How to Build a Rental Real Estate Empire
This past weekend I had the opportunity to sit down with a friend of mine to talk about real estate. Specifically, I was picking his brain about how he built his successful rental real estate business. He currently owns 22 properties, all mortgage free, and he is buying more properties at a rate of 2 – 3 per year. He has acquired all 22 of his properties in the past 12 years.
Here is how he did it…
The First Rental is the Hardest
Getting your first rental property is the hardest. My friend, let’s call him Jack, bought his first property seven years ago as a “fixer upper” foreclosure. He had saved up around $15,000 in cash from working extra jobs, and from a bonus at work to have the money needed for the down payment. He bought the house for right at $100,000. He then did most of the repair work himself, and spent $5,000 getting the house cleaned up and move-in ready. His mortgage payment, with higher rental taxes and insurance, was $600 per month. After doing a good bit of rental market research he listed his rental property at $800 per month rent. He listed on Craigslist, through social media, and by placing a sign in the front yard. He had signed his first tenants within two weeks of listing his home for rent.
Jack now had a tenant in his home, paying the mortgage for him, with an extra $200 per month. He made the wise decision of putting $50 of that surplus into a savings account to pay for any necessary repairs to the home. He then put the additional $150 towards extra mortgage principle payments. Just by adding that additional $150 to the mortgage payment, he was able to shave 12 years off of the estimated 30 year mortgage repayment schedule. But that was not fast enough for Jack. He also continued to work extra jobs, and put every extra paycheck, every bonus check, every tax refund, every gift that he received towards the principle down payment. Fast forward two years, and he was able to pay off his mortgage in full.
Jack now had one rental property, free and clear, that was giving him $800 per month income.
The Dominoes Started to Fall…
Dominoes falling is a good thing right? Well, for Jack it sure was. Once he had paid off his first rental property he was hungry for more. He began saving the $800 per month from his first tenant, and soon had enough funds for another down payment on a new rental property. He again bought a house through foreclosure, but this home was practically move-in ready and he did not have any expenses in repairs. He spent $80,000 on this new home, but because it was in a better neighborhood, with 3 bedroom and 2 baths, he was able to charge $1000 per month in rent. He had new tenants within a week. Between the two properties he was now bringing in $1800 per month in rental income that he applied entirely to the new mortgage principle. Again, with the combination of extra side job paychecks, he was able to payoff the mortgage on this new property within 2 years.
Jack’s third home purchase went a bit differently. He was trying to figure out a way to generate more cash quickly, so he could use that as seed money for additional rental properties. He decided he would buy a house and try to “flip” it. He again bought a small bungalow as a foreclosure, and spent about 2 months doing repairs himself, and getting the home move-in ready. With a very quick turnaround, he ended up netting almost $60,000 when he re-sold the home. Please remember that this was in 2005 at the height of the real estate market. I think it is still possible, although much more difficult, to “flip” houses for this sort of profit in today’s real estate market.
However, he used that $60,000 to purchase a third rental property. Paid it off in full in a few months, and now had three properties generating rental income each month.
From that point, his system went as follows: Take rental income from all properties and apply towards mortgage payoff, once mortgage on new property is paid off apply the rental income towards down payment for next home, buy next home, apply rental income towards mortgage payoff, save for downpayment, buy next home, apply rental income towards mortgage payoff, etc….you get the idea! He was also saving a little out of each rental check to pay for repairs on any of the houses that the security deposit would not cover.
Fast forward to today and Jack now has 22 properties generating net rental income of around $20,000 per month. He can now payoff a brand new $100,000 rental property within 5 months, and rent it for $1,000 per month. He has literally built a rental real estate empire.
Can We Replicate This?
Jack’s system makes a lot of sense, and I REALLY appreciate his stance on paying off very rental property before purchasing a new one. This virtually eliminates the risk from investing in real estate. If a rental property were to sit vacant for a few months due to repairs or to finding a new tenant, there is no mortgage payment to front.
Jack was also blessed with the ability to work extra jobs and generate significant extra income to put large extra payments towards the mortgage principle. I think this is entirely possible for anyone, maybe just on a more extended time frame. 6-8 years may be a more realistic mortgage payoff schedule. However, once you have one rental property free and clear, you have an instant boost to your mortgage payoff plan.
Jack is also a very handy man. He has taken on almost all of the home repairs himself, or has contracted the work out to people to knows well. This has saved him a lot of time and money in arranging and paying for repairs. Now that he has such a large number of properties however, he is contemplating hiring a part-time handy man to handle all of the repairs for him. I told Jack I thought he would be crazy not too.
One option that may be a bit more attainable for you and I, is to apply these same principles towards our primary residence. We can apply all of our extra income towards paying off the principle on our primary residence. Once we are able to pay off our primary residence we can move homes and rent out the old house. You can then apply the rental income from the old house, with your regular mortgage payment, plus any extra income, and payoff your new home mortgage very quickly. Rather than moving again so quickly, you could then buy a new house as a rental and continue applying your regular monthly mortgage payment plus all rental income towards paying off that property.
Whatever route you decide to take, please understand that there is risks involved, and everyone is not cut out to be a landlord. However, if you make smart decisions, there is serious wealth to be made!