 25k, I could buy at minimum 15 more units in cash, or 2-3x that if financed.
*** What would you do? ***
Afterwards, as a safety net for some capital infusion, I will take two months off of every year to take advantage of an opportunity I have to make about $20k. It's not something I would want to do for longer than those 2 months per year. That will more than cover my living/travel expenses, leaving all the real estate income to pile up. Part of the income will be invested in a boring Vanguard stock index fund for safety and dividends. At that point, I would like to become either a multi-unit franchisee or directly purchase businesses, hopefully buying them with cash since I am very wary of the risk. I would also like to get into oil & gas leases and farms to further diversify my business interests.
I don't understand why you want to partner on these deals. Why dilute your returns when your goal is to no longer have to work for "the man". You can get commercial/portfolio loans with the properties you are currently buying and you don't have the additional cost of having a partner....
I already have 3 properties with a partner, just a small part of my portfolio. He's a childhood friend and it's really not a pain at all. The terms for a conventional mortgage are far more attractive to me than a commercial/portfolio product, so I would like to maximize those before moving on.
Originally posted by @Jerry Poon:
@Steve A. How did you manage to get 30 units in 1 year??
I'm with Jerry,
How did you get 30 units in a year? I'm also curious about how you got 30 year loans? I do all my financing via commercial lenders, and they are only 20 year lenders.
Also, just to be a teasing jerk, it's "strike when the iron is hot", not the anvil. Ha!
Travis
Don't count on that oilfield job for several years with the current economy. Shale production is not as profitable with current crude price, if at all, and OPEC is more than happy to run them out and suck up the loss. It could also turn around and be a non-issue, I would have an exit plan for the current job if it disappears.
Originally posted by @Ryan Jackson:
Don't count on that oilfield job for several years with the current economy. Shale production is not as profitable with current crude price, if at all, and OPEC is more than happy to run them out and suck up the loss. It could also turn around and be a non-issue, I would have an exit plan for the current job if it disappears.
Yes indeed! Thank you for the words of caution. I do have an exit plan that would allow me to make an active $10k/month, but it wouldn't qualify me for financing and I would go insane if I had to do it year round.
Originally posted by @Travis Beehler:
Originally posted by @Jerry Poon:
@Steve A. How did you manage to get 30 units in 1 year??
I'm with Jerry,
How did you get 30 units in a year? I'm also curious about how you got 30 year loans? I do all my financing via commercial lenders, and they are only 20 year lenders.
Also, just to be a teasing jerk, it's "strike when the iron is hot", not the anvil. Ha!
Travis
Good call...I always get colloquialisms wrong. For the financed ones, I still had a job at that point. The rest were cash. I was able to buy so many because I made a load of money from the internet.
I think you should look into the financing aspect more. A commercial/portfolio loan is roughly 5% interest. The interest difference is quite small in my experience. The main difference is the amortization from a 30 year on conventional to a 15-20 for commercial/portfolio loan. With your equity position and available cash flow you should be able to have plenty of adjustment room to accomplish your goals. It sounds like yu are partnering for financing reasons which takes away 50% of your cash flow on a child partnered deal. That plenty of spread to accomplish your expansion goals of what you very stated.
Originally posted by @Kyle Hipp:
I think you should look into the financing aspect more. A commercial/portfolio loan is roughly 5% interest. The interest difference is quite small in my experience. The main difference is the amortization from a 30 year on conventional to a 15-20 for commercial/portfolio loan. With your equity position and available cash flow you should be able to have plenty of adjustment room to accomplish your goals. It sounds like yu are partnering for financing reasons which takes away 50% of your cash flow on a child partnered deal. That plenty of spread to accomplish your expansion goals of what you very stated.
Interesting, I will consider this. Do you have a recommendation for a lender offering what you mentioned?
Originally posted by @Steve A.:
Originally posted by @Travis Beehler:
Originally posted by @Jerry Poon:
@Steve A. How did you manage to get 30 units in 1 year??
I'm with Jerry,
How did you get 30 units in a year? I'm also curious about how you got 30 year loans? I do all my financing via commercial lenders, and they are only 20 year lenders.
Also, just to be a teasing jerk, it's "strike when the iron is hot", not the anvil. Ha!
Travis
Good call...I always get colloquialisms wrong. For the financed ones, I still had a job at that point. The rest were cash. I was able to buy so many because I made a load of money from the internet.
Ah that makes sense. I think people are right though, in that with a commercial loan, you do get a few advantages with them. Check out your lenders in your area, and see how you can leverage "other people's money" as we call it. :) No sense in spending $60k on a property and making say $500 a month, when you can finance a property, make $400 a month, and only be out say 15-20k. You'd be able to buy 3x as many properties for the same amount of money than you would be with buying 1 with full cash. Then, you make more money per month, AND you get appreciation of the property, AND you get to deduct all that nice interest off your taxes. :) Your mileage may vary of course. :)
I would also HIGHLY recommend you make Microsoft Excel your friend. I have a really nice spreadsheet that I made based upon another user's work, and it helped me figure out right away if a property was worth it or not when buying, and it gave me a quick net return results when I popped in the numbers. I'd be happy to share it with you or anyone else on here. Just message me if you'd like it and I'll happily send you a dropbox link.
Travis
Thanks Travis, I actually mapped all this out in excel awhile back, but thought I would post the plan on here to make sure I'm not crazy. I have never dealt with this much cash before. I see what you're saying in that you can expand faster with loans, but at what point does one start buying in cash to take slower growth for more security?
Originally posted by @Steve A.:
Thanks Travis, I actually mapped all this out in excel awhile back, but thought I would post the plan on here to make sure I'm not crazy. I have never dealt with this much cash before. I see what you're saying in that you can expand faster with loans, but at what point does one start buying in cash to take slower growth for more security?
I think that boils down to your comfort level. If you want to start buying with cash and avoid loans altogether, that's an ok route to take, but the disadvantage is of course, you are slower to grow. But, on the flip side, you don't have a monthly mortgage, and can last much longer without a tenant financially.
Personally, my comfort level is to have commercial loans on smaller (1000-1500sq ft) single family homes. That seems to be an area that works best for me and my situation (Cash flow is MUCH more important than appreciation). Some people are more comfortable buying multi family apartment buildings in trendy neighborhoods.
It's all about finding what works best for you. What are your goals, what are your comfort levels, how fast do you want to grow, and what's your ideal amount and type of properties? Once you answer all those, then you'll get a clearer picture of how to make it happen.
Also, you're absolutely right. Excel can tell you numbers, but it can't tell you strategy, or how to learn from your mistakes. I've made a few and while I've managed to make it out ok, they have been a wee bit costly to me.
But keep at it, and eventually you'll get to where you want to be! :)
Travis
@Steve A. Are all of your investments in the Indianapolis area? There are a lot of topics in your post, but I would agree with Travis here that you are better off leveraging for as long as you can. In fact, if I were you, I would be doing cash out refinancing on the properties you bought for cash and use that money for future down payments. When it comes to security, you may see things differently, but I actually feel more secure when I buy properties with the bank's money and keep my cash in my pocket, figuratively speaking.
Originally posted by @Petar Skobic:
@Steve A. Are all of your investments in the Indianapolis area? There are a lot of topics in your post, but I would agree with Travis here that you are better off leveraging for as long as you can. In fact, if I were you, I would be doing cash out refinancing on the properties you bought for cash and use that money for future down payments. When it comes to security, you may see things differently, but I actually feel more secure when I buy properties with the bank's money and keep my cash in my pocket, figuratively speaking.
Yes, they are. I plan to diversify out eventually, but probably not until I hit 60 or so units, maybe not even then.
It's cool that you guys are recommending leverage, as the numbers with leverage certainly look alot juicier than without. Would you recommend this to a "normal" person or are you just doing so because of my high paying job and crazy low expenses? The reason I ask is because I see alot of cautionary leverage posts around here, too.
If I stick around for 3 years, the amount of property I could get using 70% leverage would be pretty sickening.
you may also want to consider doing fewer transactions per year and acquire larger unit properties say 600k 12 unit instead of 10 60k. less transaction costs, you can hire property manager on your payroll. these will be commercial loans 5y ARM with 25y amortization.
tax advantage of leverage comes from making taxable income after depreciation nearly zero. others have pointed to ability to purchase more.
Focus on net worth as the lone metric instead of number of units, cash flow per month.
@Steve A. When determining the right amount of leverage, what it really comes down to is your own risk tolerance, investment style and goals. Personally, I have no fear of taking as many 80% 30-year fixed loans under 5% interest as I can possibly get. In his interview with CNBC, Warren Buffet said that he would love to buy a couple hundred thousand single family homes with 30-year mortgages at today's rates. The reason I say that is because it's obvious that this guy has all the cash in the world, but he's still choosing to leverage. Apart from the straight cash-on-cash ROI, you also need to account for the massive benefits of interest deductions. I get several thousand dollars a year back on my taxes due to the interest expense deduction - and that's just on my primary residence. I wouldn't have this if I bought cash. I also wouldn't have cash in the bank either.
Also, keep in mind the benefits of inflation. Over the decades, the dollar loses purchasing power. Example: what you could buy for one dollar back in 1984 would cost you $2.27 in 2014. So while your real estate may fluctuate in value in the short term, it is very likely to appreciate over a 30-year period. At the same time, your mortgage payments remain the same. And the loan balance continues to go down.
If you don't feel comfortable with leverage, that is perfectly fine. But in the title of this post you mentioned wanting to build a real estate empire. You definitely won't be able to do that with a $12k a month job and doing cash transactions on all of your investments. Don't get me wrong. You may do very well, but you won't build an empire without the appropriate leverage.
The Warren Buffett quote sold me. I'll be using leverage, probably only 70% though. Hopefully it works out. If things get tight I can always go back to a job.
I'm impressed by the action you took in 2014 to get into the game. I can definitely appreciate the way you think regarding your investments. I would have to agree with what @Abhay K. said and get into buildings with 12+ units. I think you'll start benefitting from the economies of scale here.
@Steve A., Ironically, just a couple weeks ago, I happened to read your post from last January.
I'm sorry to hear your internet business has fizzled out quite a bit, but that was exactly what you were worried about in your previous post and hence wanted to diversify into REI. Congrats on sticking with that strategy!
Originally posted by @Jennifer T.:
@Steve A., Ironically, just a couple weeks ago, I happened to read your post from last January.
I'm sorry to hear your internet business has fizzled out quite a bit, but that was exactly what you were worried about in your previous post and hence wanted to diversify into REI. Congrats on sticking with that strategy!
Thanks, I am hoping my current strategy works out the same way, as planned. I really hope oil goes up or stabilizes, because if not, this entire plan can be scrapped. There's no other industry that will hire me for six figures.
Congrats on your great success. It sounds like you and I have quite a bit in common. Although at 37 it has taken me a few more years to get here. I too have 30 units mostly single family but also some duplexes. I have partners in some and own others myself. I own a small farm, have direct investments in commercial real estate, and have even started a couple very small oil companies to operate working interests in stripper wells.
I constantly find myself asking the same questions about levering up further or paying off debt to decrease risk. For the past ~ 7 years i have used a local bank for all my borrowing and can't tell you how much I appreciate the relationship with these guys. Sure you don't get the ultra low federal reserve manipulated rates or terms of fannie mae paper but what you get in return from a good local banking relationship is well worth it. FYI I'm not a banker.
As for my one tidbit of advice, name your empire if you haven't already. I've been building The Abbey Empire International ever since I purchased my first home at 22. When I first used these words, my friends laughed and thought I was crazy but those that know me well no longer laugh at my dreams. I wish you continued success in all your endeavors.