How To Buy One Rental Property Per Year: Early Retirement Guide

How To Buy One Rental Property Per Year [Your Early Retirement Guide]

How To Buy One Rental Property Per Year To Retire Early
Jessica Willens Headshot

Jessica Willens

What if we told you that there was a simple model that anyone can replicate to build a solid rental portfolio? And it only required you to buy one rental property per year?

If that sounds like something you’d be interested in, then read on.

As we all know, buying a rental investment property is not a get-rich-quick scheme. It’s a long-term investment that will potentially yield good returns over time.

But growing a large real estate investment portfolio is something that very few real estate investors achieve—and for good reason: it requires time and financial resources. It also requires an understanding of how to use the power of leverage and the power of compounding interest over time to grow your investment.

That’s why it’s so important to learn how to buy one rental property per year. This model is simple, straightforward, and easy to replicate if you have the right guidance and resources at your disposal.

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How to Buy One Rental Property Per Year – The Rules

You’re probably thinking: “One rental property per year? That’s ambitious!” And you’d be right. But it is possible, and we can show you how.

First, let’s get real about what “buy one rental property a year” actually means. It doesn’t mean you actually have to buy a new house every year—you can buy a new rental property every two years if you want to!

Here are the rules for building a passive income property portfolio while buying one rental property per year:

1. Buy first property with cash - get a good bargain

You know how they say that you make your money when you buy, not when you sell? Well, for most real estate investors, that’s not true because they’re buying properties at market value. But for those who are able to buy below market value, this is absolutely true. And one of the best ways to do that is by using cash.

Cash means fewer and lower closing costs because you’re not paying fees to a lender. It also means that your cash flow is maximized since there are no mortgage or interest payments on the property in the future. Plus, if you need more time to find the right investment property, using cash allows you to patiently search for bargains.

So how do you find great deals? Look at foreclosed homes or properties that have been on the market for too long—these types of sellers are always willing to budge on price. The key is doing thorough research on your local market. You could also use RealWealth to find and research profitable properties in any location in the US.

2. Each property should be a SFH

The truth is that while multifamily apartments can be a lucrative investment, they aren’t ideal for this strategy. The main reason is that it’s harder to get financing and manage these properties—which means you’ll spend more time, money, and energy managing them than you would with single-family homes.

And then there’s the fact that single family rents have consistently increased by about 3% annually since 2010. In Q3 2021 alone, they posted their fastest year-over-year increase in the past 16 years—and that’s not exactly a sign that things are slowing down anytime soon!

SFRs are easier to buy, manage and sell. Also, single family tenants have more incentive to take care of the property since they usually plan to stay longer. So what does this mean? If you plan to buy one rental property per year, it’s probably best to stick with single-family homes. If you happen to have a little more cash laying around you could also consider a duplex, which will allow you to have two doors for less than the cost of two single family homes.

3. Purchase price stays constant

When you’re buying a house, one of the first things you want to know is how much you’ll be paying each year in mortgage payments.

Your mortgage constant is a number that tells you how much cash you’ll need to throw at your house each year—to pay down the mortgage. It’s calculated by dividing the annual debt service for the loan by the total loan value. Keeping it constant by searching for homes with similar purchase prices helps simplify your calculations.

4. Reinvest 100% of the cash flow into the down payment for the next property

The key with this model is to reinvest 100% of the cash flow into the down payment for the next property. This strategy works especially well if you can find properties that cash flow and are also appreciating in value. By taking advantage of both cash flow and appreciation, you can potentially buy one rental property per year.

In this way, you’ll be following in the footsteps of stock market investors who reinvest dividends from stocks into more stocks. By using cash flow to buy more income-generating assets, investors may be able to increase wealth over time with multiple cash flow streams.

When done correctly, a passive income portfolio through real estate can make saving for retirement a reality. Since real estate thrives during inflation, many investors set a goal to retire on real estate income.

Example: Owning four rental properties (four year real estate plan)

Assumptions:

  1. Gross rents stay the same for years
  2. Property values increase by 5% each year
  3. Cash flow is re-invested
  4. No closing costs and no rehab costs
  5. You’ve purchased the first property all-cash.
  6. Cash flow is consistent
  7. An excellent credit rating and 25% down payment for leveraged transactions.

Using this property as an example:

How Many Rental Properties To Make $100k Article - Atlanta Real Estate Market Pro Forma Example

In year one, let’s say we bought this single family rental all-cash. This property delivers an annual cash flow of $12,252.

How To Buy One Rental Property Per Year To Retire Early - Year One Example

Assuming you’ve not touched the annual cash flow for rental one, your out of pocket costs for rental two by the end of year two becomes 43,000 – 4,368 – (12,252 * 2) = $14,128.

How To Buy One Rental Property Per Year To Retire Early - Year Two Example

Assuming you’ve not touched the annual cash flow for rental one and two, then your out of pocket costs for rental three by year three becomes 43,000 – (4,368) – (4,368 * 2) – (12,252) = $17,644.

How To Buy One Rental Property Per Year To Retire Early - Year Three Example

Assuming you’ve not touched the annual cash flow for rentals one,  two and three, then your out of pocket costs for rental four by year four becomes 43,000 – (4,368) – (4,368 * 2) – (4,368) – (12,252) = $13,276.

How To Buy One Rental Property Per Year To Retire Early - Year Four Example

If you continue to buy one rental property per year until you own eight properties, you’ll be able to cover 100% of your down payment costs for your ninth property by the end of year eight. Then it’s just a matter of paying down your mortgage, building equity, and recovering your out-of-pocket expenses.

A faster approach would be to use cash out refinance by year four to cover your out of pocket costs. So if real estate prices appreciate at a 5% annual rate. By year four, you’d have built enough equity in your first property, and you can do a cash out refinance to recover some of your investment.

  • Year 1: Property one price = $180,600
  • Year 2: Property one price = $189,630
  • Year 3: Property one price = $199,111
  • Year 4: Property one price = $209,066

After four years, an investor could pull out 50% or more of this through cash out refinancing. That is, over $100,000. This covers all your out-of-pocket costs. Income from your properties will keep paying your mortgages. Then you can rinse and repeat.

5. Avoid properties that need too much repairs or come with high operating expenses

You’ve done it! You’ve found your first rental income property at a bargain price.
Now, what do you do? Well, the first thing is to make sure that you’re not buying a money pit.

You want to avoid properties that need too much repairs or come with high operating expenses. It is okay to buy a fixer-upper. While you may have high hopes of turning the rental property into a moneymaker, you should be realistic about the money and time it will take to improve the house, especially if it is your first investment.

Fixer-uppers can be great investments—as long as you know what you’re getting into! If something needs lots of work and/or money right off the bat, then it probably isn’t worth your time or money.
The old saying “you can’t tell a book by its cover” may not be true, but it definitely applies to houses. Buying and renting out a property that needs many repairs can cost you a bundle, especially if you don’t know how to do the repairs yourself.

6. Maximum no of loans at any time should be four

There’s a lot to consider when you’re trying to get more than four conventional mortgages at once. Fannie Mae allows you to finance up to 10 real estate transactions, but the problem is that most banks wouldn’t offer financing for more than four properties. So buying one rental property per year until you reach 10 properties might be hard to pull off.

Even if you find a bank that allows more than 4 rental income properties to be conventionally financed, there are some challenges that come with the process. In contrast to “traditional” homeowners—who submit loan applications with only a W-2 and paycheck stubs—seasoned real estate investors may be asked to provide tax returns, REO schedules and other financial documents for each home underwritten and approved.

7. Find properties that can generate positive cash flow immediately

Some investors prefer properties with lots of space and scenic views that will command higher rents. Others prefer smaller homes with more modest features that won’t break the bank but will still provide decent returns on investment.

But no matter which type of rental income property you choose, you need to make sure that the rental income covers all of your costs—including mortgage payments or rent (if applicable), taxes, insurance premiums, maintenance fees and repairs—and leaves enough left over for profit.

The BRRRR strategy

The BRRRR Method is an option for investors looking to buy one rental property per year to retire early. This strategy was proposed by David Greene, a former police officer and real estate investor with more than nine years of investing experience.

The theme of this strategy is buying properties in bad shape to acquire some value at the onset by rehabbing them, renting them out, recovering your out of pocket costs via a cash out refinance, and then using cash from refinancing to buy another run-down property.

The only problem with this strategy is that sometimes it may take longer than anticipated to accrue enough equity to do a cash-out refinance. But let’s explore it in a bit more detail.

Buy

The BRRRR strategy is not for everyone, but if it sounds like something that would work for you, here’s what you need to know:

  1. You’ll have to focus on fixer-uppers but make sure they will be profitable investments. That’s because it’s easy to get deals on these kinds of properties.
  2. You might need to pay all-cash for the property. Your property might not meet a conventional lender’s appraisal standards.
  3. You’ll need to calculate the after repair value of the property. That is, you’ll assess comparable properties to estimate what the property would be worth after rehabbing or renovation.

Renovate

When you buy a fixer-upper, the first improvements you make should be ones that will ensure the home is safe to live in and up to code. These improvements won’t add any value to your property, but they are necessary for it to be habitable by humans—and if you don’t do them, you could get sued or fined.

Investors should know the difference between repairs and improvements. A repair is like a band-aid; it keeps your property from getting worse, but an improvement is like a facelift; it makes your property look better and helps you achieve greater property value. For example, replacing a roof is a repair because it maintains the existing condition of your roof; installing solar panels would be an improvement because it would increase your property value by adding something new and valuable.

While both repairs and improvements are tax deductions for rental property investors, they’re reported in different ways: Repairs are deducted from income over time (up to $10,000 per year), while improvements are depreciated over 27.5 years.

Rent

Before you apply for refinancing, you want to make sure you have paying tenants. Without this, most banks won’t approve your refinancing request. And that requires that you screen tenants beforehand, making sure they can pay promptly each month.

When using the BRRRR strategy, your mortgage will be slightly higher because you’ll probably borrow more money against the house. This means you have to be that much more careful when running rent-comps to know what you can expect for rent once you purchase your property.

In other words, stay away from properties with a low rent-to-value ratio!

Refinance

Take out a loan against the equity in your home (or investment) and use that money to buy another distressed property (likely one that needs work). There will be more equity than when you started because of the increase in value after renovating and renting out the home for a percentage of its market value.

But how do you find lenders that can help you refinance your investment? Here’s a unique way to do it. Go to a website such as ListSource or CoreLogic and search for every loan made in your city and price range in the last year to non-owner occupants. You’ll find the names of hundreds of potential lenders who can help you with your refinance.

Repeat

Use the cash as a down payment for another investment property! The original property still continues to generate rental income while the new one pays off its own mortgage—and voila! You now have two properties generating income for you instead of just one.

But what if things don’t go according to plan? What if market conditions change or interest rates rise unexpectedly? In that case, you’ll have to fine-tune the BRRRR method to fit your situation.

How many rental properties can I own?

There is no limit to the amount of rental properties you can own. However, the prospect of gaining access to more financing is often limited by the amount of cash you can put down as an investor. Moreover, you can only have up to 10 mortgages at a time. And in reality, most banks only allow you up to 4 mortgages at a time. That puts a cap on how many rental properties you can own. Read this article to see how many rental properties you need to make $100k rental income.

Now, if you want to buy and own more than one rental property, and you’re looking at ways to increase your financing options, then forming an LLC can help. Owning 10 rental properties is easier with an LLC. An LLC is like a hybrid between a corporation and a partnership—but without all the legal paperwork! But there are pros and cons to consider before making this move—so let’s take a look at both sides of the coin!

On the plus side, forming an LLC will allow you to benefit from pass through taxation. Any income earned by the LLC including real estate profits will pass through the LLC to its members.
On the other hand, if you are planning to transfer real estate from an individual’s name into the LLC, you would need to seek a waiver from the mortgage lender before doing so. That’s because of the due on sale clause.

Final Thoughts

So you think it’s impossible to buy one rental property per year?

It’s not. And it doesn’t have to be complicated, either.

Once you have the right strategy, it’s easy to buy a rental property per year. The first step is making sure your finances are solid, and knowing how to research profitable rental income properties. That’s where RealWealth comes in!

We help you research the most profitable real estate investing markets, and connect you with real experts to guide you on your investing journey. Sign up for free here to view sample property pro formas and to schedule a one-on-one strategy session!

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