Beginner - Investment Property Business - Business Plan HELP

Hi everyone,

I have been thinking of starting a rental property business with a friend and am just trying to get my head around a solid low risk strategy for this.
I see other people using the OPM strategy all the time and this looks very lucrative but also very very very risky. I am a Dave Ramsey no debt kind of person and the idea of borrowing money to buy more property to refinance as well just sounds scary to me.

I know however that there can be a smart way about doing this, I am just not sure what it is yet.

My first thoughts is that we would come up with about 50k-80k in cash to be our own hard lender. We could buy our first property outright. Safest thing. Then my guess would be to refinance it to come up with money to buy a 2nd place. My question though, how much down would you put on the 2nd place. Im thinking something like 35-50% would be safe enough for worst case scenerio. Worst case being no one is renting, cant make payments. At worst case I would say losing the properties would be the case. I dont want to be stuck with a tax bill for the refi’s etc…

Am I being “TOO” cautious here? I want to be able to grow this LLC with multiple properties but dont want to do it with the risk of losing everything. I have heard the stories of people going from millionaire to bankrupt. What can I do now starting out to make sure that doesnt happen.

Is there a strategy perhaps of buying 2 places at a time, so if 1 isnt rented the cashflow of the first could handle the 2nd’s expenses? Etc… Im looking for something like that.

Other stradegies I find are. Use a hard lender, refi, buy another play, refi, buy another place, refi… Before you know it you have 10 mortgages and if you cant find renters, you are screweddddd.

Thanks in Advance!
I would really like to hear suggestions on starting out and strategies like this. IE, how much money should the LLC have in reserves, etc… how much should down payments be. Any other good reading would be great too!


Dave Ramsey talks to unsophisticated people. If he gets into how money actually works he will lose most of his audience pretty quickly. So his message is simple “debt is bad”. But in actuality there is good debt and bad debt (you notice he allows debt for purchase of a home). Bad debt is consumer debt. That allows you to get what you can’t afford. Good debt is business debt that allows you to leverage the money you have. If you go into debt to buy something that makes the money to pay its own debt and makes you money to boot is good debt. For example if you have $100,000 cash and you use that to buy a house worth $100,000 cash you will control $100,000 worth of real estate and if that house goes up 10% you will make $10,000 on the $100,000. But if you took that same $100,000 and put 10% down on 10 houses worth $100,000 each you still be in for $100,000 but you would then control $1millon worth of real estate. If those houses went up 10% then you would make a gain of $100,000 ($10,000 per house) or an increase of 100%. You get all the gain if the house is paid for or financed. You don’t pay the mortgage the houses pay the mortgage. They amortize their own debt. Also if you rented your paid off house for $1,000/month you would make $12,000/year. But if each of the financed houses rented for $1,000/month but after expenses made $300/month you would make $3,600/year per house times 10 houses or $36,000/year.

Real estate is no better than any other investment except for leverage. Paid off real estate only makes around 7%. I have none of my own money in most of my houses so I have infinite gains. My dad likes to say I own a bunch of free houses.

Say you buy an apartment complex for $1million and you have put $200,000 down and finance $800,000. But it is only worth $1million because of poor management and you can increase the occupancy rate, get bad tenants out and get all the tenants paying, use the money borrowed to purchase the complex to upgrade the systems and reduce operating costs you can then value the complex at $1,200,000 you can then refinance the complex to 80% of its new value and get $200,000 back out. You then have no money in the complex and still own the complex. Because you have better tenants and a better property you also cash flow it. Having real estate without using financing is like having a car but only driving it in first gear.

I understand where you are coming from. But just trying to figure out how to lessen the risk. If you borrow 100,000 to buy 1mil of property and each go down 10% and only half are rented, you are now in a hole that may be hard to get out of if you dont have a reserve to pay the expenses.

What is a “sound” startup strategy for refinancing and buying more properties. After your first, do you refi right away and buy the 2nd? and after that, at what time do you refi again.

What is a good equity to debt ratio, if that is a real thing? Its pretty risky owning 10 places with only 10% equity in each. You could lose it all if something goes bad… but if you have 50% equity in each and own 10 places, then at worst case you have enough equity to cover all the expenses. See what Im saying?

Im just saying, isnt that how everyone got burned a few years ago and went bankrup? Borrowed 100k, to buy 10 properties worth 1mil?
Im sure there is a proven proportion of Debt to Equity, cashflow. I just dont know what that is right now.


Start slow and move up as your comfort level grows.
If you’re a Dave follower, you should be out of consumer debt and Ideally have your home paid off before you start your RE investing.

By one house with cash, fix it, rent it. Let the reserves build in that account.
At the same time be saving up your excess income from your day job.
With a buddy, this should go pretty quick.
Once you have six months revenue in the rental account, start looking at doing a cash out refi. This will be an 80% ARV loan. If you bought right, this should give you all of your initial investment back. You should clear 200+/month after note, taxes and insurance. This means you have 6-10 months of reserves in the rental account if things go South plus you’re adding 200/month to that account.

You have all your original investment money so go do it again.

Additionally, you’ve been saving up more money with your buddy.
These “extra” funds can be used to do unexpected repairs or invest in an additional house when you’re ready.

Keep following this schedule and after a few years you will have 10 houses with mortgages and big fat bank accounts with lots of reserves and you will look back and smile.

Remember you make money in RE when you buy.

There are ways to lower your risk with rentals, but there’s still plenty of risk w/ rentals. Sure you can have insurance on things, but people can cause lots of damage and there’s big ticket things like the HVAC system that can go bad. You will lower your risk by buying a place that will rent for a good amount compared to the purchase price and rehab cost. Some people on here talk about getting places where the monthly rent is 2% of the purchase and rehab price. I’m usually above that number on our places.
One thing that we were able to do that really built our business was to eventually get 100% financing deals. We weren’t overpaying, but we were able to get banks to finance the entire purchase price of the property. On some, we got rehab money too. So don’t only think that you can buy in cash and refi back out. You might also be able to get really favorable financing where you wouldn’t want to refi.
You will spread out your risk among many properties. The chance of most of your properties being vacant all at the same time is very slim unless you’re doing something wrong. If you have two vacant houses, it’s a pretty good drain on you. If you had six houses with good numbers, two vacancies wouldn’t matter much since the other four would be producing.
Knowing what you’re buying, having the ability to get repairs done at a reasonable cost, and good tenant screening standards will go a long way for you in this business.

Thanks for the responses.

I am currently debt free but dont own my own home yet. This is a goal for me but until I know exactly where I want to live long term, I have just been saving up.

I like the idea of going into the first house all cash and refi out. I also appreciate the 80% number. I would think too after the fix up, we should be able to get all our original money out.

How hard is it to get a refinance these days. If the house is 100% ours, I would think it would be easy? Are they still going to scrutinize our incomes, credit, etc? Or is the house enough colateral for the bank/credit union. I want to be 100% sure we can refinance, as that original money is money I would need for my personal house, etc… It would be a short term loan to the LLC. Once we refi I want the option to pay myself back if I need it.

Im going to assume yes, but as a first place, I should probably be looking at something with minimal work needed? Just to get something under our belts?

I think the biggest thing to scare me is Foundation issues, and issues that I can not see. As I would be new to this. Floors and Walls I can see the problems, but plumbing , electrical, foundation I wouldnt see and I know are the biggest expense. Along with Roofing. Any tips for spotting this? Or do I just rely on the inspection before we close on the property.

Again, thanks for the responses!!


For the re-fi portion of your question, you should contact banks in your area. There’s no way for any of us to know which banks will be doing investment property loans. I think you’ll have better chances at smaller local banks. That’s where we’ve had the best luck.
If you need an inspection in the beginning because you don’t know what to look for, then it’s probably well worth the money. If you can find repair people you trust, you can probably get them to take a look at places and tell you what it will need and how much it will cost.

Ian486 – you’re wise to be cautious about over-leveraging. Don’t automatically think it’s a God-send if you can “get all your money back out” on a refi. Personally, I like to have at least 20% equity in the property, using the current market value. This part is usually pretty easy. Buying REOs/SS’s/distressed properties, then doing a nice rehab, will almost always force that much equity into a property, such that you might well “get all you money back out” and feel good about the deal.

The 2nd metric is cash flow, of course, and you’d be well-advised to ensure that your gross potential rent on a property (using good rent comps and/or prop mgr advice) is at least 4x your P&I pmt on your loan. Additionally, target a minimum of $200/mth of cash flow per door, where cash flow = Gross Rent divided by 2, minus P&I.

Stick to these disciplines for equity and cash flow, and you’ll be fine.

LTV <= 80%
GPR/P&I >= 4.0
GPR/2-P&I > $200

Also, don’t sweat whether your props will rent, every newbie worries about this unnecessarily. If you purchase outside of war zones, they’ll rent. There’s is a huge underswell of support for the rental market these days, as the # of renters skyrockets, and SFR houses in the $700-$1000/mth range are enjoying strong demand almost everywhere.


Your saying that you get more then 2% per month in rent? So lets say you buy a 40k house and fix it with 10k, your getting more then 1000 a month? That sounds too good to be true. What kind of properties are you buying and fixing. I do see some very cheap places in the 20s but they look like way too much work to make nice to find a tenant that will want to live in that area. Im thinking rents on a 50k property will be somewhere around 800. I know its all location, but just thinking ballpark.

Thanks for the insight. Knowing some benchmark numbers to look at when searching for properties will really help me.



Thanks for the response. All of this is great info.
Something that I have been wanting to ask. When looking at comps, i have been to zillow on a couple of properties that caught my eye. But it looks like their comp/resently sold in the area section, has prices very similar to the place I am looking at. Does that mean its not going to be a good deal? This seems pretty normal. I am naturally looking for a price that is well below the recently sold #s right?


Ian – be aware that there are two markets out there: the retail market (owner-occupant buyers, property in at least average condition), and the distressed market (REOs, short sales, BK sales, and distressed/motivated sellers, usually in below-average condition). You want properties in the 2nd category, where you can force appreciation into the property. Flippers buy from category 2, then sell to category 1 buyers). The comps you’re seeing on Zillow are drawing from both property types, and it can be confusing if you don’t drill down further. It’s much better to use the MLS as a comping tool, working with an agent, as the MLS will identify if it was an REO or short sale. Also use the property assessment system in your target county to get sales and tax assessment history for any property. These systems also often provide a listing of recent sales in the same neighborhood or area as your target property.

Zillow is typically missing alot of sales, as well. The valuations are typically overstated, especially for a distressed property, as Zillow doesn’t know anything about condition. You will need to get very good about going into a property and walking out with your inspection worksheet filled out with your rehab estimate. The ZRent estimate in Zillow is normally fairly good, at least in my area. I usually also pull the Yahoo Real Estate valuation tool, it will give you the eppraisal value alongside the Zillow value. Sometimes they’re wildly different. They’re just computers tools, they have no idea of property condition, which is precisely why real estate will always present alot of opportunities to smart investors at the local level.

Alot of investors these days focus on REOs, because they’re abundant and easy to view on the MLS. Other investors market to underwater borrowers that might be short sale candidates (buy a list of who is being mailed pre-foreclosure notices, then mail to them several times). Inventory on the MLS is getting more competitive.

Like Justin, I generally don’t buy anything with rents of less than 2%/mth. In my area, my typical house purchase is: buy at 20-25k, rehab at 10k, rent for $825. You can achieve this all throughout the midwest, south, and rustbelt, as well as pockets all around the country, such as Rochester, NY or Fresno, CA. I’ve started looking more at the $50k houses that will rent for $900-950, simply because the banks are more willing to finance them, and they theoretically should hold their value better.

Also, in my area, I usually like for my all-in (after rehab) to be 50% or less of the highest tax valuation in the prior 5 years. This gives a bit of historicaly context to the appeal of the area, though it’s of course way down the list of things to look for. Many valuations in blue-collar areas really spiked during the subprime mortgage craze, when they were giving mortgages to literally everyone with very little down.


Can you give me an example of a 20k-25k type property you purchase. Perhaps share a link to an MLS listing or something. When I see 20k or so properties online, they look horrible, and not even just bad inside. They look like backyard sheds you would find on a farm. lol. Just saying they dont even look livable if you spit shine them. But maybe I cant see past those issues yet. If you can show me an example of a listing for something that is 20k, I be very interested in learning. Im also assuming you probably negotiate an offer. So are you looking at 40k listed houses that you offer 25 on?

I actually just saw this listing for 27k, Is this something you would find and be interested in looking at?

My fear for places like this, is that they are falling apart. Im not afraid to clean the place up and refloor and rewall, kitchen,bath, etc… its the foundation and electrical and roof that is scary.

Thanks again for the insight!!

This place looks promising. The interior pics look too good to be true though…

Any thoughts on something like this? Next step is to drive by it?


Ian – those listings look like perfect candidates, gotta buy the ugly ones since you have no competition from owner-occupants. Here’s a property in my area, a nice little 3/2, 12k rehab, rent of $850.

Your’e going to need a contractor to walk them with you, assuming you don’t have this expertise. You’ll need to check the plumbing, inspect the electrical, assess the roof and mechanicals, decide what you need to replace as far as flooring, kitchens, and baths. Try to network with other investors in your area, go to the REIA meetings, to get contact names for investor-friendly contractors. These are the contractors that will give you the good pricing you need to make the numbers work, on the promise of steady work in the future. They’re usually smaller guys, maybe just one general contractor, a couple of skilled guys, and a laborer, something like that. Stay well away from the big outfits. If you find someone on CL, make sure that you visit a job they’re working, or have recently worked on, obtain several references and call them.

Then make your offers aggressively, with no contingencies, cash purchase, quick close. You can refinance later. Fannie Mae even has a refi program now that requires no “ownership seasoning” in order to use a post-rehab appraised value. Just google Fannie Mae Delayed Financing Rule. Some local banks will do in-house loans using appraised value after a short period of time (3-6 mths), just get on the horn and call all the small banks, S&L’s, savings banks, credit unions, etc., in your area.

Start networking with investors and ask them what they pay for things in your area, and ask for referrals. Once you have a decent contractor identified, ask them who they like for specialty trades that have good pricing: HVAC, electrician, plumbers, roofers, carpet layers, etc.

Carpeting / HW floor refinishing/ floor tile
Furnaces & Central air (for typicaly 1100 sq ft slab house)
New electrical panel
Painting (per sq ft of house)
Replacement windows
Kitch cabs and counters per linear foot
Bathtub reglazes
40 gallon water heater installs

etc. etc.

That place looks great!! For 17.5!

That is definately the type of place im looking for.

Quick question when you do your walk throughs. What are the red flags that there is structure damage. If you see a cracked wall is that a pretty big red flag?

For electrical and plumbing, do you turn on lights and faucets when you tour the house with the Realtor to see if plumbing is intact? You mentioned to buy with offer with no contingincies. What do you do to protect yourself?

Thanks for all the helpful info!!


For the items mentioned above, is it ever a good idea to walk into a home depot and kinda shop there?
For instance windows. Do I need a window guy? Is that cheaper then buying at home depot? Where I assume installation is included.

I’m buying things like you and d1beard posted links to. I will pay more for a house in good shape. We just bought a 3/1, 1100+ sq ft, central heat and air, appliances included, w/ basement, basically move in condition for 26k. We bought it to move one of our current tenants from a 2br to a 3br. It is renting for $625/mo. I’ll do deals like that all day long.
I would recommend walking thru Lowe’s or HD and just look at prices for things. You’ll find out different price points for various items. It’s a rental so you don’t want to put in high end stuff, but you also don’t want the very bottom of certain things either. I’ll go a step above el cheapo faucets because I want something to last. I’ve used Lowe’s installation for certain things like carpet, but they’re priced high for a lot of stuff. You can do better by finding a handyman. You may not find the best and most reasonable priced guy at first, but you’ll get to know more people as you continue in the business and that should help you find better people.
Realize for a lot of these lower end houses, you more than likely will not have any utilities on during the walk thru. I’ve looked at several houses that haven’t had power in awhile. Sometimes you just have to make assumptions based on age and how it looks. Once you get a better idea of what things cost, certain things won’t scare you as much.

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