The Snowball- Strategic and Smart or Stupid and Slow?

Question

I am very new to the real estate world, but I have been consuming anything and every bit of content I can get my hands on. At this point, with a pretty good awareness of my (tiny) local market, I know with certainty that I want to buy and hold rentals long-term. In an effort to keep this brief, I'll just get right to my strategy idea. What I want to do is pay off the first house I have (which was my primary residence, until I placed renters in there just 3 days ago) as fast as possible. At that point, I would be completely maximizing the cash-flow on that property which I would use to make extra principle payments on the next property to help pay off that property as fast as possible. At that point, I would own 2 rentals free and clear, therefore having maximum cash-flow from both of those properties that could be used to purchase the next property even faster, while maybe even being able to pocket some of the cash. I would just continue this process over and over which would increase the cash-flow that can go toward more properties, as well as pocket-cash.

Now, one clarifying point:

1) I don't necessarily mean that I would only control one property at a time. I would be willing to own a couple properties in the beginning, but if I was to control multiple properties, the goal would still to be to pay off the property with the least debt as fast as possible so that I could turn around and use that cash-flow to pay off another property and so forth.

Advantages that I see:

The snowball effect that would result from owning more and more properties free and clear which makes it easier to buy more and more maximum cash-flow properties as you go along.

Absolute maximum cash-flow from each property much quicker than waiting the full 30-years for tenants to pay-off your mortgages.

Disadvantages that I see:

Difficulty rapidly paying off the first 1 or 2 properties.

Untapped equity in all of the free and clear properties.

Here's my questions (in addition to any other comments anyone would like to offer):

Is this a good idea?

Are there any resources on a strategy like this?

What are some clever ways to pay off those first couple of properties?

Account Closed · Answer

The best part about the person who owns multiple properties (ex. 10) is that you can use the multiple income streams to pay off the lowest value loan, then snowball that into paying off each house quicker & quicker. For example, before long you'd have 3-5 free & clear properties cash flowing that you could add to paying down other debt incredibly fast. This can get even faster if you add money out of your own pocket to getting the houses paid off quicker.

Just one scenario of many.

Trevor Ewen · Answer

@Michael Landrum

Every investor chooses strategies that some would call foolish and slow and others would call brilliant and long-term focused. What do you think? Clearly, you're in the business of long buy and holds and don't want to move as fast as the debt market will allow you. This is a bit contrarian, but it's the kind of thinking that rewards the patient and disciplined.

There's a tendency to assume that Warren Buffet woke up one day as a billionaire, and although he did, it was not over-night success. His wealth was built in daily, contrarian lifestyle habits of his signature brand of investing. It's 'conventional' wisdom now, but not when he first gave it a shot.

There are many advantages to the low interest rate environment of today. However, there's also not a ton of great places to make a safe 3-5% return. Paying down your debt does just that. Since conventional mortgages in the US have no early re-payment penalty, it's as good as investing in a bond from where I sit.

I also like this strategy because it forces you to move slower through market cycles, but it's also harder to really lose your shirt. The faster you move, the more you are exposed in a correction situation.

If you decide to more aggressively utilize debt and equity later, there's not harm in going that way whenever. Abundance mentality will teach you that all options are available to you. Good luck!

Levi T. · Answer

@Michael Landrum Your better off doing the two-step. Buy 2 properties, sell one and take the cash to buy 2 more properties. You can sell your old ones, low performers, or flip some right out the gate. This gives you downpayment cash.

There is a lot more to the business than you are seeing; operating cost changes as you move from sub 5, 15, 30, 60, 100 units. Interested rates have been great for many years, but if they go up to the old 6%, your loan payments double as you try to expand. At some point you will have to go with commercial loans if you want to keep growing, which means 5 year arms on interest rates.

Because of this, $100 a door is horrible. Repair cost, evictions, turnover, etc. will catch you fast. I just replaced 3 HVAC units for $12,000 total. It would take you 40 months (3.3 years)  to pay just one of them, and before that happened you would already had other issues you would have to pay for. I would not touch a property that produced less than $300 a month, and it better be an A+ property in an A+ area, at that price point. I want $500 or $800 a door.

Buying properties normally come with some repairs or rehabs out the gate, basic stuff like floor, cabinets, paint, and new appliances can run you $10k-20k for a 1,000sqf. That's more cash you need to keep the engine rolling.

@Trevor Ewen post is on point. You need to be in for the long hall. Yes you can get fast when opportunity presents itself, but there is going to be a lot of slow years in between.

You can do it, but don't rush into it!

Zach Quick · Answer

Are you 1031ing a lot of these when you are selling?

Michael Landrum · Answer

Levi T.

ALSO!! GOOOOOD insights into the business that I was not aware of. I hadn't really considered what the rise of interest rates would do to the loan payments. As well, the difference in operating costs for the amount of properties I own was not something I had given much thought too! Again, thanks for the advice!

Michael Landrum · Answer

Levi T.  Very good! I can see that there's no way to get around the longevity required to really succeed in this real estate biz. I need a more sober-minded view there so thanks for that! As for the "$100 a door" goal that I have, that is AFTER expenses (which include utilities-if i pay for them-, capex, vacancy, eviction, repairs and maintenance). I want to build money in reserves for those inevitables AND THEN have a $100 that can be pocketed.( or, ideally reinvested).

Could you talk a little more about the "two-step"? What is the advantage to leveraging to buy 2 at a time? Keep in mind that my ultimate goal is maximum cash flow, not just control of properties and equity. Is the idea that as I'm picking up multiple properties at a time, I can sell along the way and pocket some of that cash? So, say I pick up 2 properties, rent 1 and flip the other? Then repeat?

Levi T. · Answer

I don't have to do that, I'm already surpassed the burn rate. If it's the same year you can't 1031 as it's a flip, otherwise one would.

Levi T. · Answer

Yes, buy 2, sell or flip 1, then buy 2 more, sell or flip 1, buy 2 more.. When I talk about $300, $500+, I mean after expenses, after everything. This is a business, as you grow repairs are always happening, and at some point capital expenses are always happening, and court, evictions, turnover, leases, commissions, etc. While it's nice to think you can put a pin on what it's going to cost you, you can not 100% do that. if business was that easy the rest of the world would be doing that without all the ups and downs you see in the stock market. Everyone shoots for averages, but you will always have the unknown, and the unknown is always expensive. O'yes, the stories I could tell you!

First you do some residential loans, then you get into commercial loans, then you go from residential landlord insurance to commercial insurance. All of that is not the same beast, it always cost more than the first, insurance always covers less but cost more, loans go from 30 years fix to 20y with 5y arms, etc, etc. Then you have repairs, most start of DIY'ing it, then they start Craigslist'ing, then they find cheaper contractors, then you get so big you can't put up with the BS so you higher mid range or more expensive GC's to handle a lot of your repairs and remodeling till one day your so big you just hire you own people full-time to do all that bs. And thus it's a business.I started out with just one rental, now I have an entire management company for myself, also have an full on investment company /arm of my portfolio, real estate buying company /arm, I have guys that rehab for me full-time, repair guys that work full-time, agents leasing full-time as well. All just to support that dream your talking about!Good luck!

Michael Landrum · Answer

@Jonathan Fowler

Your absolutely right. After reading everyone's input,  i came to the conclusion that this is the pepper way to get the snowball rolling. So now my plan is to acquire about 5 to seven doors, each cash flowing at least $100, and assuming all that cash flow at the least leveraged property. With the low process in my market, paying off debts completely will not be terribly difficult,  and momentum will build incredibly fast. I'm so excited because this seems like such a powerful strategy that will help me realize my real estate,  and financial goals!!!

The Snowball- Strategic and Smart or Stupid and Slow?

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