Another New Member from DFW

[Gary West]

Hello everyone. I love the site and my friends and family tell me that I spend way too much time here. :o)

I am a 43 year old Registered Nurse. I would very much like to become a full time real estate investor. Its a very slow task when you were not born with a trust fund. Still with everyone's help I may be able to live my dream.

I own one rental property that pays 1250 in rent and has a small and ever shrinking balance of the original mortgage left. I should have it free and clear by Nov 2013. I also own a land property free and clear where I would like to build to rent or build to sell.

Im a bit more conservative than alot of you "go getters" but if anyone has any pointers Im always glad to listen and learn.

Currently my investment plan consists of paying off my current SFR rental and then building a 65k(ish) structure on my land. Once the house is built Ill sell for a profit or rent it out. Once its paid for Ill grab another one. Ill rent it, pay it off then rinse and repeat. The beauty of the plan is that the second structure will have 3 people paying the note. Me from my w2, the renter of the first structure (since it will be free and clear) and then the new tennant of the 2cnd structure. My goal is to have 10 - 15 free and clear structures by the time i retire. Where the last structure actually has up to 16 people paying for it. This way I will slowly develop wealth (assets), simultaneously with considerable income.

Certainly there are ways to make this better such as finding great buys and possibly flipping. Im open to those avenues as well. However (unless i change tactics) ill only be buying properties every 2-3 years as thats how long it should take US (me and my tenants) to pay the latest purchase off.

Im open to suggestion for improvement. Thanks all.

[Harry M.]

Gary West - welcome to BP!

Some feedback on your plan: level of comfort with how much you owe is a personal thing, but one thing you could do to go faster is to leave the financing in place as you add properties, then once you've reached the requisite number of properties, attack the mortgages until they are paid off. Cash flow grows faster due to the higher return with financing, and when it comes to paying off you've already got a number of properties to "gang up" on each mortgage.

I've got a little simulator I wrote so I can play with different scenarios and see what happens. Here's are a couple of example scenarios I ran to see the difference between the two approaches. The hypothetical investor has 2K/month of outside money (W2, flipping, etc - everything but cash flow) to put in and purchases 65K properties that rent for 950/month. His cash flow goal is 5K/month. He saves 6 months of PITI per property and keeps it on the sidelines for reserves. Since you were talking about building new properties, I put the expenses at 45% instead of following the 50% rule precisely. In this case, I think it's reasonable to expect lower maintenance/CAPEX for a number of years. The sim also assumes 2% for closing costs, and also 2% inflation (applied to everything except mortgage payment of course)

Scenario 1 - keeping the financing in place until there are enough properties that when paid off will meet the cash flow goal. This works out to 10 properties. Then pay them off.

Properties are bought between months 10 and 68, and cash flow hits 3110/month at the beginning of year 7(this is in year 7 dollars with the 2%/yr inflation applied).
The first property is paid off in month 78, and it accelerates from there, until the last one is paid off in month 133. Cash flow is $6096 (the original goal of 5000 is 6094 in year 11 dollars).

Scenario 2 - Buy and pay off one a time.
Property 1 is bought in month 10, and paid off in month 33. And so on, until property #10 is bought in month 174, and paid off in month 183, and the cash flow goal is met.

So there's a good 4+ year difference in the time it takes to reach the goal.

Regarding the increased risk of carrying a lot of mortgages, one way to reach a happy middle ground is to increase the amount of reserves you save for each property. There's a law of diminishing returns to how much risk is eliminated as you increase the reserves. The difference between a guy carrying 1 month PITI as reserves and 6 is day and night. In fact, I'd say the guy carrying one month is pretty much guaranteed to get into serious trouble before long. Between holding say 12 months and 18 months of reserves, not so much. There may be a point where the difference in risk between holding X in reserves, and owning the property free and clear is fairly small. In scenario #1 above, if you increase the reserves for each property to 12 months PITI, you get there in 147 months, still a lot faster than scenario 2.

Can you tell I'm a complete nerd? Anyway, I hope this was of some use. Best of luck with your plans!
-Harry