I don’t have any problem with your approach. Having paid off properties is an excellent goal and if you are willing to work very hard for several years to cover the negative cash flow, I’m all for it. However, I challenge your assertion that you can work hard for 5 years and retire on 5-7 $31K houses. The cash flow on a $625 gross rent property with no mortgage is only about $312. So, even seven of these would only give you a positive cash flow of about $2,184 per month. You certainly couldn’t retire on that!!! Also, your equity with only seven $60K houses would only be $420,000. Again, not too impressive for a net worth.
That’s why I do it the other way. I can have the cash flow now and have the equity now. With my plan, I’m shooting for $10,000 positive cash flow and $2,000,000 equity in 5 years. When the mortgages are paid off in 20 years, the positive cash flow will be $30,000 per month and the equity about 6 million IF I didn’t do anything else after the 5 years.
I agree with you Mike, any negative cashflow will only hurt you in the long run. It is just very hard (but not impossible) to find positive cashflow properties using real world numbers in my market. I rode around with another invester this afternoon, he was helping me analyze some deals, he primarily does flips, but is building a portfolio of rentals as he goes along. With his rentals he doesn’t even come close to the returns that you are getting with yours, even though I think of him as my mentor I don’t see how he comes out, he has survived 20 years in this business so I figure he is doing something right.
Iron Range, I am sorry but I still don’t get it, I guess I am not creative enough. I just don’t see how I can make it work when I don’t have extra money to cover negative cashflow, and I am not going to get another job to cover it. My farming career already takes up too much time out of my investment career LOL.
In most markets, this does not exist. I would buy these as fast as I could sign the paperwork, but there are v ery tough to find.
I totally disagree. In fact, I would say that these deals exist in the vast majority of the United States, also called flyover country. I am sure that these deals do not exist in significant numbers in the coastal “blue” cities and counties.
There should be no doubt, these deals are hard to find in any market. However, finding these deals IS MY JOB as a landlord. I’m sure that less than 1% of properties on the market can be purchased at these prices. Just last night, we were looking at some properties on the MLS. There was a 6 unit building in my investment area for $200,000, I bought my last 6 unit for $88,500. These both would have the same income, but one is being sold at retail and I bought mine for pennies on the dollar from a desperate landlord who would do ANYTHING to get out of the property! The monthly rents are 2.6% of the purchase price. There was not a single multi-unit on the MLS yesterday that would meet my criteria. So what? I don’t have to buy something today, tomorrow, this week, or this month (although I’m actually in the process of buying 4 small apartment buildings from a desperate landlord). I am patient and I have nothing but time. I’m holding all of my properties for a lifetime, so it is VERY important to me that I buy the right properties. Buying a property with negative cash flow would only hurt my cause.
I’ve never had much luck buying properties “on the market”. As soon as an agent gets involved, the possibility of buying with free equity is tapped out. I still check the listings from the MLS, foreclosures, legal notices, classifieds, etc. but I don’t hold my breath. The coastal “blue” states are where the vast majority of the population prefer to live. For this reason, competition is always greater as there are much more people per square mile. Looking where everyone else does would make it very difficult to find anything for a great price that happened to slip by 5,000,000 people.
Looking on the MLS, you might not find anything at 70%. That’s the lazy way of finding properties. The good deals are for those who don’t mind working a little harder. You can either find a potential seller by networking or you can specifically target a property from the boots-on-the-ground method. Anything else and you have dozens of people looking at the very same listing at the exact same time you are (not in the landlocked states with a population of 20-30, most of which don’t own a computer or have electricity).
In business you need a goal/s. These goals are worth nothing without a plan behind them. I have two goals, the one is to own the entire world. The second which is a more important goal to me is the goal to retire after 5-years of Real Estate. So I wrote out my goal and then I had to find a way to make that goal happen in 5-years, this is called “The Plan”. Unfortunitely buying great deals and making $100 a unit on 1-4 unit properties isn’t going to cut it for my 5-year plan. The profit in these properties are when they are paid off, not in the beginning. So my plan is to buy 1-4 unit properties with 30 year mortgages at great prices, but also I needed to include buying 5-7 properties that I can have paid off in 5-years.
If you are unwilling or unable to put anything into Real Estate and you are unable to make any sacarifices, then the 30 year fixed loan with a goal of retirement in say 20 years is more realistic for you. I on the other hand are willing to make the sacrafices and contributions (5-year loan) needed to retire very young.
My primary goal is not to maxiumize my wealth when I die (30 year loans with many, many properties). The goal to own the world takes a backseat to the immediate goal of getting out of the cubical 9-5pm life. So I need to always remember the goal of maximum wealth, but the short 5-year goal is first on my list.
“If you want to make truley great things happen, then you must find a way to make truly great sacrifices.” Iron Range
Iron Range, I guess I own you a little explanation of where I am coming from, I was kinda raised old school (don’t buy anything if you don’t have the money type of old school). I have been successful at my farming career so far, I am young (26), the only thing that holds me back in that business is urban sprawl, hence the reason for the REI interest. The reason that I have been successful is because I have followed my dad’s advise of business, slow and steady, don’t be a big shot for a year, be quiet and be in business for a lifetime. In order to be successful in any business a person must have positive cashflow, if you are having to work other jobs to support another career, just imagine how successful you would be at doing the main carreer with positive cashflow! Just my thoughts…
I agree with you totally. That is a great way of thinking and there is absolutely nothing wrong with buying great deals on a 30 year mortgages. I have put six properties on a 30 year mortgage. My situation is that I am 28 years old, so like you I am young so I don’t have great piles of money to put down on large commercial properties, so I am limited at this point to 1-4 unit properties.
My point I wanted to make was that in a goal there must be a drawn out plan. When my plan was written there wasn’t a way to make the 5-year retirement goal possible using only other people’s money (30 year mort). So something had to be different, that’s where I came up with 5-7 properties paid off in 5-years, along with any properties I put on a 30 year. The 5-7 properties are very cheap properties simular to the $31,000 property.
There’s nothing creative about my goals or plans. Many people come up with goals, but very few ever put a plan behind that goal. That’s why people’s goals fail. The plan gives you a realty check on what really needs to happen. You have a dream, you’re living it by owning a farm. Try working in a cube prison on for size and you will get a much better understanding of my 5-year goal.
Yep, that’s my way in REI. One good deal at a time. After 9 years and 25+ transactions, I’m still looking always on the hunt, but you must stick to your objectives, style and financial performance goals
My goal is to retire at 32 years old, but the retirment age for my generation is 67 years old. By retiring at 32 I am trying to accomplish something very great, so having the idea that I can retire at 32 instead of 67 without sacrificing anything and putting nothing of my own into the process is unrealistic.
I doubt your father would tell you that to be successful one should work their 8 hours day and call it good. Like you he probably works a lot more hours than 8 hours a day, so that is what I am doing. Go to work and then to make dreams come true maybe work a few extra hours somewhere else. Instead of spending that money I put it back into the properties.
Have you ever heard of a 401k or IRA? These are excellent tax vehicles that all have a negative cash flow.
Your point is well taken, I understand what you want to do now, I hope you are able to acheive that goal of retiremant at 32 that would be awesome. Keep me posted as you aquire properties. I would like to learn how you are structuring them.
Even through a person can buy half a dozen properties and maybe have $1,000 a month in extra cash, they will just spend it. It’s not a matter of discipline its a matter of life. So rather then trying to buy 10 properties with $100-200 a month positive and pretending I will put the money to good use by paying off their mortgages or buying more properties, I instead structure some properties on a 5-year mortgage, thus forcing the reinvestment of profits and creating a solid foundation.
I think it is dangerous to continue to buy and buy and buy without have a solid foundation. The part no one has discussed is the realty of buying. It sounds good to not pay off properties and instead continue to just buy and buy. But the realty is that it cost money to put down, money in closing costs, and if you are buying at 70% or less of mkt value then there are almost always some tenant and property repairs needed. So you can’t really just keep buying, unless you have money to put down, pay closing costs, and pay for initial repairs.
To me the way you discussed is risky, to you my way is risky. Funny how that works.
Your post makes absolutely no sense. If you buy 10 properties at a 30% discount that each have a $100 per month positive cash flow, you have 30% in equity immediately and $1,000 per month cash flow. Why would someone else be more inclined to spend this money than you will be inclined to spend your positive cash flow in 5 years when your properties are paid off? In addition, since the mortgages are fully amortized with my plan, the mortgages are being paid off, albeit at a slower pace (over 20 years).
As I said in an earlier post. You can work extra jobs to pay negative cash flow for the next 5 years and have 5-7 properties paid off giving about $2,200 positive cash flow. That’s your plan and it will work. Or you can buy 50 (or more) rentals with none of your own money and at the end of the 5 years have $5,000 per month positive cash flow and a million dollars of equity. My current goal is to have 100 rentals with more than $10,000 per month positive cash flow and $2,000 million dollars in equity at the 5 year point.
I’m not disagreeing with your plan. Your plan will work. In my opinion, it is just not the most efficient way to do things.
To say my post makes no sense shows you fail to understand what it is like when you start real estate with little to no money. It is very difficult to buy 50 properties in 5 years. Where are you going to get that much money to put down, where is the money going to come from for closing costs, and where is the money going to come from to evict the tenants and fix the properties up. Don’t say it comes from the profit from each place. Buying 10 a year is just unwise, and not very likely unless you have piles of money or credit. Piles, not just a little extra each month is what it will take to do your plan.
The difference is that you had money when you started real estate. There are a lot of things that make sense to do when you have money, but don’t make sense if you don’t have money. You are right that my plan will work, I will retire at 32. If you have a way to retire earlier then 32 then good luck. I’m happy with 32.
When buying properties at a 30% discount, you don’t have to put any money down. The money to evict tenants comes from a cash reserve or your positive cash flow.
It’s true if you have credit and money you can buy with no money down, I have done it many times. One time my wife’s score went from 720 to 600 in one month because of all the properties that popped on her credit report. If I were to buy 10 a year there would be nothing left of our score and then the buying would stop regardless of who you go through, unless it is through seller financing.
The main reason you are able to buy great deals is due to the lack in tenant management, so if you buy at 70% you will have evictions with almost every purchase (my experience). They are selling at 70% because of the tenant headaches that they can’t seem to get a hold on. Now I am 6 foot 265 Ibs and when I say get out, people listen. But it is still a huge headache and money loss each time you buy a property at deep discounts.
I don’t think my way is the only way, but I do think is a great way if your goal is to retire young. What I don’t like is people saying that my way make “absolutely no sense”, when it does.
I did not say that your plan makes no sense. In fact, I said “that’s your plan and it will work.”
What I took issue with is that if someone makes $1,000 cash flow, they will automatically blow it. That makes no sense.
Who pays the eviction and repairs? Evictions and maintenance are part of the operating expenses. If you don’t have enough cash flow to cover the initial rehab, then you must buy low enough to be able to afford the repairs with the loan.
If you buy at a discount and have positive cash flow with each property, your credit score should not drop. I have dozens of rentals (all acquired in the previous 3 years) and my credit score is 760. When you buy right, you are making more money and your wealth is increasing with each property you buy.
While I agree that some properties bought at a discount have management problems, I disagree that doing it this way is money lost. If you buy a property at a $30,000 discount and you have an $800 eviction, that’s still pretty good in my book.
As I’ve said several times, I am all for you doing it your way. Furthermore, I think your way will work and is appropriate for you. If you are happy with your results, that is all that matters.