What am I doing wrong? Or am I doing things right?

Question

I currently have 4 rental properties.  2 are older (30+ years) in an area that is around 300,000 people and growing, but a little lower cost.

2 are in a major metropolitan area and > 10 years old requiring minimal repairs and, although they cost more, the rents are a lot higher and pay almost the same cash on cash with more appreciation potential than the 2 older homes.  These homes are in a primo prime location and would be expected to appreciate well over time (although I didn't purchase them for just that purpose - I actually worry about them appreciating too much and my not being able to raise rents fast enough to offset property tax growth).

All 4 of these homes provide positive cash flow each month and if repairs and vacancies are minimal, generate about $3,000 of net profit per month in total.

I have approximately the following equity in each home:

- Older home 1 - 50%

- Older home 2 - 25%

- Newer home 1 - 30%

- Newer home 2 - 30%

All have had full occupancy the last couple of years.  I haven't been through a recession or a big downturn since I've become a landlord, so I don't know what to expect there (any insights would be appreciated).

I work a regular job that pays well and could have all 4 of these paid off in the next 6 years if things go average.  Sooner if things go well and much sooner (maybe 3 years) if other investments do really well.  I plan on having the cash saved up in the next 6 years to pay them off.

Until then, I am keeping these on 30 year notes ranging from 3.75% to 4.125% and make the minimum payment each month

They cash on cash around 8-9% for the newer homes and around 12-14% for the older homes.

I am not planning to add any new houses to my portfolio in the next couple of years while I build up my powder again.  I could technically quit my job and live off the profits from these 4 homes today but I am more risk averse than that and would like to have more cash reserves after they've been depleted a bit to acquire these homes.

I'm always amazed how people are able to build a portfolio of 40, 50, 100 homes and haven't quite figured out how to do that unless most of those homes are under $100,000 (or much less) and they've been doing it 10+ years, but you do hear of it on the Bigger Pockets podcast.

So, given all that:

1) What am I doing right?

2) where am i taking on too much risk?

3) what am I doing well?

Any thoughts or recommendations would be greatly appreciated.  Thanks!

Ron Flatt · Answer

Looks like you have a great handle on things, but also are adverse to risk, (which is a good thing.)  Personally, I would probably try package the two older homes and get a 75% loan, with that you would have cash available if a bargain comes up.  5 properties should give you the same net each month, but you have 5 properties also being paid off.

You have received lots of advice, and I can see the advantage of each of them.  My brother-in-law will only buy for cash.  I do buy for cash at Auctions and Tax Sales, but when I can I do refinance to pull my cash back out, unless I am owner financing them.

In the end you know your risk tolerance, Do not over leverage, stick to numbers that work for you.  I figure a 20% vacancy rate and for the last 10 years I have never had a year less than 95% occupancy.  Use numbers that work for you and your buying philosophy.  The more doors I have, the less a vacancy hurts.  When I only had one rental and it went vacant, I was scrambling to make the mortgage from the family account.  Now if one is vacant, the others have all the mortgages paid.

I admire Dave Ramsey and his view on debt.  I just disagree that all debt is bad.  A car, a credit card that is not paid off monthly etc.  Debt on income producing assets are different in my opinion.  I want more doors that will cushion a vacancy and my tenants are paying for each door for me.

Shannon Slade · Answer

Take on as much leverage as that you can still sleep at night!  Only grow as fast as you feel comfortable, contrary to belief real estate will not make the average person a millionaire overnight.  So invest slow and steady, that's my goal.

Brent Coombs · Answer

"I plan on having the cash saved up in the next 6 years to pay them off". My verdict: Wrong.

"I am not planning to add any new houses to my portfolio (soon)". My verdict: Wrong.

I reckon @Ben Wilkins has the RIGHT idea: "why do you want to wait in order to grow your portfolio? Why do you want to pay off the current properties?" Congrats, so far...

Ben Wilkins · Answer

@Steve S. - To mitigate risk, make sure that you have a strong lease, and that you are setting aside savings for maintenance, CapEx, and vacancies for each property that you own. That will lower the risk factor

As far as growth: why do you want to wait in order to grow your portfolio? Why do you want to pay off the current properties?

The more equity that you have in your properties, the less cash you have for investing in more properties. If you want to grow your portfolio, you should leverage the properties that you currently have. With only 6 years left to pay them back, you probably have quite a bit of equity available that you could be using to expand. That is usually how people expand faster, rather than paying off properties.

If each property is set up with savings for maintenance, CapEx, and vacancies, then your risk is decreased.

Dylan B. · Answer

@Steve S.

If you are not wanting to acquire more properties, then ya sure pay them off, however you are using other peoples money to pay them off so I wouldn't use your own cash to help pay them off.

I am more risky and would like to grow my portfolio and don't have a ton of cash on hand so I like to take HELOC's out of the properties that I do own in order to put down on more properties. My ROI is higher because of the leverage I am using.

The reason to me that it is smart to leverage rental properties, because you are using other people's money to pay them off (through the rent money).  Let's say you had $100k that you wanted to invest, you could buy a $100k home all cash, however this puts a lot of risk on you because you have all your eggs in one basket plus your ROI is a lot lower vs the alternative. Let's say you are able to rent the place out for $1400 and after you pay your expenses, you cash flow $800. That's great however let's say you had the same $100k but you purchase 5 properties at 20% down ($20k down on each of the 5 $100k properties). You are able to rent them all at at the same $1400 however your expenses are more and you are only able to cash flow $250 on each, so multiply that by 5 properties... $1250 a month cash flow. That's a lot better than the $800 with the 1 property and you invested a total of $100k on each scenario.

It all comes down to what are your goals and what types of risk are you willing to take.

Anthony Dooley · Answer

Risk is a question only you can answer.  A conservative strategy that I have used and recommend is to "debt snowball (Dave Ramsey) the properties.  Pay off the one that has the lowest balance. With no debt, your cash flow increases and you can't get foreclosed on in a market crash situation. Save up a strong reserve for emergencies, repairs, and taxes. Everything above that, put on the smallest debt balance. Once that is done, do the same to the second one. I know this sounds boring, but ask yourself, "What would the monthly cash flow be if there were no mortgage debt on these?"

Account Closed · Answer

Use your own head, instead of listening to supposed RE gurus.  Sounds like you're doing great to me.  I'm sure there are stories about people having 100s of properties, but heck, look at how many times Trump filed bankruptcy lol.  Just because someone supposedly owns hundreds of properties, doesn't mean it's lucrative or lucrative for the long haul, etc.

Do what works and makes sense to you.  What you said makes sense to me, and something that is manageable in the real world.

Brent Coombs · Answer

@Steve S., my premise is: there's bargains to be had, in ANY market, ANY time!

What if you come across one (motivated/distressed Seller) - TOMORROW? Ready?...

Steve S. · Answer

I'm not saying I WOULD do that. I'm just saying if all goes well, I could.

I don't want to chase high prices at the moment but who knows if they will ever drop below today's prices again.

Steve S. · Answer

My understanding is you really can't leverage your properties until you have way more than 25% equity in them. Most of mine are around 30% equity at the moment so I really wouldn't be able to use them hardly at all to fund the next deal at this time.

I was saying if I really focused and all goes well, I would probably have enough cash in 6 years to pay them all off.

What am I doing wrong? Or am I doing things right?

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