25 units at 24 years old - What I've learned

[Axel Ragnarsson]

Last week, I closed on a triplex and my portfolio hit 25 units, and I wanted to share what I've learned in the hope that it may help some investors who are starting out (both young and old). This deal:

Purchase Price: $162,500

Rehab required: $10,000

ARV: 220,000

Monthly rents: $2,800

My monthly cash flow will likely total ~$350, depending on what I ultimately get for rents. I'll probably leave about $10,000 in the building after I refinance, which is more than I'd like but still makes it a good deal (for my criteria). 

Anyways, what I've learned:

- Start networking with private money lenders immediately. Even if you plan to use conventional financing for your first deal or two, you'll never be able to effectively scale and consistently close on great deals if you don't use private financing. In today's market, you just can't consistently compete (if you are looking to do a number of deals in a short amount of time) using traditional financing. When meeting with private lenders, bring sample deals that would be an example of what you'd pitch them so you can truly evaluate what caliber of deals you will need to find to secure financing.

- Start focusing on equity, not cash flow. Of course, it is essential to analyze cash flow when evaluating a potential buy and hold investment, however, I've found that the best investors are the ones who focus on leaving minimal cash in deals (and buying with equity on the front end). Stop focusing on dollars a month in cash flow, and start worrying about how much below market you are buying the property at and what your cash on cash return will be (as a %). I own properties where I make $50/door in cash flow, some people may laugh at that, but I have no money in the deal (infinite return).

- Despite the goal of not leaving cash in deals, you'll have a hard time responsibly closing on deals if you don't have cash in the bank (closing costs, inspections during due diligence, paying contractors after you close, dealing with unforeseen problems). With that being said, if you truly don't have money in the bank, focus on increasing your income before trying to figure out how to buy real estate with truly no money down.

- Always buy with your exit in mind (even if you plan to hold long term). I recently had difficulty selling the first property I bought because it had an undersized septic tank and a dug well servicing the building (not a drilled well). As a result, it didn't qualify for FHA/VA/conventional financing and my buyer pool shrunk significantly. While I ended up finding a buyer, my selling price took a serious hit (learning experience!).

- Focus on getting in the game. Don't feel the need to hit a home run on your first deal.. a single or double is better than sitting on the sidelines. If you're young and can't get conventional financing, use commercial financing. Most of my 2-4 unit properties are financed with commercial loans because I won't qualify for a traditional 30 year, fixed-rate mortgages.. sure the terms are worse but it's better than not owning property.

Best of luck to everyone!

[Peter Tverdov]

Sorry to be a wet blanket, but you're equity stripping everything, leaving your cash flow dangerously thin on already tiny properties at this point in time of the real estate cycle when rates are increasing and we've seen a 10 year run? I hope you're LTVs are 60-70% on those refis and not 75-80%. What is your plan when commercial loans re-set in 5 years and the rates are 7%? Your $50 or even $350 a month cash flows will go south in a damn hurry. 

I'm going to venture a guess you have little to no real reserves (credit is not a reserve) and that you haven't factored in what happens if rental markets get soft or drop.

What could go wrong being mortgaged to death?