Video version of this blog post here: https://www.youtube.com/watch?v=QyNWjz-fP8o
One of the things that I love about real estate is that there are so many different ways to make a living and build wealth. With all of the property types, entries/exits, and ancillary businesses, there’s an almost-infinite variety of career and investment paths.
While variety is the spice of life, sometimes it’s important to cover the meat-and-potatoes of life (mmmm…gravy) and speak to one of the most straightforward, repeatable and accessible methods of winning at housing: build a portfolio of 1-4 unit properties over time.
The best metaphor that I can surmise for this strategy is what I call the Bucket MethodTM. Almost anyone can do it. It takes some cash, a lot of patience, and a few well-timed and well-executed strategies, but it’s time-tested and a great way to get started.
But also like meat-and-potatoes, there are ways to spice it up 🌶️🌶️🌶️
How to Build an SFR Portfolio
Ingredients:
An account in which to stack cash (more on this later)
Some cash (yours or OPM)
Time
Steps:
Open a central account (the BucketTM)that you use to build a cash reserve. This can be as simple as a high-yield savings account, but the higher the interest rate, the better. The important thing is to NOT TOUCH it for other purposes. The less you siphon off for other needs, the faster you can build equity. This also makes it cleaner for tax purposes.
Use accumulated savings, home equity, gift funds from a parent or sugar dadd/mama (preferred) to purchase your first property. It can be a house-hack that you also live in or a separate property.
Stabilize said property. Renovate, repair, spruce up, decorate, etc.. and find tenants(s) to pay rent that exceeds the debt that you have on the property (aka - cash flow).
Once stabilized, place any excess monthly cash from the rents into the Bucket. Make sure to account for deposits, reserves, etc..
Continue to add savings from other income, etc.. into the Bucket as well to accelerate accumulation.
When the Bucket reaches the level to support purchasing a second investment property, pull funds out and do so.
Repeat steps 2-6 until desired level of generational wealth has been achieved.
Like I said, simple and repeatable. A staple of any diet. the cash accumulation accelerates with each additional rental, so the wheels really get spinning as you progress.
What if That, but More?
But how do we give a little more oomph to the recipe? How do we tickle our tastebuds while getting our calories? Here are a couple of ways to give your investing an extra kick:
🌶️ Use a first-position HELOC like the WealthBuilder. This loan product is the perfect fit for a Bucket, much better than a standard mortgage for investors for a few reasons:
The structure of the loan efficiently mitigates interest cost (rather than just making extra payments), while allowing you to access that equity just like a checking account.
There are no monthly payments, instead daily interest is compiled and added to the balance each month. Not having to make a monthly payment allows flexibility in a situation where cash flow is temporarily negative (vacancy or repairs).
Funds in your account defer much more interest than you would earn with a HYSA, and you can write off any interest payments as housing expenses
🌶️🌶️ Keep your reserves and deposits from all of your properties in the WealthBuilder account, further reducing your interest expenses and building equity more quickly. This requires good accounting practices and states have different regulations about how and where you can keep rental deposits, so be aware.
🌶️🌶️🌶️ Utilize interest-only (I/O) mortgages on other properties
Why? A traditional mortgage pays down the principal balance a little each month. But that equity is now trapped in that property, which isn’t useful to you as an investor. Instead, if your rent payments are going into the main bucket account, you want to keep as much of that money in the account where you have access to it.
If you have an I/O mortgage, you’re only paying the interest on that note, keeping the equity where it is most helpful. I/O loans have slightly higher rates than conventional loans, but if you’re at the point of buying multiple rental properties, you’re likely out of conventional loan territory anyway.
You can also even push the loan to a 40-year term to lower your interest payments and juice this move to the max.
By structuring your debt in a specific, systematic way, you can pay less interest and free up capital to expand your portfolio. Yes, it takes time, but these moves compound and will get you much farther than building savings alone. Work smarter, not harder!