Building a $1.8 Million rental portfolio in 2 years

Building a $1.8 Million rental portfolio in 2 years

Real Estate Investor · Minneapolis, MN · Member since 2016 · 10 posts · 9 votes

 I started out by renting my condo to a friend 3 years ago when my company moved me all  over for a work assignment. I was able to save up quite a bit as my living expense was paid for and I put away all my salary and paid down my condo with the rent. I started looking at investing my savings and realized real estate is the best way to go, I began reading books and listen to podcasts religiously and guess which podcast I listened to the most :) .After returning to states I found these two old school investors (brothers) on Craigslist who were willing to CD out their 260k duplex near dt Minneapolis ( Marcy Holmes) for 10% down and 5.5% int, I knew just enough to jump on the deal and it worked out great. It was cash flowing and only need cosmetic work, I also had a friend who knew about fixing houses so I worked out a deal where I give him a certain % equity so he would help me with updating and maintaining the property. We have since increased rent and the property is apprised at 320k. The whole experience provided me with more confidence and I began to look for SF Brrrr opportunities. Long story short, I found two single families in a up and coming neighborhood in Saint Paul, one was 75k, apprised at 130k after updates and the other 90k, 150k after updates. I also began working with a portfolio bank and build good relationship where they provide me with access to line of credit and quick refinancing. Long story short, the two brother who CD us the duplex liked us so much they CD-ed us a $450k four-plex ( Marcy Holmes again) at better interest rate. We were also able to do few cosmetic update and raise the rent 20% on that one as well. Long story short, since than I have bought 2 more single family rentals( one financed and one on CD in North Minneapolis), a duplex , 4-plex and one more 4-plex I currently have under contract. Its been a crazy ride but I tried to avoid all the mistake mentioned on the podcasts and books and so far I am loving the experience. Sleep was not easy the first few month and I was working between 60-80 hours per week.  Now every thing is cash flowing and I have cash reserve/line of credit set up for emergencies. I have a go to contractor I call for most of the work and I am setting up a website to help with application process.I am actually looking at a apartment building now and have asked the owner if they are interested in doing CD, they have said they may be open to it, this would almost double my portfolio but I am looking to raise funds from family and friends... wish me luck

Lee

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Peter TverdovBusiness Member
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
9y

Lee I personally feel like you're playing with fire but I like to be very mindful of risk. People probably thought rental markets were still strong in 2007, just like guys in the oil fields thought oil was a solid price at $100+ a barrel 2-3 years ago before it tumbled to $25 a barrel. If a storm comes (like a rental market quickly changing) that LOC will pucker up real fast and then you will have dangerously low reserves. I would personally never count on a LOC as my reserves when it can be taken away in a matter of minutes. Furthermore, if you only have 15% equity in your portfolio that is also dangerously high. That means your LTV is 85%? So if there is a problem, you are screwed. You cannot refinance because most refinances are 75-80% LTV. I say this not to attack, but to warn you. I have a large portfolio but I will NEVER allow it to go above 75% LTV and I track that monthly. I keep 6 months of reserves on every property and that money is cash or in equities that can be pulled in 3 days. It's easy to fall into a false sense of security when you haven't had to deal with bad things happening or a bear market. Be careful, I think you're playing with fire and should not buy anything else until your LTV is 75% and you have real cash reserves not a LOC. Just my 2 cents. Good luck.

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  • Real Estate Investor · Minneapolis, MN · Member since 2016 · 10 posts · 9 votes
    9y

    sorry about all the "long story short" quotes

  • Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    Congrats @Lee Yan!  Thanks for sharing your story and how hard you worked for it in the beginning (60-80 hr weeks).

    I see 'CD' mentioned a lot.  Do you mean Contract for Deed?  I hope not.  They work if they work, but not if the brothers get into financial trouble at all and liens attach to 'your' properties.

    Thanks for the clarification and congrats again!  

  • Real Estate Investor · Minneapolis, MN · Member since 2016 · 10 posts · 9 votes
    9y

    Thanks Steve, you are right about CD as contract for deed and the risks it carries. The brothers are older gentlemen and owns the property free and clear, they own about numbers of property in the area and their motivation was retiring. We did get a lawyer and a broker and went through a closing company for all paper work involved.

  • Tim SwierczekPro Member
    Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y
  • Tim SwierczekPro Member
    Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    opps I mean to add great, share thanks for the motivation

  • Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    9y

    @Lee Yan Congrats on building a nice portfolio in such a short time frame!

  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    9y

    What's the total mortgage on that portfolio and also how much reserves do you have per property? LOCs can be frozen FYI. Also, the portfolio lender you used...was this a small bank/credit union or one of the national portfolio lenders you see online? TIA.

  • Real Estate Investor · Minneapolis, MN · Member since 2016 · 10 posts · 9 votes
    9y

    Peter you are correct about the risk of LOCs, however, as long as the rental market remain strong, (which I am seeing as getting stronger in Minneapolis and the banks agrees), banks will likely see my business model as safer lending and keep the LOC open. I am working with Citizen bank of Minnesota, they are a 140 year old community bank HQed in a small town in MN. Aside from service and competitive rates, they also value their long term relationship with customers. These type of banks recall loans as absolute last resort and will work with you during crisis. I got look at my spread sheet closely but I should be between 15-16% equity on the portfolio. I have about 5k per property for cash reserve, it may seem low but when I buy property I avoid ones with major repair such as bad roof or siding(aside from the flips). I am also planning on selling my condo and I believe it will be a 25k gain. With my current cash flow I can choose to pay off a property under 200k every 3 - 4 years or keep acquiring. I like to get to 2-3 year pay off period and roll up to 40% equity before acquiring again. I say that now but will not pass a deal if I see one.

  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    9y

    Lee I personally feel like you're playing with fire but I like to be very mindful of risk. People probably thought rental markets were still strong in 2007, just like guys in the oil fields thought oil was a solid price at $100+ a barrel 2-3 years ago before it tumbled to $25 a barrel. If a storm comes (like a rental market quickly changing) that LOC will pucker up real fast and then you will have dangerously low reserves. I would personally never count on a LOC as my reserves when it can be taken away in a matter of minutes. Furthermore, if you only have 15% equity in your portfolio that is also dangerously high. That means your LTV is 85%? So if there is a problem, you are screwed. You cannot refinance because most refinances are 75-80% LTV. I say this not to attack, but to warn you. I have a large portfolio but I will NEVER allow it to go above 75% LTV and I track that monthly. I keep 6 months of reserves on every property and that money is cash or in equities that can be pulled in 3 days. It's easy to fall into a false sense of security when you haven't had to deal with bad things happening or a bear market. Be careful, I think you're playing with fire and should not buy anything else until your LTV is 75% and you have real cash reserves not a LOC. Just my 2 cents. Good luck.

  • Excelsior, MN · Member since 2016 · 52 posts · 27 votes
    9y
    Congrats Lee Yan
  • Real Estate Investor · Minneapolis, MN · Member since 2016 · 10 posts · 9 votes
    9y

    @Peter Tverdov

    You make good points about risk of having low LT. I am slowing down and plan to sell 2-3 properties in the next 5 years before any more purchase. I am bullish on rental market as I been tracking housing inventory/rental in MN  for the last 3 years. Here's my assessment on the market in Minneapolis, please let me know your thoughts on my thoughts: ( this would only apply to MN and I do track economical data at my day job)

    1. Demand- is being outstripped by the low supply of affordable (=< 250K) single family homes and affordable multi-family rentals (lowest inventory in 20 years). This market pressure will likely increase as builders stopped building houses under $350k due to thinning profit margin. With the tighter lending standards by banks and the "wait and see" attitude of the millennials, we predict the demand for median single family rentals and affordable small multi-families ($1200-$1500) will continue to increase over the next 4 years.

    2. Supply - The average backlog for builders in MN are 3-4 years, which is further pressured by shortage of qualified labor and higher turnover/costs. We had predicted last year the supply would not catch up with demand for 4 years, but we are pushing that time line out to 5-7 years. (While tighter government policy may lead to less immigrant population, it will only affect certain housing pockets around Minneapolis/ St. Paul)

    3. Job market - Historically, rental market in general has been tied to the job market; US job market is stable and will continue to be so for the foreseeable future. While we are not crazy about the growth, U.S will be the most stable economy in the world. This and the supply pressure will keep the pool of qualified renters filled for the next 10 years.

    4. Competition - While we are seeing new apartment complexes being built, those tend to be high rental fees and does not compete with affordable single family/small multi-families. Our renters much rather pay $1200 to $1500 for a 2-3 bed single family or 3 bedroom apartment than pay the same amount for a 1-2 bedroom apartment in the newly build apartments.

    5. Bubble – This type of investment is independent of the state of the housing market, as we are supported by stable cash flow and not the outcome of the market price. It is not cash intensive as flips and can be managed part time or through a rental company. We would argue flipping is getting too competitive at the moment and margin is tighter as people are fighting over limited supply of rehab potentials. I also would avoid flips unless you have the necessary knowledge and can do some of the work yourself. The housing market value is increasing at a historical pace but is there should be slight correction in the next few years.

    6. Rental rates – YOY we have increased our rent by average of 15%. Our portfolio consists of duplex, four-plex, single family, townhomes and condos. We are seeing the highest increase in single family homes, followed by 3 bed+ units and 2 bedrooms units.

  • Real Estate Investor · Minneapolis, MN · Member since 2016 · 10 posts · 9 votes
    9y

    @Peter Tverdov

    I also plan to bring in partners for bigger purchases, anything above 300k.

  • Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    9y

    Lee Yan,

    Good for you !  Get some legal advice on soliciting funds for your deals.  Additionally, please review by BP profile page and listen to some interview podcasts on raising capital I've done.  Free eBook on how I raised $1m in two weeks on my website under thought leadership tab.  Looking to put together a capital raising workshop in Austin next spring.  I find if you can raise capital, there is no limit on what you can bring to the table as everyone seems to need cash and you can leverage yourself and OPM.  I've raised ~ $10m in one year over 5 MF deals and grown my accredited investor base from zero to 75+.  Get good at this area.

  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    9y

    @David Thompson keep me in the loop about that workshop

  • Property Manager · Blaine · Member since 2015 · 209 posts · 276 votes
    9y

    I love it. The best part about real estate is you can start with a little and potentially build it to something big. Who cares about LTV when you're starting out. If the economy goes way south you will have the experience to build it back up by buying land contracts (hard to find one these days). I'm with the other guys that operate at over (and track) at least a 60% equity position in my portfolio, but thats only because I worked so damn hard for the money I invested in it. I live in the TC and I'm personally worried about MPLS housing prices getting too high, rent being unaffordable, and the amount of new units coming to market. However, I still see some "deals" in Saint Paul if you you are comfortable working on the 130 yr old up/down duplexes. Not my hustle.

    Anyway, I was able to get my lender to lock in my loans long term. Not even sure it was the right thing to do as the 10 year bond seems to be going the other direction again. I would try to get the LTV over 25%, look into bringing in some investors, probably best to avoid friends and family, and keep doing what you're doing. If you buy a deal that is putting cash in your pocket every month you are on the right track. I can't see the bank closing down a LOC, but if you bought a deal you should be able to get a lease in place and finance.

    I have a brother in law who is just graduating college, and I know it's not the right time in the cycle, but still 3 percent down on a 4-plex in rural Minnesota.  I don't think he could lose.  

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