Am I moving too slow buying rental properties the traditional way?

[Bearded Man]

I see a lot of videos on youtube of guys who started with two houses and turned that into 42. Or the recent article I read about the guy who started with very little in 2012, and just sold his portfolio of 2,400 properties for 252 million to a REIT fund.

I have three houses, two of them rentals, and two more under contract. My primary residence will eventually become  rental as well.

Maybe I need to cash out and put the money into Indianapolis with those turnkey rentals. If not now, at least once they have gotten nice and fat (Seattle area appreciation) and cash out so I can buy 10 properties or so in IN.

My method is slow because it requires me to save a lot of money (65-75K) per house these days to make a down payment. It's really slow, but I would say lower risk and effective at slowly building wealth. It's just I hear these multi millionaire gurus talking about how this is OK just slow, but that creative financing (taking over a mortgage, owner financing, etc.) is the way to go. This seems really hard. Finding a property that will cash flow alone in my area is hard enough, let alone finding one where the seller is willing to sign the house over to me while I take over payments on existing mortgage (per freedom mentor).

[sol]

Isn't "too slow" kind of a relative judgement call?  Too slow for you might be too fast for someone else.  It all depends on what you're trying to accomplish.

For a while there rebs was targeting five properties per year.  Personally I wouldn't do more than one per year but he was outsourcing most of the work and giving up margin to get volume.  If you want to do 1000 per year like the person you posted about, I imagine you need a whole team of employees finding and closing deals for you.  It would be a full time job just to sign all the paperwork.

[waltworks]

Lots of people did awesome in the 2009-2012 time frame. Lots of real estate was practically free, hence crazy returns from rentals - which could be quickly used to buy more practically free real estate, etc.

That is no longer the case, so it will take longer just because everything is much more expensive.

Second, the amount of leverage you can pull off and are comfortable with is a very personal thing. There isn't a right or wrong answer - it will depend on your risk tolerance as well as your overall goals.

I can say that I personally would not be going nuts with RE leverage right now (in fact I sold all my rentals this year) but that's just me.

-W

[Bearded Man]

Why is that walt? Why did you sell all your rentals?

[mr_orange]

People also start out with different initial conditions.  Many of the stories about people acquiring tens or hundreds of properties could be for folks that inherited millions of dollars and are just putting them to work.  You initial conditions may be far different than theirs.

Taking properties subject-to has many risks and really shouldn't be used for long-term financing.  John T. Reed has a good (although extreme IMO) article about this here:

http://www.johntreed.com/dueonsale.html

FNMA mortgages run out after 10 properties and the leverage gets harder and different after 4 properties.  So at some point if you use more leverage you either have to assume loans, take them subject-to (and take the risk of the loans being called with it), or get commercial financing with what generally carries 5-year bullets. 

I agree with the post above about leverage comfort being a personal decision.  I bought a lot of properties when I first got started in the game around 13 or so years ago.  After that I have focused more on buying and selling to build cash reserves.  As our leverage decreases I am more confident about buying more.  Ample liquidity gives you staying power and will be what carries you through in the lean times. 

[waltworks]

They all appreciated far beyond what rents could justify, basically. I'm not holding onto houses that will sell for $325k when I can only get $1600 in rent. They were good deals at the time, now I'd rather have that money elsewhere.

-W

Why is that walt? Why did you sell all your rentals?

[Another Reader]

If any of those "gurus" is a multi-millionaire, most of the money likely came from selling books and seminars, not buying real estate.

In 2009-2012 you could throw a dart in a lot of markets and make money.  It's hard work today.  Look at your cash flow today to estimate when you can RE on the cash flow.  If you want to FIRE soon, you may need to massage the portfolio.  Otherwise, in your shoes, I would stick with the plan.

[zinethstache]

I am north of Seattle. I own three multis that were a PITA to get. In all cases we were NOT #1, but for one reason or another we got our properties on the rebound. DH has very strong DIY skills and is a licensed electrician and the rebounds were always "too much work" which we gladly took on.

It is indeed so hard to find a property here and make it CF. We buy one per year because like you it is hard to save up the down payment. I buying multis need a bit more than you.

I too feel rushed and worry that prices are going to be out of my reach by the time I am ready for #4. We've paused to prep our primary residence for sale as it is NOT at all rental friendly and our plan requires every property be easily rentable (think RV travelling for us)

I love the idea of buying in Indiana, and as we get closer to buying perhaps DH will fly out there and test the waters. I am not sold on that model however.

I am being careful with our reserves, I do NOT want to get into trouble if something bad happens with either my job or a property itself so we maintain enough in reserves for about a year's expenses OR multiple major repairs (god forbid if its both!)

Our property values are also high, not quite like Walt's example, but still way under the 1% rule if you use today's zillow valuation.

I don't want to make any fast moves, one thing to realize is how expensive it is in our area to sell. The three major costs are 1.87% excise tax... ouch... and the 3% to buyer then 3% to seller fees. Then there's the regular stuff which I think is standard. I have one property I'd love to dump but I cannot lose that much in fees. So I keep it and the rent checks flow on in. All of my properties CF pretty well for us, we bought in 2012-2014...

I will be watching this thread with interest!

Walt, not sure where you live, but I cannot sell a property if that sale eats up most of my profit! Are the fees less prohibitive in your region?

[waltworks]

We certainly coughed up plenty in commissions and fees. But when properties have doubled (or more) from their low points, eventually you need a plan to extract the equity, or else (barring skyrocketing rents) you'll be stuck with fairly crappy returns forever.

To be fair, my perspective is this: if I have a $300k property (assume it's paid off) I figure that's $300k of my money that I want working for me. It doesn't matter if I paid $200k, or $100k, or 50 bucks for it originally. Others would say that if they paid $100k for a property that rents for $1500/mo (or whatever you consider a good deal) then that return on the original $100k is what matters to them.

-W

[NoNonsenseLandlord]

I bought one per year.  Each one required ~100K in down payment and expenses to get it rented.  Some a lot more.

Buy a property, get it rented, make sure it is stable, then buy another.  It may take a year to get it accomplished.

[CashFlowDiaries]

2 rentals and 2 more under contract? That sounds like you are moving fast.  How much faster do you want to acquire?   I have no idea how some of those people you mention are able to acquire properties that fast.  Its hard enough finding good deals.

I mean im moving as fast as I can and its a matter of saving for down payments on each house.  Once I have the cash reserves to handle cap ex, down payment and cash reserves I pull the trigger.  Ive bought 2 this year already and Im hoping I can buy another one in the fall/winter.

The turnkey route can be a great way to acquire rentals, that is how I have been doing it my last 3 rentals but its not all peaches and cream.  You really need to be picky about what you buy and who you work with. 

[Mother Fussbudget]

Oh Bearded one... have you considered note investing? 

It's very hands off, and returns are generally better than market rates.  You own the promissory note (i.e. the mortgage) secured by the property, and the home owner pays the mortgage... to you.  Usually, these private notes are written as 'seller financing' by older home owners, construction firms, etc and they sell at a discount when the note holder wants cash sooner than the term on the note.  That's one of the strategy's Joe & Ali used (in addition to turnkey sight-unseen rentals) to achieve their recent FIRE, and the one I'm about to plunge into with both feet after doing lots (perhaps too much) research.  I'm interested in 1st position performing mortgages, but there are also non-performing notes, 2nd position's, etc - to me, these seem more risky, but with the risk comes greater potential rewards.

[zephyr911]

My method is slow because it requires me to save a lot of money (65-75K) per house these days to make a down payment. It's really slow, but I would say lower risk and effective at slowly building wealth. It's just I hear these multi millionaire gurus talking about how this is OK just slow, but that creative financing (taking over a mortgage, owner financing, etc.) is the way to go. This seems really hard. Finding a property that will cash flow alone in my area is hard enough, let alone finding one where the seller is willing to sign the house over to me while I take over payments on existing mortgage (per freedom mentor).

Those gurus are generally masters of negotiation, AND were able to exploit local conditions at just the right time to pull off massive portfolio growth. I don't doubt that some of them achieved great things, but I don't have the zeal for all the tricks and the juggling they do, and generally we're talking about techniques that only a small portion of investors can do (because if everyone tried, it'd stop working, or the returns would go away). I'm happy to just buy quality properties and maintain them well for good tenants.
The only thing currently limiting my rental portfolio growth is the availability of capital, but the snowball is growing. I haven't bought since 12/31/15 - renovations sucked up all free time and cash through June - but there will be a multifamily in the fall and new buys quarterly thereafter at a minimum, accelerating until we hit our revenue targets and stop buying. And that's just plunking down 20% the old-fashioned way. It feels dizzyingly fast when I look at where the compounding will take it by 2017.
Why do you think you're not moving fast enough? What's driving the urgency?

[Bearded Man]

@zhinethstach: I've looked at Multi family in the greater Seattle area as well, they cost about the same as the SFH I buy now and required the same down payment, alas, there is a smaller market for those than the SFH. Then again, I'm not sure if you are buying 700K multi family either. Most of the ones I looked at where a lot less than that.  Nevertheless, I need about 70K for each house I buy.

@motherfussbudget: I HAVE actually considered selling notes by becoming the bank and offering owner financing. However; this is not something I am familiar with and am hesitant to get involved with something I have no experience in and don't understand.

I actually stumbled across a video by freedom mentor where he talked about how it is better to own one or two properties that are paid off and cash flow nicely than it is to have 24 properties that are leveraged to the hilt. Considering he speaks from experience, I think I'm going to go with what he says. I will still leverage most of my properties for higher returns, but it just seemed like I was moving too slow compared to some of these people on youtube talking about how they went from one house to 42 in 2 years or whatever.

At the end of the day, this isn't my primary job right now. I need to focus on work to keep getting money, which allows me to put the machinery in place for long term wealth.

Also, he noted in the video that he is not a fan of TK investing. He tried it himself but eventually sold and bought property in Florida where he moved to. If I wanted to buy more properties than I have now, with the money I have now, I could always cash out and move to IN and buy a dozen properties paid in full; live in one, rent the others our and call it good. Alas, although FI, I am still working to get more money. The opportunity cost of quitting a high paying job is too high, and things are going well, so why not keep working to add more buffer and build more wealth in the long run?

I think I'm better off doing the slow and steady/safe route than speculating and getting in over my head. After all, this isn't the bread winner for me right now. It adds to my wealth drastically, but I wouldn't quit my job to do it full time right now (another point freedom mentor cited as one of his mistakes).

[SwordGuy]

Taking properties subject-to has many risks and really shouldn't be used for long-term financing.  John T. Reed has a good (although extreme IMO) article about this here:

http://www.johntreed.com/dueonsale.html

Thanks for the link!   I attended a seminar by Larry Harbolt and he discussed using them.   He at least made sure folks understood that the lender could call the loan if they found out, but he also downplayed the risk big time.

[mr_orange]

Subject-to purchases are fine for short-term financing.  If you intend to finance properties like this for the long term you need to be prepared to pay off all of them at once if interest rates rise, 60 Minutes does a special about evil investors using them, or any other number of reasons.  You have effectively given the lender the right to call them all at once.  There are ways to disguise the transfer, but a lender that wishes to figure things out can do so pretty easily. 

Assumable VA loans are a better source of FNMA financing past 10 mortgages IMO.  If you're young and wish to leverage a lot of properties quickly this would be a decent way to do it.  I think as people age they should decrease leverage and work on increasing cash flow.  There is always a tradeoff between ROE and delivering absolute dollars given a fixed quantity of equity, which pretty much everyone has.  There are ways to finance real estate using syndications or by raising money, but you need a track record to do this.  You also end up buying yourself a well-paid job by financing more product in this fashion. 

To me folks should aim to get their money working for them as soon as possible.  Once you reach the accredited investor stage this is easier because you can invest in many more types of private offerings.