Is it time to worry? Home prices are surging, affordability is becoming a concern, and home flippers are back out in droves. Surely that’s a recipe for disaster, right?
A new report from RealtyTrac revealed that the number of “active home flippers” in 2015 was the highest it has been since 2007, around the time things came crashing down, partly due to those very flippers.
Last year, some 179,778 single-family homes and condos were flipped by flippers, with flips accounting for 5.5% of total U.S. home sales.
That was up marginally from the 5.3% share in 2014, but it marked the first annual increase in the share of house flips after four consecutive yearly declines.
And in 83 of 110 metros nationwide (75%) flipped homes increased from a year earlier. So it’s not just some markets seeing increased flip activity. California is the only noticeably cold state.
For the record, RealtyTrac defines a “home flip” as a property sold a second time within a 12-month period. But if I had it my way, I’d expand that definition slightly seeing that some folks wait just over a year due to tax purposes.
So the number of flips could be even higher if you move the definition to say 13 months, which is still clearly a fast turnaround intended to make a quick profit.
110,008 Flippers Flipped in 2015
Sorry for having fun with the word flipper. I can’t help myself. I think we need a new word for it, personally. Anyway, a total of 110,008 investors/entities flipped at least one property last year.
That was the highest number since 2007 when a slightly higher 130,603 home flippers existed. Still, it’s nowhere close to the peak seen in 2005 when 259,192 flippers were out doing their thing. Back then flips made up 8.2% of total home sales.
The share of flipped homes was actually above 2005 levels in 12 metros, including Pittsburgh, Memphis, Buffalo, San Diego, and Seattle.
The states with the highest share of flips included Nevada (8.8%), Florida (8.0%), Alabama (7.4%), Arizona (7.1%) and Tennessee (6.9%).
As far as metros go, Memphis (11.1%) Fresno (9.2%), and Las Vegas (9.2%) led the way.
Interestingly, despite the numbers inching up again, the number of home flips per investor (1.63) was the lowest since 2008.
So it appears as if today’s flipper is a bit more discerning, possibly because they have no choice. We know inventory is limited, and it’s already more difficult to obtain financing for several properties at once.
That could limit some of the bad things surrounding house flipping, but it doesn’t mean noobs aren’t still buying homes for double the price the previous buyer purchased them for.
Tip: Look at the property history at the bottom of Redfin/Zillow listing pages to see what the previous buyer paid to determine if you should pay double that!
Flipped Homes Purchased at 26% Discount
RealtyTrac said flipped homes were on average purchased for 26% below market value and later resold for a five percent premium above the estimated market value.
The average gross flipping profit, defined as the difference in purchase price and sale price, hit a 10-year high in 2015 of $55,000, not far from the $58,750 seen in 2015.
This figure doesn’t include the costs of rehabbing the property, which is typically anywhere from 20-33% of the property’s after repair value.
The best return on investment (ROI) was in the $100,000 to $200,000 home price range, with Pittsburgh (129.5%), New Orleans (99.2%), and Philadelphia (98.4%) the leaders nationwide.
Unfortunately, this return to flipping means less opportunity for traditional home buyers who rely on mortgage financing to get the deal done.
This competition, coupled with a continued lack of housing inventory, will make it increasingly difficult for first-timers and others with limited cash reserves to buy homes. Additionally, it could be yet another sign of the formation of another bubble.
Last Updated on February 25, 2022 by Mark Ferguson
Buying one rental property may not make you a ton of money right away. However, rentals can be an amazing investment when held for the long-term and when multiple properties are purchased. There is also the opportunity to buy larger commercial or multifamily properties, which can increase returns as well. With a good rental property, you should be making money every month (cash flow); you should make money as soon as you buy by getting a great deal; you will have fantastic tax advantages, you can use financing which greatly reduces the amount of cash needed; and the property value and rents will most likely go up in value over time.
Rental properties have been a great investment for me. I make more than $100,000 a year from the cash flow on my rental properties after all expenses including mortgages, property management, maintenance, and vacancies. I now have 20 rental properties which are a mix of residential and commercial. I bought my first rental property in December of 2010 for $97k. I started with residential properties but now buy almost all commercial, including a 68,000-square-foot strip mall in 2018.
You cannot buy just any property and turn it into a rental if you want to make a lot of money. You have to buy properties below market value with great cash flow to be a successful rental property owner. Not only do I make money every month from my rentals with minimal work, but my rentals have also increased my net worth thanks to buying below market value and appreciation (I don’t like to count on appreciation, but it is a nice bonus). This is not just a hypothetical article. I have owned rentals for many years, kept track of their returns, and written many articles about what I have learned.
The cool thing about real estate is while I have more than $6,000,000 worth of rental properties, it did not take millions of dollars to buy them.
Why did I choose rentals?
One of my passions is automobiles. I purchased a 1986 Porsche 928 a few years ago, and I absolutely love that car. I also have a 1999 Lamborghini Diablo, a 1981 Aston Martin V8, a 1998 Lotus Esprit Twin Turbo, and a few other cars. In my early 20s, I never thought I could afford any of these cars in my early. However, I started to make decent money as a real estate agent in my mid to late 20s. The problem was I was not saving much money. I just kept spending it. I knew if I ever wanted to get ahead in life and be able to afford these cars, I would have to invest the money I was making. I researched everything I could and decided rental properties were the best investment. I worked very hard to save money to buy my first rental.
As soon as I started buying rentals, I could see the fruits of my labor. I was making money every month from rent, I made money as soon as I bought the house because I bought it below market value, and it was forcing me to save money. I wanted to buy as many as I could, and I knew with steady money coming in every month from the rentals I could someday feel comfortable buying expensive cars.
[embedded content]
Why are rentals a good investment?
Not all properties are a good rental, but if you can find properties that are, they can be an amazing investment. A rental property should have a number of attributes
Cash flow
Good rentals will make money every month after paying all expenses. The expenses should include mortgage, taxes, insurance, maintenance, vacancies, and property management. The cash flow is the rent minus all of these expenses. Some people like to shoot for different numbers, but I always liked to see $400 to $500 in cash flow per property.
Buy below market
I get a great deal on every rental I buy. I don’t want to pay retail when I can pay to 20% to 30% less than retail. It is not easy to get great deals, but it is possible. On almost every house I have ever bought, I got a great deal. That instantly increases my net worth, makes me more cash flow, and looks better on my balance sheet for banks.
Leverage
You can put as little down as 20 percent when buying rentals. You can put even less down when buying a property as an owner occupant and then turning the property into a rental.
Tax advantages
Most expenses on rental properties are deductible or depreciable. You can also depreciate the structure of a rental property, which means you can save thousands of dollars each year on your taxes. You can also complete a 1031 exchange on rentals to avoid capital gains taxes.
Appreciation
Many people only talk about housing prices when comparing rentals to the stock market, but appreciation is a bonus. It is not what you are shooting for when buying a rental property because no one knows for sure if prices will go up or when.
It is not easy to find rental properties that are a good investment. It takes me months to find great deals that make over $500 a month like mine typically have, and they are not available in every market. My typical rental property used to cost between $80,000 and $130,000, and it rented for $1,200 to $1,500 a month. I put 20 percent down on the properties and finance the rest with my portfolio lender. I usually end up spending $25,000 to $35,000 in cash to buy each rental property. Cash flow is not the only benefit of rental properties. I slowly pay down the mortgage every month; I have great tax advantages; and they will most likely appreciate.
I am able to save that much cash from each rental property because I make a very good living as a real estate agent as well as from fixing and flipping houses. I like to have nice cars and a nice house, but I always make sure I am saving and investing money first. There are ways to buy rental properties with little money down, but I think you will get further ahead in life by saving as much as possible and investing wisely.
How much do you need to buy a rental?
I go over the exact cost of a rental property here, but let us assume that it costs $30,000 to purchase and repair one rental. You do not have to invest $90,000 a year to buy three rentals a year because you can begin refinancing rental properties after you own them for a year and take cash out to invest in more rentals. You can also save the cash flow from your rental properties to buy more rental properties. I usually buy my properties for about $100,000, with a four percent interest rate and 20 percent down, which leaves a payment of $381 for principal and interest. Those numbers combined with rents from $1,200 to $1,500 a month leave me with at least $500 a month in income from my rental properties.
How much should a rental property cash flow?
It is not easy to make $500 a month in cash flow from a single rental property. I detail how to calculate cash flow here, and I created a cash flow calculator to help people determine cash flow. Cash flow is not the rent minus the mortgage payment: you must consider many other factors. My rents range from $1,250 to $1,600 a month, and my mortgage payments range from $450 to $650 a month. I have to account for maintenance and vacancies on my rental properties, which leaves me with about $500 in profit each month. I buy my properties for $80,000 to $130,000 and usually make quite a few repairs before I rent them out.
What are the long-term returns for someone with little money?
Investing in rental properties can provide fantastic returns when you have a lot of money to invest. Even if you have little money, you can invest in rental properties. I am going to walk through how many years it will take someone to accumulate one million dollars from investing $7,500 a year into long-term rental properties.
The more money you make and save, the easier it is to make one million dollars from rentals. However, even people who do not make a lot of money can get there, although it may take a little longer. I am going to write out this plan assuming someone has a $75,000 salary and can save 10 percent of their income a year.
When you first start out, $7,500 does not go very far, and it takes a lot of money to buy an investment property. Luckily, there are many ways to buy a rental property with much less money if you are an owner occupant or use some of the techniques I discuss here. In the first year, the best bet is to buy a HUD home or REO that needs some work but will still qualify for an FHA or conventional loan. The key to my strategy is buying houses below market value. HUD or REO houses are a great way to do that. We will assume the investor can buy a house similar to the ones I purchase in my area, which cost around $100,000. There are closing costs that the buyer is charged when they get a loan, but you can ask the seller to pay most of your costs.
Buying as an owner occupant year one
The first step is to buy a house. But you cannot buy just any house; you want to buy a house as an owner occupant that you can later turn into a rental. You also want to get a great deal on a house to gain instant equity. To get a great deal on a house, you may have to buy one that needs some repairs. With a HUD home, you can roll $5,000 of the repairs needed into the loan with the FHA escrow and only put 3.5 percent down for the down payment. If the home needs a lot of work, you could use an FHA 203K loan to roll more repairs into the loan. We will assume this house needs $4,000 in work to qualify for a loan, and you bought a HUD home with the costs rolled into the loan. With an FHA loan, you have to pay mortgage insurance every month and an upfront mortgage insurance premium (which could be $200 or more a month).
With a conventional loan, mortgage insurance is much lower than FHA, and you might be able to remove it after two years. However, you may not be able to roll the repairs into the loan, but you could get the seller to fix some items before closing. If the repairs are cosmetic items, you should be able to get a loan without making the repairs before closing. I will assume the total cash needed to close on this hypothetical house is about $5,000. Hopefully, this house was bought below market value because it needed some repairs and was a foreclosure. Once the house is repaired, it should be worth around $125,000.
Since you bought this house as an owner-occupant, you have to live in the home for at least one year.
Year two
After one year, you have gained about $22,000 in net worth; $125,000 – $100,000 purchase price – $4,000 repairs rolled into the loan + $1,000 gained in equity pay down. In year one, no rent was collected because the home was owner-occupied to get a low down payment. In year two, the house is rented out and you can buy another owner-occupied home using the same strategy. When you try to buy a home right away, you won’t be able to count the rent from the first house as income right away. It is best to buy houses priced low enough that you can qualify for two houses at once to make this work. Otherwise, you may have to wait up to a year for the rent to count as income and can buy again.
You can only have one FHA mortgage at a time, so this time you have to get a conventional loan with 5 percent down. In the second year, you have saved up another $7,500 from your job and have $2,500 left over from the first year for a total of $11,500 saved. The second home also costs $100,000, and the seller pays 3 percent closing costs. The down payment needed is $5,000, and $5,000 in repairs are needed on this second house. The total cash needed to buy an owner-occupied home is $10,000 and the repaired value is $125,000.
The first house is rented out for $1,300 a month (which I will do all the time on a $100,000 purchase), and the payment is $550 with taxes and insurance. Add vacancy, maintenance, mortgage insurance and we’ll assume $300 a month in positive cash flow.
Year Three
In the second year, you made $25,000 from buying house number two (equity) and made $3,600 from cash flow. You also made $2,500 from equity pay down on both loans (I am assuming each loan will pay down $500 more each year). In year two, all the savings was used from year one, but you saved $7,500 and made $3,600 in cash flow for a total of $11,100 savings. Buy another house using an owner-occupied loan and use $10,000 of cash. Net worth increases to $53,100 after adding the equity pay down, cash flow and equity gained in the purchase of a new home.
The second house is rented out again using the same figures, although the mortgage insurance may be less because we are using a conventional loan instead of an FHA loan.
Year Four
Another house is bought below market value in year four. Cash flow increases to $7,200 a year plus $1,100 in previous savings and $7,500 saved this year. You now have $17,300 cash saved up before we subtract another $10,000 for the purchase of a new house as well as cash for the repairs. Net worth has increased $25,000 on the purchase plus $4,500 in equity pay down. The total net worth increase is now $90,800 for the last four years.
You own four houses and three of them are rented out. At this point, you may be able to remove the mortgage insurance on the conventional loans that have been held for two years, but I am not going to in my calculations to keep things simple and conservative.
Year Five
In year five, we repeat the entire process again and come up with the following numbers. Cash flow increases to $10,800 and previous savings $5,800 and $7,500 saved up equals $25,600 saved cash. The investor purchases another property and uses $10,000 in cash to leave $15,600 in his cash account. Net worth increases by $7,000 for equity pay down: $10,800 for cash flow and $25,000 for the purchase of a new property. The total increase in net worth is now $133,600.
You may have noticed this investor just mortgaged his fifth house. For many people, getting a loan on more than four houses is very difficult. However, the investor is buying houses as an owner occupant, which makes it much easier to get a loan.
Year Six
The same process is repeated all over again. Cash flow is $14,400, previous cash is $14,100, savings equals $7,500 for $37,500 cash minus $10,000 for a new purchase. The investor has $27,500 left in his bank account. He increases his equity pay down to $13,500, has an increase of $25,000 in net worth from a purchase, and an increase in net worth from cash flow of $14,400. He now has increased his net worth by $186,500.
Year seven
In year seven, the seventh house is purchased. Cash in the bank equals $26,000 from previous savings, $18,000 in cash flow, and $7,500 in new savings, which totals $53,000. You are now able to buy two properties this year! Buy another owner-occupied property using $10,000 and an investor-owned property.
To purchase an investment property, we need to put at least 20% down, and we still need to make repairs. We are buying below market value still, so we are going to assume we are adding $25,000 more a year in equity and $3,600 more a year in cash flow. Estimated costs for down payment and repairs is $32,000 to buy an investment property. You have $11,000 of cash left after buying two properties this year. Net worth increased by $60,500 after adding the usual amounts to total $247,000.
Year eight
Year eight is very exciting because we get to add two properties into the mix instead of just one. With the extra houses added, increased cash flow, and continued equity pay down, our net worth increased $98,200 in just one year! Total net worth is now $345,200, and you are making real progress! You have $42,200 saved up after buying another house in year eight as an owner-occupant, so you can buy another investment property, but won’t, because our margins will be too thin with only a couple thousand in savings.
Even though you are still making only $75,000 a year, you increased your net worth by almost $100,000 a year. There are not many people who can increase their net worth by more than they make in a year!
Year nine
In year nine, you are adding $26,500 in equity pay down, $28,800 in cash flow, $25,000 in built-in equity with purchases, for a total net worth increase of $80,300. Your total net worth increase over nine years is now $425,500. You also have $60,000 saved up after paying for one house as an owner occupant, which is enough to buy another investment property, leaving $26,500 cash left over!
Year ten
In year ten, you have enough cash to buy two more properties and have $28,000 in cash left over. Net worth increases by $114,500, bringing us up to a total increase of $540,000.
Year eleven
You can buy two more properties and increase your net worth by $129,200 for a total of $669,200. Cash flow is at $43,200 a year, and there is $36,700 of cash left over after buying two more properties. You could buy a third house this year but decide not to stretch your limits. You need to make sure you have plenty of reserves for the rentals.
Year twelve
This year, you buy three houses because there is $94,600 in cash available. After buying the three houses, there is $22,100 cash left in savings, equity was paid down, and $44,500 and $50,400 in cash flow was generated. Total net worth is now $814,100! You are getting closer to making one million dollars investing in real estate!
Year thirteen
You have increased your net worth by $190,200 this year because you bought three houses last year. The total net worth increase is now $1,004,300! Your actual net worth will be higher than this because I did not calculate savings from your income into the net worth, just the gain from buying rental properties. Cash flow is now $61,200 a year, and you have paid off $54,000 of equity in one year!
You own 16 rental properties which are producing over $60,000 a year! The incredible part is we did not increase the rents at all, even though they are likely to go up over thirteen years. We assumed there was no appreciation, even though there likely will be over that time. Due to the tax advantages of rentals, you are probably taking home as much in passive income from your rentals as you are from your job.
Things we did not consider
This was a very basic calculation for how to make one million dollars investing in rental properties. It would take a book to go through all the variables and possible roadblocks that might come into play. Here are a few items we did not consider, which would have an impact on the time it takes to reach one million dollars in increased net worth.
Inflation will increase the prices of homes and wages as well as rents. While the investor has to pay more for houses each year, he will also be making more and saving more. The biggest factor is the rent increases. His rent on the first houses he buys will increase as time goes on, but his payments will stay the same. His cash flow will increase greatly as time goes on, which we did not account for.
Taxes were not accounted for either because that gets very complicated. The cash flow the investor is making would be income, but the investor could offset that with depreciation from the rental properties. I assumed those two factors even themselves out.
Investment property purchases had 20 percent down, where the owner-occupant purchases had 5 percent down. There should be an increase in cash flow on the investment property purchases because of the lower down payment, but I left them the same to make the math easier.
Refinancing was not considered either, but the investor could easily have refinanced a couple of properties to get more cash out to buy more rental properties. This would have increased cash flow and net worth due to the increased number of properties purchased.
Obtaining more than 4 or more than ten mortgages can be difficult. I am assuming the investor is able to get as many loans as possible with a lender. I can have as many loans as I want with my portfolio lender, but many people cannot. This would be a roadblock once he reached ten financed properties.
Buying owner-occupied properties each year is possible but may not be realistic. Moving thirteen times in thirteen years may put a bit of stress on the family!
I also assume the investor manages his homes himself, which is doable in the beginning but it maybe tough when he gets ten homes or more.
How Did I Build a Rental Property Portfolio
I have 20 rentals now, but I did not buy them overnight. I started in 2010 and slowly bought them over the last 9 years. I bought 1 in 2010, 2 in 2011, 2 in 2012, and kept building from there. I worked very hard to make a great living as a real estate agent, but I also used real estate to buy more rentals.
I bought my first rental by refinancing my personal house and taking cash out of it. I also refinanced some of my rentals along the way so that I would have more capital to buy even more rentals. I was lucky that our market appreciated so much, but I also bought every rental property way below market value, which allowed me to take cash out when I refinanced.
I stopped buying residential rentals in 2015 because the market in Colorado became too expensive. However, I was able to invest in commercial rentals in my area and cash flow on them. There are a lot of different ways to invest in real estate!
[embedded content]
How much have my rentals made me?
I put together some stats to show how much rentals made me after four years of owning them. It has been a few years since then, and things have gotten even better! At the time, I had bought 11 rental properties. After doing some calculating, I discovered my rental properties have appreciated and been bought cheap enough to produce a gain of $600,000 since December of 2010! It is important to remember that net worth is all on paper, and I would not realize $600,000 in profit if I decided to sell all of my rental properties today. I would have to have selling costs, and I would have a large tax bill if I sold my rental properties.
How much equity have I built with rentals?
One thing I have done with every rental property I buy is buying them below market value. I try to buy my properties at least 20 percent below the current value, and if a home needs repairs, I want that rental property worth 20 percent more than the price I paid plus the cost of the repairs. For example; if I buy a rental for $100,000 and it needs $20,000 in work, I want it to be worth $144,000 or more when I am done repairing the home ($100,000 + $20,000 = $120,000 * .20 = $144,000). That means I usually gain at least $20,000 in net worth on every rental property I buy. The 11 rentals I have bought have gained at least $220,000 (I buy many properties at more than 20 percent below market) just by buying homes at the right price.
I also have been lucky that prices have increased significantly in Northern Colorado in the last few years. I would say lucky for the sake of calculating net worth, but the increase in prices has made it harder to buy cheap rental properties with great cash flow. If you want to know how much my houses have appreciated, I broke down each rental and how much money it has made below.
Rental 1
I bought my first rental property for $96,900 on 12/5/2010. At the time I bought it, I knew it was worth at least $125,000, which is not a huge spread between the buy price and fair market value, but the home needed less than $2,000 in repairs.
The house is now worth at least $165,000 and most likely more. I had it appraised earlier this year, and the appraisal was $165,000 and our market values have increased since that time. If the house is worth $165,000, then my net worth increased about $66,000 after you subtract the repairs. The home was rented out for 1,050 a month when I first bought it and now is rented out for $1,400 a month.
Rental 2
I bought rental property number 2 for $94,000 on 10/5/2011. This home needed much more work than number one, and I spent about $15,000 repairing the house. At the time I bought this house, I thought it was worth $140,000 after it was repaired, and this house is now worth around $175,000. That leaves me with a net worth increase of about $66,000 on this property as well.
This house has been rented to my brother-in-law since I have owned it. The rent has been steady at $1,100 the entire time but could be $1,400 to $1,500. My brother-in-law has a house under contract and will be moving soon.
Rental 3
I bought my third rental property for $92,000 on 11/21/2011. This house needed repairs, and I spent about $14,000 getting it ready to rent. At the time I bought this house, I thought it was worth $135,000 fixed up, and this house is now worth around $170,000, which creates a net worth increase of $64,000.
This home has been rented to the same tenants for $1,250 a month, but we just raised the rent this month to $1,300 a month. It would probably rent for $1,400 to $1,500 to a new tenant.
Rental 4
I bought rental property number 4 for $109,000 on 1/25/2012. This home also needed about $14,000 in repairs before it could be rented. At the time I bought this house, I thought it was worth $145,000. This house is one of my most valuable rental properties and is worth $185,000 in today’s market. That leaves a net worth gain of $62,000.
This home was rented for $1,300 up until this year when I rented it to new tenants for $1,500 a month.
Rental 5
I bought rental property number five for $88,249 on 12/14/2012, and it needed more repairs than the others. The market had definitely begun to improve at this point, and finding a home that was under $100,000 was very tough. This home was a good deal, even though it needed $18,000 in repairs. I thought it was worth around $130,000 when I bought it, and I now think it is worth $165,000. That leaves a net worth increase of $59,000.
This home has been rented to the same tenants for $1,200 a month.
Rental 6
I bought rental property number six for $115,000 on 3/7/2013. This house needed about $15,000 in repairs, and I thought the property was worth about $150,000 after it was fixed up when I bought it. It is now worth $170,000, and that leaves a net worth increase of $40,000.
This home was first rented for $1,300 a month until earlier this year it was rented for $1,400 a month.
Rental 7
I bought rental property number 7 for $113,000 on 4/18/2013. This house needed only $9,000 in repairs, and I thought it was worth $155,000 when I bought it. This neighborhood has done great, and the home is now worth $185,000, which leaves a net worth increase of $63,000.
This home has been rented for $1,400 a month since I bought it.
Rental 8
I bought rental property number 8 for 97,500 on 11/18/2013. The home needed $15,000 in repairs, and I thought it was worth $150,000 once fixed up. It is now worth $165,000, and that leaves a net worth increase of $52,000.
This home has been rented or $1,400 a month since I bought it.
Rental 9
I bought rental property number 9 for $133,000 on 2/14/2014. This home only needed $4,000 in work before it was rented, and I thought it was worth $155,000 after it was repaired. I think it is worth $165,000 now, and that leaves a net worth increase of $28,000.
This home is rented for $1,400 a month.
Rental 10
I bought rental property number 10 for $99,928 on 4/13/2014. The home only needed $3,500 in repairs before it was rented, and I thought the home was worth $125,000 when I bought it. I think it is worth about $130,000 now, leaving a net worth increase of $26,500.
This home is rented for $1,250.
Rental 11
I just bought rental property number 11 on 7/24/2014. This house will need about $15,000 in repairs, and I paid $109,318. I think this house is worth $155,000 repaired, leaving a net worth increase of $30,000.
I think this home rents for $1,400 a month.
What is the total gain?
If you add up all these numbers, my total net worth has increased by $556,500, but these numbers do not tell the entire story. I had more costs than I listed when I first bought these houses, but I did not go back through each closing file to get those exact costs. On many of these properties, I had the seller pay some closing costs, which covered much of my buying costs. I also had some carrying costs while I was getting the properties repaired and they were not rented out yet. However, I also did not include any of my cash flow or the money I made on these properties since 2010. I used all of my cash flow to pay off rental property number 1, which added up to over $70,000. That $70,000 in cash flowdefinitely covers all the closing and carrying costs I had on each property and went directly to increasing my net worth by paying off a loan. Speaking of paying down loans, I did not include the equity I have gained over the last 3.5 years by paying down my loans. I have paid down thousands of dollars of loan balances with regular payments on my rental properties.
Net worth is not money in my pocket but what I am worth on paper. Even though it is cool to see this number increase over time, this money is not all readily available. I would have to sell my rental properties to see this money, and I would not see all of it. There would be selling costs when I sell the properties and taxes owed once I sold them. Since I am using the depreciation on the rental properties to save me in taxes, I would have a higher than normal tax bill because I would have to recapture that depreciation.
What about in 2019?
I have 20 rentals that have increased my net worth about $3,000,000 in the last 9 years. I have gotten lucky that Colorado has appreciated like crazy, but they were still awesome deals even without that appreciation. They make me about $13,000 a month after all expenses. The cool part is I have spent less than $350,000 on the properties after refinancing some to take money back out. Talk about an amazing investment!
You can see all my rentals here.
My book on making money with rental properties
I provide a lot of information on my blog and YouTube channel, but I also have written six books. My book Build a Rental Property Empire has been a best-seller for years. It goes over everything I do to find, finance, repair, manage, and even sell my rentals. I also added a commercial chapter to go over that aspect as well. You can find the book on Amazon as a paperback, audiobook, and Kindle. Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely.
Conclusion
It can take time to make a lot of money with rentals, but it is possible. Over the years I have bought a 1999 Lamborghini Diablo, a 1998 Lotus Esprit, a 1981 Aston Martin, and more thanks to the rental properties. The rentals have also allowed me to be aggressive with my house flipping business because I know I have that cash flow coming in every month. We flipped 26 houses last year!
Last Updated on February 24, 2022 by Mark Ferguson
Getting a loan on one or two rentals is not difficult if you have good credit and a decent job. However, many banks will tell you it is impossible to get more than four loans. The fact is there are many ways to get loans on multiple rentals, but the big banks don’t like to do it. There are ways to get loans on 10, 20, or even 100 properties. There are traditional banks that will finance more than four properties and portfolio lenders that will lend on multiple properties if you know where to look. There are even national lenders that specialize in rental property loans who prefer to lend on huge packages of rentals. When you hear a bank tell you it is impossible to get a loan on more than four properties, they are only talking about their bank. Don’t give up hope!
What is a portfolio lender?
Local lenders who offer portfolio financing are another option (my favorite) for investors. It can take some research, time and networking to find a portfolio lender, but they have much looser lending guidelines. Portfolio lending means the bank is using their own money to fund deals, and they don’t have to use Fannie Mae guidelines. My portfolio lender has no limits on how many loans they will give to investors as long as they have the cash reserves and income to support the mortgages. They allow 20% down on those properties and don’t require your life’s history to give you the loan.
Recommended lenders
Kiavi empowers real estate investors with modern technology, timely capital to fund opportunities, and the confidence required to unlock the …
The nation’s leading in rental loans. Rental loans, vacation rentals, and commercial loans. Offers 30-year fixed and many other flexible …
Lending One offers house flipping and rental property loans. I have used them to finance multiple house flips and they …
There are some drawbacks with a portfolio lender. My local bank does not offer a 30 year fixed mortgage. They offer a 15 year fixed, a 5/30, or a 7/30 ARM (adjustable-rate mortgage). I prefer to use ARMs with a 30-year mortgage instead of 15-year mortgages because the payments are much lower, which gives me much more cash flow. I can save that cash flow and keep buying more and more rentals that make much more money than the 4% or 5% interest rates on the loans. It does not hurt me to get an ARM and it is so much easier working with a local bank than it is working with the big banks.
Every local bank will have different terms and rates when they lend money. Some will not offer 30-year loans, some will have balloon payments, and some will not want to lend on rentals at all. It can take some time and work to find great investor-friendly banks.
[embedded content]
Why don’t big banks like to lend on rentals?
I think long-term rental properties are one of the best investments. Part of my retirement strategy is buying as many long-term rental properties as I can. The problem with buying many properties is most lenders don’t like lending to an investor who already has four mortgages. Most big banks will tell you it is impossible for them to give the fifth mortgage to anyone. The big banks have strict policies about loaning to investors because their primary business is lending to owner-occupied buyers. There is no law that says they cannot give investors more loans, it is simply the bank’s policies.
Most big banks will sell their loans off to other banks or as mortgage-backed securities. Because they sell their loans and do not keep them in-house as a portfolio lender does, the big banks have much stricter guidelines.
When are big banks a good option?
I used a conventional loan to finance my first rental that was from Bank of America. The loan was not easy to get, but I got it. I am a real estate agent and it is tougher for self-employed people to get loans, especially right after the housing crash (2010)! It was a 30 year fixed rate loan with an interest rate of right around 4 percent and I had to put 20 percent down. It was a great loan and I wish I could have continued to get loans like that, but Bank of America would not lend to me after I had four loans in my name. When starting out with less than 4 mortgages a big bank may be a good option.
How to get started investing in rentals.
Can you get a conventional loan on more than four properties?
It is possible to finance more than four properties with a traditional bank. Technically Fannie Mae guidelines say investors should be able to get a loan for up to 10 properties. Even with these guidelines in place, many lenders still won’t finance more than four properties because it is too risky for their investors. If you are diligent and make enough calls you should be able to find a lender who will loan up to ten properties. If you want to try an easier route, call a mortgage broker who can help you find a lender who can get it done. These are the requirements for most lenders that will finance from four to ten properties.
Own between 5-10 residential properties with financing attached
Make a 25 percent down payment on the property; 30 percent for 2-4 unit
Minimum credit score of 720
No mortgage late payments within the last 12 months on any mortgage
No bankruptcies or foreclosures in the last 7 years
2 years of tax returns showing rental income from all rental properties
6 months of PITI reserves on each of the financed properties
These guidelines are much stricter than when you are getting a loan and have fewer than four mortgages.
Refinancing rentals
If you want to refinance any of your properties and you already have four mortgages, most banks will only allow a 70% loan to value ratio and probably won’t allow you to take any cash out. One of the keys to my rental strategy is being able to take cash out when refinancing my rentals. I then take that cash out money and invest in more rental properties. Lenders will say it is too risky to do a cash-out refinance for investors with more than four mortgages. In my opinion, if an investor has the cash to put 20% down and has the cash reserves needed, they are less risky than the first-time home buyer putting 3.5% or less down.
Just because the big banks will not do it, does not mean it is impossible to do! I have been able to complete many cash-out refinances with a 75% loan to value ratio with local banks. I have done this on residential and commercial rental properties.
How to find a great lender
In order to find a portfolio lender, it takes some work. The first step is to ask everyone you know in the real estate industry. Ask Realtors, lenders, title companies, property managers, and other investors. Local real estate investor clubs may be able to provide information on portfolio lenders as well. If you can’t find a portfolio lender through word of mouth, try calling local banks. Ask banks if they loan their own money, what their policies are for investors, and if they don’t offer the right terms ask them who might.
National lenders
There are some new programs available from national rental property lenders that are built for investors to get loans on their rental properties. The lenders base their loans on the properties, not the investors. They have slightly higher rates than conventional lenders but are a great option for those who cannot find other financing. They often are much easier to work with if you have a high debt to income ratio, bad credit, or other issues. They usually do not have any limit on the number of loans you can obtain.
If I ever run into a problem finding a local bank to finance my rentals, I would look into using some of the national companies to finance me.
You can see a list of some of the lenders here.
Conclusion
There are ways to finance more than four properties even though many people will tell you it is impossible. Try talking to a mortgage broker who can get you in touch with banks that will finance more than four properties. If you have a big goal like myself like buying 100 properties in the next ten years, then you will need a portfolio lender who will finance more than four, more than 10, and more than 20 properties.
Zombie house flipping is a television show on A&E, and it is also a term for houses that have been vacant for years. I was sucked into the show the other day even though I get really frustrated watching house-flipping shows. I have flipped over 210 houses and currently do 20-30 flips a year.
I get really annoyed watching the house-flipping shows because they are so unrealistic and do not show the real numbers. I tuned into Zombie Flipping to see if the shows had gotten any better, and I was really disappointed. This one was worse than most of the previous shows before it. The numbers were horrible and the show focused on silly mishaps and ignored all the real issues that flippers face.
What is Zombie House Flipping?
Before I get into the show Zombie House Flippers, I want to discuss what zombie house flips are. Zombie house flips became a popular term in the last housing crisis. It describes houses that went into foreclosure or were abandoned by their owners but were never sold to the public. They basically sat empty for years until they were finally sold by the bank. States with extremely long foreclosure processes have the most zombie foreclosures, like Florida, which is where the show takes place. In Florida, it can take three years or longer to complete a foreclosure. The same can happen in Massachusetts, New York, and New Jersey.
If a house goes into foreclosure, the owners may move out before the bank takes possession. If it takes three years for the foreclosure to complete, the house could be vacant that entire time. If you ever happen to go through foreclosure, remember that you have the right to live in the house until the foreclosure process is complete, and even then, the bank may pay you to move out.
What is the premise behind the Zombie House Flipping Show?
The show Zombie House Flippers started in 2016 and is based in Florida, where an investor teams up with a Realtor and contractors to fix up zombie foreclosures. The show plays out like most reality shows with a highly staged atmosphere and little actual information. In most reality flipping shows, they try to make the owner of the flips seem super involved in the rehab when they are not and should not be doing the work. I once talked to an investor who was on one of these shows, and he said they made him lay some tile in the bathroom one time. It was the first time he had laid tile, and as soon as he was done, his crew came in and tore it out so they could re-lay it.
The investor buys the houses without telling us how he finds them, fixes them up with the help of his Realtor, and sells them. The interesting part is that his Realtor seems to work for free.
Why are the numbers completely inaccurate on Zombie House Flipping?
I knew I was going to hate (I know hate is a strong word, but it is warranted) the show from the beginning because they showed the potential profit of the house flip they were working on. They said the house was bought for $185,000, needed $65,000 in work, and would sell for $325,000, leaving a profit of $75,000. It seems like a decent profit, right? Except, they left out at least $20,000 in other costs that come with every house flip. When they sold the house, the final numbers looked like this:
They have no selling costs, no buying costs, and no carrying costs. Here is a breakdown of what those costs might look like:
Buying costs: inspection, title fees, recording fees: $750
Selling costs: real estate agent commissions, title fees, recording fees: $21,000
The total costs to flip this house are about $23,000 more than they said they were. The costs could be lower if the real estate agent is not charging any commission, but I find that hard to believe. These numbers also assume the investor is paying cash for the property and is not using any type of financing.
Why is Zombie House Flipping fake?
I don’t like to call people or shows fake, but I have to call out this show. It was ridiculous. On the episode, I saw the following happened:
The Realtor was doing manual labor to get the house ready.
The investor turned on the water to the house so his dog could cool down, even though it was cloudy and had just rained. The house then flooded because he didn’t know there were open pipes in the house.
There was a fire in the backyard that the neighbors helped to put out.
The house had fleas and everyone needed a HAZMAT suit.
All the neighbors came to help lay sod because they were going to miss their open house date.
The neighbors threw a block party for them when they had the open house.
I could believe maybe one of those things happening, but all of them on the same houses was a bit much. The water being turned on was just horrible. Anyone who works on houses or flips knows that you don’t just turn on the water to a house without checking pipes or with someone to see if it is safe.
Conclusion
This show is worse than most of the house-flipping shows and reminded me why I do not watch them. Every time I watch one, I get frustrated and write an article about it. They ended the show with the house going under contract for $310,000 and their repair costs increasing by $10,000, but they still did not add any other costs to the equation. I could never do a house-flipping show if they made me do that kind of stuff. If you want to see the real numbers and process for a house flip, check out some of my videos on YouTube like the one below.
[embedded content]
My book, Fix and Flip Your Way to Financial Freedom, goes in-depth on what is actually required to flip homes and covers in detail how to find great deals, how to finance them, what repairs to make and how much they will cost, how to find and keep contractors, and how to scale up the business to a full-time job!
I have multiple real estate related businesses: I own 22 long-term rentals, complete 20 to 30 house flips a year, own a real estate brokerage, write books about real estate, I have a YouTube channel, and a blog about real estate. I love real estate because it can be a ton of fun and extremely … Read more
I believe that real estate is one of the best investments to gain wealth and security. However, many people feel it is risky and does not produce great returns. They never get into the ABCs of real estate investing because they get scared away. I think many of those risks are overstated and many of … Read more
House flipping is my primary business, although I am also a real estate broker, blogger, and landlord. I flip from 20 to 30 houses per year, and there is no way I could do that without great financing. Many people ask me why I do not just pay cash for all of my flips. The … Read more
I complete 20 to 30 fix and flips every year, and I also own 20 long-term rental properties. I have certain guidelines I use to determine if I will flip a house, or hold it as a rental property. There are many factors I take into account, but I have much stricter criteria for my … Read more
Since I am an avid reader and reading has helped me become successful, I thought it was time to post some of my favorite real estate books. It is no secret that reading is one of the most important things you can do if you want to be successful. It focuses your mind, relaxes you, … Read more
Flipping houses can be a very lucrative business, but it is not easy to get started. House flipping is often glamorized by television and companies trying to sell house flipping training programs. The television and real estate investing gurus make flipping houses look easy when there is so much more involved than what they show you. … Read more