How does my 5 year plan sound?

[BJ Brinkman]

Hello again folks of BP!
I'm a brand new investor, trying to do all the research I possibly can before buying my first investment property.

I'd like some feedback as to how my plan is looking, and if I'm on the right track. What I'd like to do is amass several rental properties while maintaining my full time job (this will of course necessitate a property manager, which I am budgeting for).

I have found an area where I can purchase a turnkey rental in short sale for around $85,000, and expect rents of 1100-1200. The math looks good to me, and I plan on putting 20% down and financing the rest in a conventional loan. Budgeting 50% for expenses ($115 management, $103 taxes, $32 insurance, $115 vacancies, and $210 maintenance) I will cash flow $206/month.

I'm hoping that this is a repeatable formula. With my current job and living situation, I am able to save about $1500/month. The cash flow should bump this up to $1700, where I will save for the next down payment, rinse and repeat. All the while of course keeping adequate reserves for home issues and personal (car, medical, job, whatever may come along) expenses.

I feel that after 2 or 3 of these deals though, I will be extremely leveraged. Does this sound too risky? I will have 20% of my own cash in equity of 3 different houses. Does this seem to exceed any critical mass of investment vs. returns? Will it at house #4 or #5? What I'm asking is, how far can I take this before I have to get creative and avoid exposing myself to too much risk?

Thank you very much folks!

[Jeremiah B.]

BJ gets the gold star for the day - for asking the right question at the right time. In my (limited) experience, this is more important than coming up with the right answer.

First - every answer is unique to the investor and situation. I'll tell you a little about my situation and beliefs below, but the key if finding out what's right for you and your situation.

Second - there are probably 2 key things that can counteract the risk of leveraging: Cashflow, and Capital in non-RE assets. If you are doing well in these other areas, you can be more aggressive. If you are, or may struggle in these areas, you need to be extra careful.

So, here's my view:

• When starting out, a small percent of my portfolio is in RE, so I'm happy to leverage-to-the gills for purchases 1-3. Literally, I was underwater with properties 1-2 when I purchased house #3. We had great cashflow and capital, so we felt OK doing this.
• By properties 3-6, I'd like to get my leverage rate below 75%. At this point, I don't have the assets to cover a huge RE crash, so I need to manage my leveraging. We are looking at house #5 now and will be around 78-80% after closing. Right on track.
• As we go from 6-10, I expect for leveraging to slowly decline and be around 70% at house #10. If it increases beyond 80%, that would likely give us pause about our next steps.
• Long-term, I expect my leveraging to decline. I plan to do this until I get below 50%, at which point I might be open to taking some cash out/selling/etc. Really - when RE is a bulk of my portfolio and we are getting close to our goals, I wouldn't go below 50%.