In the last 5 years my wife and I have built a portfolio of 15 units across 10 properties. Our income from these properties is enough to completely replace all W2 income for us. I’m killing it right? I must be doing everything perfectly to have these results…no. Absolutely not. Here’s where I am screwing up and what I need to fix.
Item #1: Rehabs:
My method since Day 1 has been to buy the houses that nobody wants at a deep discount. These houses of course need some rehab work, and that has varied considerably. Our most difficult rehab cost $25,000 and took up 3 months solid of my and Mrs. C.’s time. No doubt we put 1,000 hours into it. Rehabs take a ton of time and life energy. We are now at a scale where we have a solid base that we don’t need to rehab houses. Yes on a house we buy for a rehab we may end up all in at $50,000 and rent it at $1,000 a month, but we spend virtually no time if we buy a house already done for $75,000 and rent for $1,000 a month we are really ahead. And that formula can scale. I can only rehab 2 or 3 a year, and be exhausted. I can buy infinite “ready to go” houses a year. What’s 1,000 hours of our time worth, especially if we can pay for the difference over 15 to 30 years? Just because something is a good deal, doesn’t mean it has to be a good deal for us.
For the last 14 months we have non stop been fixing properties. We rehabbed our 6 unit, rehabbed a house a tenant destroyed, and rehabbed 2 houses we purchased. We also flipped 3 houses with moderate damage from tenants. Prior to this 14 month marathon, we had only finished rehabbing our previous tax auction property roughly 4 months earlier.
In addition to being out of energy for rehabs, buying deep discounted houses that nobody wants has also gotten much more difficult this past year. Currently in my market there is only 1 house listed for under $120,000.
Item #2: Do It Myself:
Even beyond rehabs, I am notorious for wanting to do it myself. I actually don’t WANT to do it. I would rather someone else go over to fix the tenant call, whatever it is, but I can’t allow myself to do this sometimes. I have the skills and tools, and I can do it in 2 hours, why pay $500 to a contractor to do it? Well I end up losing an entire day and all my focus. If instead of making $80,000 from rental activities I make $70,000 and I never do a maintenance call again, that is probably the best scenario. I have to separate myself from virtually all physical work on our properties.
Item #3: Renting Direct to Tenants:
Originally we set out to do Section 8 rentals. We have had a difficult time with this because typically we can get a cash paying tenant easier. If I have 5 qualified people who can pay the rent themselves why would I do Section 8?
Well at this moment I have 3 tenants behind on rent. I get sob stories all the time about why rent is late and the late fee isn’t fair, and they will have it next week (and then they don’t). With Section 8 if they get a full voucher I don’t have to worry about their individual situation. The federal government will deposit the rent every month in my account. Section 8 rents have increased in our area and this is something to pursue going forward.
Item #4: Financing Wrong:
We have been strong users of the BRRRR method, Buy Rehab Rent Refinance Repeat. We already discussed getting out of the rehab business, but the refinance business is where serious changes need to be made. All of my properties are on 15 year loans which greatly reduces cashflow. Why? Because our credit union only offers 15 year loans on investment properties. I also can only get a loan while I’m working a W2 job. Why? because I am getting conventional conforming loans, which require this. I work seasonally and it is always a pain to get a loan through. In addition to that, to get a loan the amount of documentation I have to provide is extreme. I have to provide deeds, leases, insurance, and tax information for each property. This is a pain.
What I need to do is switch to an investment property underwriter who does DSCR (debt service coverage ratio) loans. These loans are issued not based off of my credit worthiness or income, but off of the income the property generates. These can often be had in 30 year loans as well and with only 20% down.
I still can do better though. These loans will still come with closing costs and a ton of paperwork. The next move is to go into seller financing. Seller financing, especially for multifamily properties of 5+ units is much less expensive than getting a conventional loan, and its a win win for me and the sellers. The sellers don’t want to manage the property any more, but likely still need cash flow. They also will take a capital gains hit if they sell the property in a lump sum. Seller Financing allows them to break up their capital gains over time, receive steady cash flow with no headaches, AND earn interest that the banks otherwise would have earned. For me it allows me to dictate the terms and have a much easier closing process. No appraisal needed, no digging into all my accounts and properties, just a couple pieces of paper with the seller.
Item 5: Using my HELOC:
For the initial buy on all or our properties we have used our home equity line of credit. We also used this to finance our rehab of the 6 unit building. Our heloc has increased in interest rate from 3% to 8.5%. This has cost a lot of money. For a $50,000 property this is an increase from $125 to $355 a month. At the same time I am in the longest stretch between my seasonal jobs ever, so I can’t refinance any debt out of my heloc. This is all short term stuff though. From a long term perspective using my heloc to consistently buy houses means that my personal residence is always on the chopping block if we missed a payment. There is peace of mind that comes with having no debt against your personal residence and I want to head towards that. Within the next 24 months I plan to have our heloc empty. This will be done through refinancing out 2 properties, paying down debt from real estate cashflow, and going after seller financing for new deals.
Item 6: Making Mrs. C Unhappy:
This is the big one. All the above make Mrs. C. unhappy. The main 2 factors is total time spent on rehabs and amount of debt on our home equity line of credit. Fixing these 2 items will go a long way to fixing Item #6.
Item #7: Taking All My Deductions:
I have been taking OK records with actual expenses incurred directly on the units. What I am terrible at is keeping records for mileage. I live about 6 miles from most of our properties. We don’t have a ton of trips for existing properties, but during the rehab stages we end up making several trips a day for months, plus trips to and from home supply stores. I’m sure we are leaving a couple grand a year on the table. With moving away from rehabs, I think this problem should mostly solve itself.
Item #8: No Inspections:
No inspections has probably been a differing factor in 2 or 3 of our properties that has been the hedge for us getting a property. At this point I feel that this lack of inspections has cost us more than it has helped us. I have to admit that I get excited about properties and see a vision for what it can be and sometimes overlook issues. So far I have bought 3 houses that had wells that needed replacing. Something about the winterizing process that banks do seems to destroy these old wells. On my most recent property I missed serious structural issues with the garage, that I now have to tear down. Most inspectors nit pick stupid stuff, I have to believe that a home inspector would have identified these major issues that I rolled the dice on.
What did I miss? If you’ve been following my real estate journey what other mistakes am I making?