These people tend to tell that the key is to use capital that’s not your own – like from a bank. I understand how it works with common mortgage. But let’s say I already have a mortgage, thus own one property/real estate. Now I’m in debt towards the bank and they’re not giving me another loan to buy another flat since I need to be repaying the first one (?).
So, how does it work? Where do these people get the needed money to buy the second property? The third one?
In: Economics
Here’s how my co-worker does it.
They buy a house. Over time the value of the house house goes up. So you buy a house for $250 K and a few years later it’s worth $350 K.
So you go back to the bank and take that equity out. Refinance or get a second mortgage and now you’ve got $100 K.
Use that $100K as the downpayment on a second house. Rent it out to cover your payments.
After a couple of years that house’s value has gone up, so you rinse and repeat.
They’re on their 4th building now. But they’re also in debt up to their eyeballs. They had 5 buildings, but had to sell one to help pay down the others when interest rates went up.
Let’s say you own a 3-level home in Boston’s Dorcester neighborhood, and your mortgage is $3000/mo for simplicity, and the government’s being really generous and has declared you exempt from tax obligations.
You live in one apartment, and your two tenants live in the other two. You charge them $2000/mo for rent. It’s like roommates but with more paperwork and you’re making that schmoney. You’re now making $1000/mo from owning property. Not enough to stop working, but enough to put some money away for property #2. Combine your income & assets with the projected income from your next property and your lender gives you a mortgage for another 3-level in Dorcester for $3000/mo. But you only need 1 apartment, so you rent out all 3 floors at $2000/mo for $6000/mo from this property, netting you $4000/mo from all properties. Rinse and repeat until you own all the property on planet earth.
Assuming your mortgages, properties, and lease agreements are all identical like spherical apartments in a vacuum, the function to calculate your profits would be ((l*u)*p) – (m*p), where:
l is the cost to rent a unit
u is the number of units on a property
m is the cost of a mortgage on a property
p is the number of properties
Tl;dr: The hardest part is getting the 1st one, the rest after are pretty easy. For your best shot at hitting it big, spec into the multi-family property skill tree instead of the single-family tree, progression is honestly broken for multi-families rn.
I’ll approach this as myself and my partner. We started as fulltime 9-5ers and now have 9 rentable units.
It’s 50% luck and 25% hard work and 25% know how. Luck is market based (now is not a great “luck” time to buy vs. 5 yrs ago for example) as well as how secure&good your job/income/life are. Unfortunately, this is a huge part…
Hard work is doing renovations yourself and willing to live in hell for 1-5 years. Know how is knowing how to do electrical/plumbing/etc or ability to easily learn stuff via YouTube.
Otherwise, the BRRR method is the secret.
1) Buy. Buy something with *potential*. A single family house that has 90s or worse finishes and is zoned in an area that allows you to build/change of purpose a garage into an ADU. *Creating* rentable units is THE BEST potential! That’s what you’re looking for, a property where you can create equity. Our first was a fixer upper duplex that due to unique layout had potential to add a 3rd unit.
2) Renovate. You will want to do this yourself as much as possible, especially if you’re starting out. Living in the house while you renovate it is technically illegal in most states. However, it saves a lot of money. If you do hire out people understand that there is absolutely a bimodal cost to labor – you will either pay 50k for a kitchen renovation or you will pay 5k – often the determining factor for whether someone ends up falling into the 50k trap is knowledge of what the work entails. Understand what the job is and how long it’d take someone. If you’re paying 50k for 100 hours of work, you’re paying them 500$/hr. That. Is. Insane.
3) Refinance. If you’ve done steps 1 and 2 properly, then you will have put less into the house than the house is now worth. Get a bank to appraise the house – if you added rentable units, it’s helpful to rent them out before refinancing. This gives you backing of the additional value of the property as that income is essentially a nullifying amount of the mortgage. We purchased our first property for 220k and put 200k into it over 3 years, it refinanced for 600k, We cashed out 200k, and had 2 rentable units (generating 3k/mo) and we lived in 3rd unit. Essentially that means it was 200$/mo away from being cash positive (aka we were paying 200/MO for our living expense… Not too shabby)
4) Repeat. After sitting on that property for 3 additional years, we saved up 500k in cash and bought a 2mil 6 unit apartment Jan 2024. Now we are renovating it while we live in it.
> Now I’m in debt towards the bank and they’re not giving me another loan to buy another flat since I need to be repaying the first one (?).
If you have a down payment, sure they will. You can’t buy a rental property with a 3% or 5% down payment like you can a primary residence, but if you have 20% or 25% a bank will lend for a rental property where the rent can match the mortgage payments.
Some ways to get that amount might be regular savings, or perhaps you use the equity in your current home — take out a home equity loan and apply that money as a down payment for your rental. Or find investors/partners where you provide the sweat equity (finding property, managing property) and they provide the financing.
What real estate investors then do is snowball equity. You buy a $200k house with a $40k down payment and after a few years, sell it for $250k. With your initial down payment, the equity gain, and the mortgage principal pay down you now have $100k you can put down toward a $500k 3-unit building. Turn your $100k into $200k in equity and buy a $1m 8-unit building. And so on, over time.
Another way may be to buy that 2 or 3 unit home as you first home, living in one unit, then later on moving out and it being all rentals while you buy a new single family home for yourself.
These are mostly wrong.
For an investment property banks will want 20% – 30% down payment. They will use the rental property as collateral. They will want to see that the house will cashflow relative to the mortgage. They will look at the entire net worth of the individual(s) asking for the mortgage, which is more in-depth than a regular mortgage. They will make sure the investor(s) have the “financial wherewithal” to pay the mortgage even if the property is vacant. You will sign a personal guarantee, meaning you are personal liable for the debt and they can take your primary house if you don’t pay.
Once you pay down 1 house, you can use the income and equity to boost your financial position to buy more, and once you have a relationship and good track-record with the bank they may start to loosen some requirements
TLDR: you need to be in good enough financial shape that you can afford multiple mortgages.
>But let’s say I already have a mortgage, thus own one property/real estate. Now I’m in debt towards the bank and they’re not giving me another loan to buy another flat since I need to be repaying the first one (?).
That’s assuming you are living in the building you are paying the mortgage on with no additional income. But if you are renting it out. Assumably, for more than your mortgage payment, getting a new mortgage doesn’t have the same risks to the lender.
A lender is going to be looking at your income stream. Collecting rent on a property is income. And if you have enough equity in your property/ properties, you can get loans just on that equity.
One way to get started is to build up enough equity in a property to take or a loan against that equity and use that loan to make a big downpayment in a new property, thus having a snake loan. Then renting out that new property, increasing your income. Then, use your regular income and the new rental property income to pay down that loan, building up more equity. Then it’s just rinse and repeat.
The trick, when it was legal, was to
put a down payment on one
take a loan out using the first as collateral
Buy a couple more
Take a loan out using those as collateral
Buy. …..
And if you keep renters paying your mortgages to sell at a profit it works.
If you slip or are unlucky it all falls apart,
you owe a bazillion dollars,
you declare bankruptcy
and the people who gave you the loans are screwed
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