What if we told you there was a simple model anyone could replicate to build a solid rental portfolio? And, that it only requires you to buy one rental property per year.
If you have your sights set on retiring early or enjoying a stress-free retirement, this article is for you.
As we all know, buying investment properties is not a get-rich-quick scheme. It’s a long-term investment that will potentially yield good returns over time.
However, very few real estate investors can achieve the feat of growing a large real estate investment portfolio—and for good reason: it requires time and financial resources. It also requires understanding how to use leverage and compounding interest over time to grow an investment.
That’s why learning how to buy one rental property per year is so important. This model is simple, straightforward, and easy to replicate if you have the proper guidance and resources.
How to Buy One Rental Property Per Year
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.
Here are the rules for building a passive income property portfolio while buying one rental property per year.
1. Buy your 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, that’s not true for most real estate investors who are 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, cash allows you to search for bargains patiently.
So, how do you find great deals? Look at foreclosed homes or properties that have been on the market for too long—typically, these types of sellers are willing to budge on the price. The key is doing thorough research on your local market and the neighborhood of the property. Another is to work with a seasoned real estate professional who understands the needs of real estate investors.
Many of our members, join RealWealth because we put our expertise to work by finding the top-performing turnkey property providers in the best real estate markets in the U.S. These providers rehab or build new single family and multi family investment properties and sell them exclusively to RealWealth members with professional property management in place. If you want to simplify your real estate investing, join RealWealth and start viewing properties and proformas.
2. Each property should be a single family home (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 for multi-family investments, and if you manage these properties, you’ll spend more time, money, and energy than you would with single-family homes.
And then there’s the fact that single family rents have consistently increased around 3% annually since 2010.
Overall, 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 lying around, you could also consider investing in a duplex, which allows you to have two doors for less than the cost of two single-family homes.
3. Purchase price stays constant
When buying a house, one of the first things you want to know is how much you’ll be paying in mortgage payments each year.
Mortgage payment structure typically includes principal, interest, taxes and insurance, also known as PITI. It may also include mortgage insurance, condo fees or homeowners association fees.
When searching for homes, choose properties with similar purchase prices and rents to help 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 exceptionally well if you can find properties that cash flow and appreciate in value. By taking advantage of cash flow and appreciation, you will set yourself up to buy one rental property per year.
In this way, you’ll follow 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 like real estate, investors may be able to increase wealth over time with multiple investment properties that provide them with multiple cash flow streams.
When done correctly, creating a passive income portfolio through real estate can make saving for retirement a reality. Since real estate thrives during inflation, many investors aim to retire on real estate income.
Example: Owning four rental properties (a four-year plan)
Assumptions:
- Gross rents stay the same.
- Property values increase by 5% each year.
- Cash flow is re-invested.
- No closing costs and no rehab costs.
- You’ve purchased the first property with all cash.
- Cash flow is consistent.
- An excellent credit rating and 25% down payment for leveraged transactions.
Using this property as an example:
In year one, let’s say we bought this single family rental property for all-cash. This property delivers an annual cash flow of $12,252.
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 will be $43,000 – 4,368 – (12,252 * 2) = $14,128.
Assuming you’ve not touched the annual cash flow for rentals 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.
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.
If you continue to buy one rental property per year until you own eight properties, you can 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. If real estate prices appreciate at a 5% annual rate, by year four, you’ll 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 you 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 ensure you’re not buying a money pit.
It’s okay to buy a fixer-upper, but you want to avoid properties that need too many repairs or come with high operating expenses. If something needs lots of work and/or money right off the bat, then it probably isn’t worth your time or money. 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.
The old saying “You can’t judge a book by its cover” may not be true for a person, 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. The maximum traditional loans per person is 10
Both Fannie and Freddie allow borrowers to have up to ten mortgages at one time. If you are a couple buying investment properties, this means you can have up to twenty loans. To secure all of these loans, it’s essential to have good credit.
7. Find properties that can generate positive cash flow immediately
Some investors prefer properties with lots of space and scenic views that 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—mortgage payments, taxes, insurance premiums, maintenance fees and repairs—and leaves enough left over for profit.
The BRRRR strategy
The BRRRR Method (Buy-Renovate-Rent-Refinance-Repeat) 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 sweat equity by rehabbing them, renting them out, recovering your out-of-pocket costs via a cash-out refinance, and then using the cash from refinancing to buy another run-down property.
The only problem with this strategy is that 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:
- You’ll need to focus on fixer-uppers and make sure they will be profitable investments.
- You might need to pay all cash for the property or get a hard-money loan as it might not meet a conventional lender’s appraisal standards, which would come to light during the home inspection process.
- You’ll need to calculate the property’s after-repair value. 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 must be 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.
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 will continue to generate rental income while the new one pays off its own mortgageand voila—you now have two properties generating passive income for you instead of just one.
What if things don’t go according to plan? What if market conditions change or interest rates increase 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 how much cash you can put down as an investor. You can only have up to 10 traditional mortgages at a time, and in reality, most banks only allow you up to 4 mortgages. That puts a cap on how many rental properties you can own. However, there are workarounds.
One way to buy and own more than one rental property is to look for properties where the seller is willing to hold the note. In short, they act like the bank, and you pay them every month. If you go this route, hire a professional to review all the paperwork and file accordingly.
Forming an LLC can also help make owning 10 rental properties easier. 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 look at both sides of the coin.
- On the plus side, forming an LLC allows 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 plan 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.
Your Next Steps
Now that you know it’s possible to buy one rental property per year, you might be wondering what to do next. First, get your finances in order and increase your credit score. Second, set your financial goals. Do you want to retire early or comfortably? Is your goal to build generational wealth? Then, start learning about real estate investing and become skilled at researching and finding profitable rental income properties.
If the 10/10 model has you fired up, we also suggest reading how many rental properties you need to make $100k in income.
How RealWealth Can Help You
At RealWealth, we spend a lot of time researching the best real estate marketing and finding the best turnkey property teams. We share all of our knowledge and connections with our members, who learn how to build a real estate portfolio and then start investing in professionally managed single family and mutli-family properties nationwide. Join RealWealth to view sample property pro formas and schedule a one-on-one strategy session with our experienced investment counselors. There is never any pressure to buy. It’s all about giving you the resources, connections, and confidence you need to invest smartly.
