I started real estate investing in 2012. I purchased one single family rental that year. It is now 2013, and I have acquired an additional two more properties. Rental Property #1 closed on July 30, 2012 and Rental Property #3 will close on July 23, 2013. So, in a timespan of just under 1 full year (not calendar year), I will have purchased 3 rentals.
What’s the gameplan from here on out? How many properties do I need to own before I’m finished with the Accumulation Phase? When do I plan on moving into commercial real estate? What’s the cash-flow expected each month? When do I plan on achieving all this?
Lots of questions that need be answered…
Here’s my revised buying gameplan moving forward:
2012: 1 property (DONE!)
2013: 3 properties (purchased 2 so far. Looking to add one more before the end of this year.)
2014: 3 properties
2015: 3 properties
If I can accomplish the above, I will own 10 rental properties by the end of 2015.
Just recently, I was planning on opening a HELOC to allow me access to more funds to purchase additional properties this year. After speaking to my loan agent, I learned that the most the bank will loan me for an investment property is 60% of the market appraised value. This was surprising news, as I expected to be able to borrow up to 75%. This is a conventional mortgage through one of the big name banks.
Frankly, 60% is just way too low, and not even worth the effort. The only other option would be to do a cash-out refinance, which would allow me access to borrow up to 80%. The problem with the cash-out is that interest rates have soared since I purchased last year, so if I do a refinance, I’ll lose the awesome 3.75% rate I secured last year. Simply put, too much risk, not enough reward to justify.
This threw a major monkey wrench in my plans! Had I been able to secure a HELOC for $60,000, I probably would have been able to purchase 3 more rental properties this year! Now, since I have to save my OWN money, the most I’ll be able to pull off is just one.
The Next Two Years
Over time, the principal on my rentals will build up, and I will build equity. If appreciation keeps up, I should be able to secure a HELOC in 2014 or 2015, and even at 60%, still be able to pull out sufficient funds to help speed up the purchasing.
However, after my most recent experience, I’m not going to hold my breath and rely on a HELOC. Instead, I’m going to be more conservative and plan using a more self-reliant model. Basically, in order to pull this off (purchasing 3 properties each year), I’ll have to keep my W-2 income through 2015. To help the process, I’ll use all the accumulated cash flow from the rentals to supplement the next downpayment.
Even without using a HELOC, I’m “over leveraged”. From a risk point of view, not taking out a secondary loan might be for the better anyway. So, although it would have been nice, my plan to reach early FI can still be attained even without it. I just might have to suck it up and work until I’m 31…
With 10 properties, I would expect to earn between $2500 to $3000 each month in cash flow. This is assuming an average of $250 to $300 for each property, which is pretty conservative. For instance, if rents keep skyrocketing in the Bay Area, there’s probably no reason why I won’t be able to collect an additional $100 to $200 for each local property. But we’ll see.
Commercial Real Estate
So, when do I plan on making the jump from residential to commercial property? Well, if all the above goes according to plan, I should theoretically be financially independent by the end of 2015. If that’s the case, I’ll probably quit my job and move into real estate investing full time. I’ll get my real estate license and proceed from there. I figure if I can do this gig full time, it’ll be much easier to locate good deals and build up my network. The natural progression of things would be to trade up (4 green houses for 1 red hotel). Again, we’ll see… but I do plan on eventually getting into commercial apartment buildings. Hopefully when I’m ready, the snowball will have grown to massive proportions and it’ll be possible!