New investor business plan

[Peter Kozlowski]

Hey everyone,

New investor here. I just read and took comprehensive notes from three books on real estate investing:

- Long-Distance Real Estate Investing (David Greene)
- The Book On Rental Property Investing (Brandon Turner)
- Home Owning For Dummies (Eric Tyson & Ray Brown)

I was particularly drawn to Brandon Turner's REI business plan templates for new investors, and I liked his ten-year fourplex trade up model. I'm looking to invest in the St. Louis, MO area.

If you all would be so gracious as to take a gander at my business plan below and offer advice, I'd much appreciate it. I guess my first question would be: If I'm going to finance that larger apartment building in 2025 whether I sell my fourplexes or not, why not just skip purchasing the fourplexes in the first five years and just go straight for that building in 2020? Again, any advice would be much appreciated!

2020

1) find a fourplex that needs a little help listed for $35K

2) offer $30K cash plus ask the seller to pay closing costs

3) spend $20K to rehab the property & make it rentable

- satisfying the standard 10% forced appreciation during the first year

4) the property should now be worth ~$33K

- giving you ~$3K in appreciation alone (not counting potential rental cash flow)

2021

1) cut out as many expenses as you can on the fourplex & have the highest rents possible

2) assuming 3% appreciation the property should now be worth ~$34K

- giving you ~$4K in appreciation alone

3) assuming all expenses are paid & $650/month individual unit rent, the total rental cash flow from all four units should be $1600/month

- total annual profit: $4K (fourplex appreciation) + $19,200 (annual rent) = $23,200

2022

1) buy fourplex II (using the profit from fourplex I) that needs a little help listed for $35K

2) offer $30K cash plus ask the seller to pay closing costs

3) spend $20K to rehab the property & make it rentable

- satisfying the standard 10% forced appreciation during the first year

4) the property should now be worth ~$33K

- giving you ~$3K in appreciation alone (not counting potential rental cash flow)

5) assuming 3% appreciation fourplex I should now be worth ~$35K

- giving you ~$5K in appreciation alone

6) assuming all expenses are paid & $650/month individual unit rent, the total rental cash flow from all four fourplex I units should be $1600/month

- fourplex II is still being rehabbed

- total annual profit: $5K (fourplex I appreciation) + $3K (fourplex II appreciation) + $19,200 (fourplex I annual rent) = $27,200

2023

1) buy fourplex III (using the profits from fourplexes I & II) that needs a little help listed for $35K

2) offer $30K cash plus ask the seller to pay closing costs

3) spend $20K to rehab the property & make it rentable

- satisfying the standard 10% forced appreciation during the first year

4) the property should now be worth ~$33K

- giving you ~$3K in appreciation alone (not counting potential rental cash flow)

5) assuming 3% appreciation:

- fourplex I should now be worth ~$36K

- fourplex II should now be worth ~$35K

- fourplex III should now be worth ~$33K

- giving you ~$14K in appreciation on all three fourplexes

6) assuming all expenses are paid & $700/month individual unit rent, the total rental cash flow from all eight fourplex units should be $3200/month

- fourplex III is still being rehabbed

- total annual profit: $6K (fourplex I appreciation) + $5K (fourplex II appreciation) + $3K (fourplex III appreciation) + $38,400 (fourplexes I & II annual rent) = $52,400

2024

1) cut out as many expenses as you can on the fourplexes & have the highest rents possible

2) assuming 3% appreciation:

- fourplex I should now be worth ~$37K

- fourplex II should now be worth ~$36K

- fourplex III should now be worth ~$34K

- giving you ~$17K in appreciation on all three fourplexes

3) assuming all expenses are paid & $700/month individual unit rent, the total rental cash flow from all twelve fourplex units should be $4800/month

- total equity: $37K (fourplex I price) + $36K (fourplex II price) + $34K (fourplex III price) = $107K

- total annual profit: $7K (fourplex I appreciation) + $6K (fourplex II appreciation) + $4K (fourplex III appreciation) + $57,600 (annual rent) = $74,600

2025

1) sell the fourplexes

- use the 1031 tax exchange during the transaction to defer capital gains taxes to a later date (covered in SELLING section)

2) buy twenty four unit apartment building w/ that $107K equity as a 20% down payment for a building priced at ~$535K (remaining loan amount is ~$428K)

- after negotiating for lower price & seller pay closing costs of course!

- see if you can’t get that $428K privately to pay off as a ‘mortgage’ w/ minimal interest rate (1% George & Mom?)

- assuming a 1% interest fifteen year loan w/ $5K annual property tax & $2K annual insurance, the monthly repayment should be ~$3K

- if nothing from George & Mom, use seller financing!

- put down that $107K down payment & have the sellers finance the rest ($428K)

- when the property appreciates in the future, get a new loan from a bank & keep the difference (to invest in more properties)!

3) spend ~$50K to rehab the property & make it rentable

- satisfying the standard 10% forced appreciation during the first year

4) the property should now be worth ~$588K

- giving you about ~$53K in appreciation alone (not counting potential rental cash flow)

- assuming all expenses are paid (including the monthly $3K loan repayment) & the building is rehabbed, you now have ~$196K in equity

2026

1) cut out as many expenses as you can on the building & have the highest rents possible

2) assuming 3% appreciation the property should now be ~$606K

- giving you ~$71K in appreciation alone (not counting potential rental cash flow)

3) assuming all expenses are paid (including the monthly $3K loan repayment) & $700/month individual unit rent, the total rental cash flow from all twenty four units should be $6600/month

- total equity: original down payment amount ($107K) + appreciation amount ($71K) + annual loan repayment amount ($36K) = $214K

- total annual profit: $71K (building appreciation) + $79,200 (annual rent) = ~$150K

2027

1) cut out as many expenses as you can on the building & have the highest rents possible

2) assuming 3% appreciation the property should now be ~$624K

- giving you ~$89K in appreciation alone (not counting potential rental cash flow)

3) assuming all expenses are paid (including the monthly $3K loan repayment) & $700/month individual unit rent, the total rental cash flow from all twenty four units should be $6600/month

- total equity: original down payment amount ($107K) + appreciation amount ($89K) + annual loan repayment amount ($36K) = $232K

- total annual profit: $89K (building appreciation) + $79,200 (annual rent) = ~$168K

2028

1) sell the twenty four unit apartment building

- use the 1031 exchange during the transaction to defer capital gains taxes to a later date (covered in SELLING section)

2) buy seventy five unit apartment community building w/ that $232K equity as a 20% down payment for a building priced at ~$1.16 million (remaining loan amount is ~$928K)

- after negotiating for lower price & sell pay closing costs of course!

- assuming a 5% interest thirty year loan w/ $11K annual property tax & $5K annual insurance, the monthly repayment should be ~$6300

- don’t forget the seller financing option!

3) spend ~$100K to rehab the property & make it rentable

- satisfying the standard 10% forced appreciation during the first year

4) the property should now be worth ~$1.28 million

- giving you about ~$120K in appreciation alone (not counting potential rental cash flow)

- assuming all expenses are paid (including the monthly $6300 loan repayment) & the building is rehabbed, you now have ~$428K in equity

2029

1) cut out as many expenses as you can on the building & have the highest rents possible

2) assuming 3% appreciation, the property should now be ~$1.32 million

- giving you ~$160K in appreciation alone (not counting potential rental cash flow)

3) assuming all expenses are paid (including the monthly $6300 loan repayment) & $700/month individual unit rent, the total rental cash flow from all seventy five units should be $23,700/month

- total equity: original down payment amount ($232K) + appreciation amount ($160K) + annual loan repayment amount ($75,600) = ~$468K

- total annual profit: $160K (building appreciation) + $284K (annual rent) = $444K

2030

1) cut out as many expenses as you can on the building & have the highest rents possible

2) assuming 3% appreciation, the property should now be ~$1.36 million

- giving you ~$200K in appreciation alone (not counting potential rental cash flow)

3) assuming all expenses are paid (including the monthly $6300 loan repayment) & $700/month individual unit rent, the total rental cash flow from all seventy five units should be $23,700/month

- total equity: original down payment amount ($232K) + appreciation amount ($200K) + annual loan repayment amount ($75,600) = ~$508K

- total annual profit: $200K (building appreciation) + $284K (annual rent) = $484K

- retire on that annual income stream!