The Half-Way Point: Owning Five Rentals (What’s Next?)

I started the journey up the early FI summit beginning in 2012. Two years have passed and I’ve made a good amount of progress since beginning the trek with $0/month in passive income. At this point, I’d say we’ve reached the half-way point of completing the journey to early financial independence.

Naturally, it’s a wonderful feeling to be able to look back down and see how far up I’ve climbed. By no means is the rest of the ascent going to come easy, but momentum is now on my side, and it helps keep me approaching each new day with a renewed sense of enthusiasm and vigor. Success breed more success, as they say. Once you’ve gotten a taste of it, you want more. And more… and then some more!

Five Properties (Seven Units)

Getting to five rental properties and seven units puts me right where I want to be. This is where I need to be in order to keep on executing the gameplan. To date, I have the following asset allocation:

  • 2 properties (2 units) in the Bay Area
  • 2 properties (4 units) in Chicago
  • 1 property (1 unit) in Indianapolis

As I’ve mentioned on numerous occasions, my long-term strategy is to achieve geographical diversification throughout the country. I started my investing career as a dividend investor, and I still carry that same mindset into real estate investing. I believe that the best way to hedge a portfolio is to create an index fund type of blend.

Each year, I try and add a few more pieces to the growing portfolio. Since I operate with the endgame in mind, I have no fears of being “overweight” or “underweight” in any particular category. For instance, I currently own four units that cater to low-income, Section 8 tenants. This allocation represents more than 50% of my total units. Clearly, not the vision I have in mind for the overall plan…

But it’s important to practice and preach patience. The journey of a thousand miles cannot be completed in an instant. Rome was not built in a day. And all good things come to those who wait. Brick by brick, my citizens, brick by brick…

There’s no need to worry if you have a strategy in place. Over the next two years, you will see first hand on this blog how my Master Plan will begin to unfold.

The Next Steps

Owning five properties and seven units is great, but I still find myself in a vulnerable position. In particular, here are the items I need to address moving forward:

  • Vacancy is still the biggest enemy. One vacancy out of seven units puts me at 86% occupancy rate. This is not ideal and does not align with my long-term strategy. If I can get to ten units, one vacancy would give me 90% occupancy rate. That’s starting to sound a little better. At a bare minimum, I need to get to ten units before declaring early FI. Let’s push forward and try to get that extra 4%. Right now, a single vacancy would halt the cash flow for any given month and slow down my progress significantly.
  • As mentioned above, four out of my seven units are targeted to low-income tenants. At this point, I am sufficiently allocated, and have no plans to keep expanding in the low-income area. In contrast, I also own two rentals that target high income professionals, with rent fetching over $2000/month. There’s an obvious gap in my portfolio right now, and no middle ground. I need to focus on restoring balance by targeting the middle class for my next few purchases. Primarily, I’m looking for white/blue collar professionals with families, good to great credit scores, and the desire to stay rooted for a few years (non-transient tenants). The most likely candidates would be young families who don’t want to live in apartments anymore and are trying to save up money for a downpayment for their own personal residence.
  • I am currently invested into three markets. I would like to locate a fourth market, and third turnkey provider. I don’t like putting all my eggs into one basket… or two. Long-term, three major suppliers would be the bare minimum I need to feel comfortable. I believe I have targeted the right company to partner up with for future purchases. This partner is headquartered in Memphis, Tennessee, but also operates out in both the Dallas Fort Worth (DFW) region, as well as Houston. I am highly interested in investing into these Texas markets. I may very well settle on one, or both, depending on how my visits go. I have plans to travel to Memphis in the next two months to meet the team and discuss the Texas markets. In addition, I may also venture into Texas to talk to a different provider. This other company is headquartered and only operates in Houston.
  • I own two duplexes and three single family homes (my classification also includes townhouses, condos, etc.). Ten units is the immediate target, and I would like to get there by adding more single family homes. I believe owning six single family homes and two duplexes would be ideal at the ten unit mark.
  • Out further into the distance, I am also considering the possibility of adding a commercial apartment building (5+ units). This move would only be considered after I reached ten units. Further, a commercial apartment could only be made possible if I executed a 1031 Exchange and sold off one (or both) of my Bay Area properties. The idea of going commercial is still very intriguing, though, so I will spend more time doing research.

Summary

There’s still a lot of work that needs to be done. Getting to five properties (seven units) is a good start, but the journey is far from over. Moving forward, my immediate plans are to locate a fourth rental market and to keep purchasing single family homes into solid neighborhoods. I want to focus on targeting quality tenants that pay market rent (no subsidies or assistance). The sooner I can get to ten units, the better, since this will help dampen the impact of any one vacancy. Lastly, if I can get to ten residential units, I will entertain the idea of picking up a commercial apartment. It’s too early to say if I will 1031 Exchange into an apartment, or if this is something that would be more suitable for post-FI. For now, let’s just say that the possibility of going commercial is open. In the short-term, though, let’s keep focusing on securing some more single family homes. Forward march!

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Finding Your Financial Tipping Point - The First Million is the HardestGarciaFI FighterEricCharles@gettingarichlife Recent comment authors
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Eric
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Eric

You will find that a Section 8 property is seldom vacant, but the maintenance cost is very high. That is why a ‘D’ category apartment demands a 12%+ cap rate. That is why many inexperienced investors fail. The money looks great, but it is still not enough.

Any tenant turnover will cost a minimum of two or three months rent in terms of costs. Most Section 8 renters exhibit the same behaviors. A Felon boyfriend that moves in, drugs, and skipping their portion of the rent.

Section 8 tenants are extremely hard on properties. This you will soon find out. Holes in walls and doors. No cleaning when they move out. Lots of stuff left behind, including furniture and mattresses, etc.

A word of advice. Do not fix ANYTHING in a section 8 property, unless your rent will be affected. If a court would not make you fix it, don’t. Paint floors, rather than carpet. But used appliances, not new. Skip painting between tenants unless the inspection mandates it. Industrial strength, but cheap. If you have to carpet, but indoor/outdoor carpet and staple it to the floor. Or cheap commercial carpet. No pad.

A section 8 landlord is a slum lord. Get into that mentality in order to maximize profit. Low quality tenants in a low quality unit. The second best way to make money.

The First Million is the Hardest
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What is the appeal of investing in Section 8 properties if this is the case? It would seem to be more hassle than its worth. Are the returns that much higher than your typical market-rate rental?

Eric
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Eric

The appeal is the anticipated cash flow. But, as in anything, high risk = high rewards. Google Section 8 horror stories.

Most experienced landlords do not do the Section 8 baby mills. In MN, two thirds of landlords do not take Section 8. Another kind of Section 8 participant is the elderly. If you have a bunch of 1-bedroom apartments, Section 8 is a solid option to cater to those people.

If you run a property as a low-income apartment, it can be done. The sweet spot of rental is high quality apartments (Class ‘A’) renting to high caliber tenants. The other, second best sweet spot is the low end; low quality apartments and low quality tenants, i.e. a slum lord. Slum lords make plenty of money. But you have to know how to deal with the tenants that live in those places. On the second of the month, you begin the eviction process if not paid. You want to bring in the new tenant before the first of the next month.

There is a shortage of Section 8 housing, so finding renters are never an issue. But remember, you are also bringing in a tenant that has access to free legal representation. If you ever get a judgment against them for non-payment or damages, you will never collect. By definition, they have no money and likely no job.

writing2reality
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Congrats on hitting the halfway mark. I think Eric has summed up nicely some of the challenges of low-income housing, but I think your diversification across the different income levels is important. Ultimately economies of scale and the accelerated capitalization by owning 10+ properties will be huge. Your cash flows will be able to start covering significant expenses and tenant turnover.

The commercial building would be a different direction for sure and would require a whole other set of parameters. Certainly it should help give you a lower “per door” buy-in, but the costs can definitely be magnified and the financing is obviously a different animal once you cross that 4 unit threshold.

Done by Forty
Guest

I’m always impressed by your plans, FI Fighter. Ambitious but realistic, due to your organized approach. I’m sure you’ll get to your 10 units in no time.

Income Surfer
Guest

Good work FI. It does feel like you’re ready to step up to larger properties. I like your approach with diversifying across the country. Has your term expired with that first turnkey group yet? So you can buy in their market and go around them.

Thanks again for your help this morning.
-Bryan

Sundeep
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Sundeep

Awesome plan. It’s nice to see your plan laid out for others to see there’s lots of thought behind what you’re doing versus just going out and buying properties in higher cash flow areas. Thanks for the insight and keep it up!

Dividend Mantra
Guest

FI Fighter,

Impressed by how much you’ve accomplished in just two years. With the progress you’ve made thus far, there’s no doubt in my mind that within the next couple years you’ll be living with complete freedom. Keep it up, my friend!

Best regards.

Charles@gettingarichlife
Guest

Section 8 units are the most profitable but can be difficult. I’m 100% invested in Hawaii so I was considering Portland. I’m now looking towards Texas but the wife doesn’t want any more properties this year since I bought two in two years. Hope you become a millionaire in debt.

Garcia
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Garcia

Congratulations mate,
It seems your snowball is rolloing down the hill. I was impressed by your idea for diversification the locations of your rental properties. Because, it is true that you know your neighbourhood, your property agencies, etc. but first rule of investing is not to put all your eggs in one basket (I do not like to put in even in two baskets).

Could you please share a bit of your experience how you manage your properties that are several hours away from your residence? Because I also think over location diversification but it would be quite uneasy to visit the tenants every two or three months for instance. It would require time and not less importantly spending some money to be aware how the tenants are caring for the property. I think over using the services of a local property agency.

Regards!

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