Rental Property Empire?

Question

Feeling a bit frustrated. Looking for inspiration.  I currently own 6 SFR’s and under contract on #7. I buy to hold and always felt that eventually with enough property I’d start to see real passive income. However with 7 properties I expect to net $2,700/month(with no maintenance). I run numbers before each deal so I account for the expected expenses however I’m starting to see that my portfolio really only takes care of itself and doesn’t do much to bring in real passive income. Allow me to elaborate. There always seems to be unexpected issues that arise with rental property. If it’s not the tenant it’s the property. When it’s time to see what these properties net each month it’s always less because of one thing or another. Maintenance, the tenant is short rent, the water meter is broken, etc. When I had 1 or 2 properties and an unforeseen issue would arise for $500-$1,000 I’d lose my mind. I’d get so upset. This would bring me negative and I’d be out of pocket. What kind of investment is that right? Now with 7 properties I find that when these same issues arise the cost is simply eaten from the cash flow coming from the other properties so I’m not personally coming of pocket so to speak. The question is however, how can a rental property investor build a portfolio that both takes care of itself and nets 8-10k/month of passive income? What does it take? 30,40,50 properties? Is the ticket to switch to MF? I’m an OOS investor and multi-family is a bit daunting. I’m not a big fan of syndication as I believe it’s far more advantageous to the syndicator. Also, they are short term and I’m looking for long term. Buy and hold forever. I’ve hit a wall as I’m beginning to feel like there is no reasonable way to win in this game yet RE is the most tried and true form of investing for long term wealth right? So, what am I doing wrong? I’d appreciate some insight.

Whitney Hutten · Answer

@Michael Lewis Investing can be monotonous and boring (as it should). And I sense your hesitation, but really what you are asking are mindset questions that only you can answer. There are 1000's if not 100,000's of investors here the invest all out of state, in SFR, small multi, large multi. and make it work. For me, investing out of state was the only way I was going to hit my financial freedom number with the capital I had in the timeframe I wanted. Perhaps it's time to switch markets, teams, and maybe perspectives to bust through your plateau and reach the next level.

David Burdo · Answer

HI @Michael Lewis, I don't think what you are experiencing is abnormal.  Seven properties, cash flowing about $400/door, B/C area properties out of state, professional PM - that sounds about right in today's market. To get to $8-10K/month, it is realistic that you will need 20-30 of that type of investment property to get there.

I agree with @Whitney Hutten (easy to do BTW, she's always right) I don't think you're doing anything wrong.  I think you're learning your business and learning about yourself in the process. Sounds to me like you're winning. Keep playing.

Michael Lewis · Answer

@Whitney Hutten

Thank you Whitney. I believe you’re correct. What it comes down to simply is having more cash invested to yield to CF I’d like to see. Buying SFR’s is what I know and feel comfortable with but it’s slow and as mentioned it doesn’t move the needle much. Perhaps it’s time to entertain larger purchases.

Kerry Noble Jr · Answer

what market are you investing in?

Michael Lewis · Answer

@Whitney Hutten

Thank you Whitney. I appreciate your input. My portfolio does cash flow. In fact to date for 2020 my portfolio has had a 11.6% COC return. To answer your questions. About half are TK and one is fully paid off so I have a mix which I believe is good. Perhaps I just find that with every new property added it only moves the needle slightly. The concept of 2-4 unit MF’s sounds good in theory however from my research and in the areas I invest in the MF’s tend to attract a lower quality tenant which result in increased maintenance and turnover. For example I almost pulled the trigger on a duplex last week. It was in a decent B-/C+ area and was rehabbed a few years ago. After some due diligence I found that in the past 18 months it had a total of 16 maintenance calls and a break-in. That was a hard pass for me. The #’s looked good on paper as usual right but the reality painted a diff story. I run into this often when looking at 2-4 units. The idea of buying into a 5+ like a small apartment when OOS is something I’m not sure I’m comfortable with. Especially with the presence of covid and the increased demand for SFR. If I were to buy an apartment building I’d prefer it within a couple hour drive from home. Yes you are right, I’ve calculated 25-30 SFR’s to bring in the # I’m looking for out of a RE portfolio however is that advisable? Seems like a lot to manage even though I use professional PM CO’s there is still always the managing your PM that is required.

Whitney Hutten · Answer

@Michael Lewis It's hard to say why you aren't seeing cashflow with your properties.  Are the turnkeys? Are they rehabs? What level of repair are they in? What type of tenant do they attract? How well does your PM take care of them? Are they proactive, or reactive?

Then there is the element of scale.  And there are a million ways to slice this topic as well.  One investor on here may have 5 properties paid off cash and manage them themself and say "I'm financially free". Another wants to use lending to create velocity with their money, and spread their risk and need 20-25 homes?  The math is simple though... take what you need to monthly to provide for FI (add a little buffer), and divide by your average cashflow per door.  This will tell you home many properties you need. The caveat here is you have a property that is very well underwritten and have calculated setting aside reserves every month.  I imagine you are going to be 20+ properties when you do this calculation.

Then there is when people decide to pivot. Initially, an investor can only handle so many puzzle pieces (analysis, market research, lending). Once they figure that out, they are OK with 20-40 doors and call it a day. Others realize at 5-10 doors that to scale faster they need to pick up new skills (I hit this piovt point at 20 doors... late bloomer!).

In this case, this pivot for you sounds like MF so you can get more doors under 1 roof with 1 transaction. Yes, you need a new realtor, PM most likely, and lender... but you have translatable skills and can make this mind-shift much easier.

Back to your central question "what am I doing wrong"... Nothing... you are evolving and you have internal resistance to that. It's not so much about the goal of FI, but who you have to become to reach that goal.  Sounds like you are on the precipice of great change in your business.

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