Waterfall method or keep accumulating properties

[Neo]

Question for the group: I went into rental property investing with a clear plan. Buy 4 properties and when I close on the 4th, start applying all profits (minus a repair fund) from all 4 properties toward the mortgage with the highest interest, paying it off in just a couple years. Then buy another and apply all 4 properties profits to the next highest rate mortgage and so on. This was somewhat based on my understanding that its difficult to get more than 4 mortgages at a time.  I only buy multifamily units, usually quads with 4 1bdrm apartments.

My lender is now indicating that more than 4 mortgages is not a problem. Also, there are a decent amount of properties to my liking available in my area. Quads go for about $100k and the three I have now profit about $600-$800 a month each.

Interest rates have started going up and property prices are ticking up slightly. I have considered abandoning my waterfall approach and going into unbridled accumulation mode. Basically acquire as many properties as I can before rates/prices move away from these historic lows. Anybody want to give me an opinion on why they think waterfall or accumulation is the right move?

[J Boogie]

Sounds like the choice is between a relatively big increase in net worth vs a relatively small increase in monthly cash flow.

Unbridled accumulation seems to be the clear winner here man, good for you.  What area are you investing in?

 

[waltworks]

Yeah, what post-apocalyptic world do you live in where quads go for $100k?

-W

[Neo]

I don't want to totally give away my location but I'm in the Midwest. I have bought three multifamily properties with an average purchase price of $101k. They are clean, sound but dated buildings in C- areas. Working class people, retirees, and people on disability are my main clientele. No section 8. Rents are $400-500 for each 1bdrm unit. Owner pays heat and water. Taxes are also low in this area.

[waltworks]

I'd buy as many as possible, keeping in mind of course that if they're all in one location/city, you're piling up risk to some extent. You'd be doing that paying the mortgages off too, of course.

If you have the financing, keep rolling with more purchases. Pretty much a no-brainer, IMO.

-W

[J Boogie]

Well dude given that you're in the 'nati, I would DEFINITELY continue accumulating property if you can get it that cheap.   From what I read on Shotgun Granola, you're in for big time appreciation on top of that sweet cash flow.


Sorry, couldn't resist.  Barbara Streisand effect I guess!

[Neo]

Wow I had never heard of that site before. Interesting reading...

[Bobberth]

If each building is profitable, then the bigger the monthly pay down will be when you do start paying down loans. You might even be able to FIRE sooner and not worry about paying loans off.

On the flip side, since you are talking 4-plexes, each property you buy is 4 additional tenants to manage. Do you want to quickly increase by 8/12/16 tenants by purchasing more than one now? Do you even want that many tenants to manage?

I suggest focusing on your monthly cash flow target instead of number of units. Or at least convert cash flow into units. My target is 15 units but I derived that from the monthly cash flow that I am looking for.  When I hit that number, that is when I will start focusing on paying down debt. (ok, it's 15 because 14 sounds like stopping short and it gives me an extra cushion). 

[marty998]

Easy then, hire a Property Manager (local realestate agent offers the service?)

Sure they might take 5-10% of rents but that would be worth it and better than getting 7 phone calls on a Friday night asking you to repair the heater or plumbing or fix a broken fixture.

[Capt j-rod]

rentals are like beers... More is not always better. Take on as many as you are comfortable managing and maintaining. My balance point lies between 8-10 units. If you know what your FIRE numbers are then use those. Option B is to go big and sell off the unwanted ones. I only buy B- and better property. I will pay more for the right house/neighborhood. I always keep the sell-off in the background. I mix multi units and single homes. Multi units are only desirable to investors. Single family will sell to anyone. I pay cash for single family because there is no redundancy if it is un-occupied and I don't want a payment. Your gut will tell you what's right. I keep trying to diversify my investments, but real estate still dominates.

[Hargrove]

Somebody who knows more about real estate could also point out when the rules change. You become a commercial landlord at some number, I think, and there are a lot more regulations to follow.

[tralfamadorian]

Fannie Mae has a 5-10 property financed mortgage loan product; it was created during the RE downturn to spur real estate investment and is not offered by all lenders.  Before that time the limit was four, thus why it's not on most people's radar. 

Becoming a commercial landlord is a function of the number of doors in a property, not the number of properties total.  5+ doors in a property is commercial and has more rules- sprinklers, for example. 

I would buy properties that returned $600-$800/mo net for $100k all day long if I was comfortable with the location.  C- isn't really my thing but if it's working for you, go for it!

[donta1977]

Neo - the answer to your question "which is better accumulation or waterfall" fundamentally
depends on your long-term objectives or goals. Are you trying to get to Financial Independence
as quickly as possible or are you trying to reach a specific net worth/wealth goal. If your primary focus
is to FIRE as quickly as possible, the numbers lean more towards waterfall as the best choice. Here
is my rationale: You currently have 3 properties that are accumulating $2100 in net profit ($25.2K per year).
If you went ahead and bought that 4th property, your monthly net profit would be $2800 ($33.6K per year).
You stated with the waterfall method, you would be able to pay off each property free and clear every 2 years.
Then it would only take 8 years to pay off all 4 properties free and clear. With no mortgage in 8 years, your total
net profit would jump to around $4400 ($52.8K per year). This is assuming a jump of $400 for each b/c you have
no mortgage. $52.8K per year in passive income = FIRE. Just to make sure we are on the same page, I consider net profit
as money left after mortgage, insurance, property tax, property mgmt, repair estimate, vacancy estimate, and Cap Ex.