How I Built A Portfolio of 28 Units
Who Am I?
In 2003, I graduated from the United States Air Force Academy (USAFA) with a salary of $60k/year, working as an Operations Research/Business Analyst. From 2003 to 2007, I lived in D.C. and rented from my parents. I’ve always been a natural saver, and negotiated a monthly rent of $500 (a steal) while living there. This allowed me to supercharge my savings during this time period. While there, I read Rich Dad, Poor Dad and got the Real Estate itch. Prices were astronomical at the time in that market, and I did not have the confidence to make a move. However, I formed a plan to buy one property at each of my new assignments moving forward. At 39, never married and with no children; having served 17 years in the Air Force, I now have a salary of $114k/year with a portfolio consisting of 28 properties.
My Current Portfolio
My portfolio as of this writing consists of 28 total units: a mixture of Single Families (SFRs) and multi-families (MFRs) scattered across five states. I have one Single Family Residence (SFR) in OH, one SFR in California, one SFR in Illinois, one SFR in Phoenix, four 4plexes and one duplex in Saint Louis, and two SFRs and one triplex in New Mexico. Five of those units were acquired with partners. This portfolio is worth about $2.5 Million. And it wasn’t difficult to get here.
At about $100/door, my total portfolio cash-flow is about $3k/month. This accounts for all expenses such as vacancies, repairs, and Capital Expenditures (CAPEX). My overall Cash on Cash (CoC) is just over 21% (excluding my primary residence). My Internal Rate of Return (IRR), which I feel is the most important metric, is 14%. Note: these numbers include my current primary residence mortgage of $2100/month; however, it will become a rental in July 2020 which will increase my cash-flow to approx. $5100/mo and significantly increase my IRR). As a high-income earner, I am not as interested in cash-flow as I am in appreciation. And although Cap Rate can be an important metric when determining a property’s value or income stream, my portfolio is not one that is suitable to use given its diversity. Remember, a Cap Rate is specific to a particular market, and since I’m in five, it makes the number relatively meaningless.
Financing Methods
All of my properties are financed. The financing consists of a mixture of VA, conventional, Hard Money loans, as well as seller financing. The five properties purchased with partners are held within LLCs at 50/50 ownership. I’ve also bought 5 properties with partners held within LLCs at 50/50 ownership. I’ve also acquired cash by using cash-out refinances, a few Thrift Savings Plan (think 401k for the government) loans, a Home Equity Line of Credit (HELOC), and credit cards.
My Strategy
How did I get here? Here are the important parts:
2003 - 2007: Lived with my parents and saved, saved, saved. Also spent a lot of time educating myself with Books like Rich Dad Poor Dad, The Millionaire Real Estate, and The Richest Man in Babylon to name a few.
2007 - 2009: Moved to Ohio and bought my first property. It was a Condo that I used as my primary residence while studying for my Masters in Operations Research at the Air Force Institute of Technology. I used conventional financing what was called an 80-10-10 loan (80% first position loan, 10% second position loan, and 10% down payment). I used the accumulation of savings from the pass several years for the down-payment. Keep in mind, the purchase price was “only” $110k. Here are the numbers for SFR #1.
2009 - 2012: Moved to California and bought my second property. It was a Single Family Residence (SFR) that I again used as a primary residence while working at Edwards Air Force Base. I used my VA loan here and only had to put down a nominal amount down. Most of the fees were rolled into the loan. This was in the midst of the Great Financial Crisis (GFC), and I was scared. The details of SFR #2 can be found here. This was my first house hack (did not know what this meant at the time), and it worked out marvelously.
2012 - 2015: Moved to Illinois and bought my third property. It was another SFR that I again used as a primary residence. Are yo seeing a pattern here? I used the remainder of my VA loan to acquire this property, which again required minimal out-of-pocket costs. This was new construction. It has been easy to rent out, but the appreciation has been limited, even though that was the original play. I will link the numbers soon. While there, I bought two Fourplexes in Saint Louis using conventional financing. I will link those details soon as well. These were SFR #3 and Multifamily (MFR) #1 & 2.
2015 - 2016: Moved to South Korea. While there, I bought two more Fourplexes in Saint Louis with the team I had developed while living across the river in IL. I used conventional financing for these as well. Details forthcoming. These were MFRs #3 & 4.
2016 - 2020: Moved to New Mexico. Upon my arrival, I bought a SFR as a primary residence using conventional financing . I lived there for a year, and then purchased a second SFR as a primary residence using conventional financing. I then purchased a Triplex using a FHA loan with 3.5% down. These were all in fantastic neighborhoods purchased with my brother as 50/50 partners. I also bought two SFRs (one in NM and one in Phoenix) with a business partner in a 50/50 partnership, one in an LLC. The property we put in the LLC was purchased using seller financing at 6% with a five year balloon (i.e., the loan will come due after five years, but is amortized 30 years). The other was with conventional financing purchased in his name. I have since bought my partner out of the property in the LLC. The property in my partner’s name is a 60/40 (my favor) partnership. Finally, I bought a fourplex and a duplex in Saint Louis with the aforementioned team. These were SFR #4 - 7 and MRS #5 & 6. I used hard money loans at about 15% for these to purchase, and then refinanced into conventional loans after six months of “seasoning”; which is just a term that banks use to verify that the property will indeed perform as advertised.
Future Plans
Many of the minds on Bigger Pockets strive to get to 100 units, producing cashflow of $100/month each, to earn $120k/year in passive income. Following suite, my original goal was to get to 100 units before turning 40. I’m obviously behind on this goal, but my strategy has evolved over time. As a military member who will most likely receive a pension, cash flow is no longer my focus. I believe for high earners, and individuals with sufficient pensions, its more appropriate to make appreciation plays. This will potentially affect your IRR much more significantly over long periods of time. However, I would still like to reach my original goal of $120k/year in passive income as a safety net.
I am ashamed to admit it, but I find it hard to sell my under performing properties. I’d rather hold on and make up for mistakes with better properties down the line. My income helps with this strategy, but it almost certainly isn’t optimal from a Return on Investment (ROI) perspective.
I intend to refinance all my properties that have considerable equity and continue the process of finding and purchasing higher-performing, more profitable deals. I am currently refinancing my primary residence as I type this. I’ve discovered that the “velocity of money” (i.e., the rate at which you can grow your principle) is a key factor. I will focus on this aspect of investing more.
Key Takeaways
Like the stock market, time in the game is better than finding the perfect deal. Over time, “most” deals will work themselves out. Most investors get themselves in trouble when they over-leverage. Be sure to have a high income or significant reserves to account for recessions, black swan events like COVID-19, or unexpected maintenance / CAPEX. Stay focused, continually save, look for and evaluate deals (don’t force them), and stick to your strategy. It’s alright if that strategy evolves over time, but make the change intentional.
Maximize your Income
I always try to maximize my income. I went from 60k/year to 114k/ year as an officer in the military. Aside from that, I’ve side-hustled with AirBnB, Turo, and craigslist. . I also choose to live a simple, frugal lifestyle which saves more than most could imagine. Also, you should always be looking for opportunities to increase your income.
Have a ~50%+ Savings Rate
Your savings rate is one of the key ways to build your portfolio. Obviously, finding Other People’s Money (OPM) can supercharge your growth; but you need a track record to get to that stage.
What I’ve accomplished so far isn’t rocket-science. Simply learning and taking action has gotten me to where I am today. In fact, I would gather that I should be much farther along in my journey given the knowledge I have. C’est le vie.
understand your Markets
I don’t believe there is a “right” or “best” market. Each market has the potential to allow you to profit. It all comes down to knowing your numbers and building a team. Do that, and you may be surprised by what you can do.
You should also develop criteria and avoid the “shiny object” syndrome.
Keep in mind, markets with growing populations, diverse employers, and stable incomes tend to have the least risk and perform the best.
My favorite markets at this time are Denver, Salt Lake City, Austin/Dallas/Houston/San Antonio, D.C., Atlanta, Saint Louis, Kansas City, and Raleigh.
Always run your numbers
I consider myself to be a numbers guy. In that sense, it’s been easy for me to conduct analysis on potential properties. However, in the beginning, I was typically overwhelmed by the whole “buying” process. Not running your numbers in a conservative fashion can (and most likely will) burn you. Always run your numbers. Even better, run your analysis by a more seasoned investor to get feedback. While doing that, determine whether you are a “cash-flow” or “appreciation” investor. But remember, appreciation plays are often seen as gambling.
Use the 50% and 1% rules to get an idea if a deal is worth investigating. The 50% rule states that 50% of your gross rental income is going to go to expenses BEFORE financing costs. For example, if your rent is $1000 per month, $500 will go to expenses (e.g., maintenance, management, utilities, etc.). The 1% rule states that you should, at a minimum, have your rents compared to your purchase price equal 1%. In this case, if you buy a property at $100k, you should receive $1k in rent to meet this rule. They are generalizations. The term “rule” really means “rule of thumb”. Nonetheless, these two “rules” serve as a quick way to evaluate deals. But never make a decision simply based on those projections. Each market is different. Use tools to calculate rent (e.g., rentomenter), vacancy (property managers can get you this info), insurance, management, taxes (after sale, NOT current), Interest, and maintenance. An easy way to remember this is to use the acronym VIMTIM. You should also earmark costs for Capital Expenditures (known as CAPEX and are things like roofs or HVACs). In some markets, especially MFRs, you will also need to consider utilities.
Run Your Rental Portfolio Like a Business
If you manage your own properties, then “pay” yourself a management fee. Don’t let the tenants know you are the owner. Record and track all your numbers. Understand your performance. Create and track Key Performance Parameters (KPPs). Outsource the day-to-day operations (e.g., hire property managers, contractors, bookkeepers, etc.). Build out your network and professional team (the “core four”: real estate agent, lender, property manager, and real estate attorney).
Thanks for taking the time to read this lengthy post.
(Disclaimer: I used the formatting from an Anton Ivanov post on Bigger Pockets)