I Built a $12K/Month Rental Portfolio While Working 9-5

0:00This investor bought his first property less than 10 years ago. Now he makes$12 ,000 per month in net cash flow, even though he lives in a high cost of living area. This could be you if you just go out there and take that first leap. Today, we're going to hear his basic repeatable real estate investing formula that almost anyone can follow to take control of their financial future.

0:28Hey, everyone. I'm Dave Meyer. I'm the head of real estate investing here at Bigger Pockets. And on this show, we teach you how to achieve financial freedom through real estate. Our guest on the show today is Pratik Shah. He's an investor based in New Jersey. And Pratik discovered real estate investing and bought his first property in 2017 when he wanted a way to use the earnings that he got from his W-2 to generate additional wealth and some passive income. And that is still his philosophy eight years later. Work a day job, save money, and buy a new property when the time is right. That approach has helped him grow to almost 20 units in eight years, spread between three different markets.

1:11And today we're going to hear the lessons Prateek learned from overcoming a very difficult tenant situation with his first property, how he got comfortable investing outside the expensive market where he lives, and why keeping his day job has allowed him to scale even more quickly. Let's bring on Prateek. Prateek, welcome to the BiggerPockets podcast. Thanks so much for being here. Thanks for having me, Dave. Yes, it's going to be a good time. Let's just jump right into it. Tell us a little bit about yourself and your background, how you first got into real estate. Sure. So I'm a pharmacist by training, live in Jersey.

1:43I got into real estate. I was actually on vacation with my wife in Italy, and we met an investor on a boat to Capri. And we're just talking to people that are on the boat. And he's like, oh, I'm from Jersey as well. I'm like, look, that's same here. And he told me about what he did, and he's a real estate investor. So I got intrigued. We came back home. I connected with him. We had dinner. And long story short, fast forward there, I actually bought my first deal off of him. How big was this place? It was three bedrooms, two baths. So on each unit, it was top down and I inherited section A tenants.

2:20So that's the story in itself. But yeah, it was in a rough area. This was in 2017. So the market was going high, but it was still climbing a ladder. So I got in at a great point. And honestly, I learned a ton off that house itself, whether it's managing tenants, managing toilets. You hear the toilet story? It's always toilets. I never knew what a flapper was until I actually had to. When you were looking at these deals, did you have multiple options or was this kind of like, this is the deal you should buy? Or how did you pick this one? So when I met him and I got intrigued about real estate investing, I started listening and do my own homework, right?

2:59So I was listening to BiggerPockets, I was reading books, just understanding how to analyze deals. And then when we met for dinner and he brought this opportunity for me, he was getting to a bigger commercial space. And so I was curious, He was 1030 wanting some houses. And I was like, oh, okay, these numbers pencil in. And why not buy a unit from someone that I could get experience from, that can kind of hold my hand through the first deal in a sense. Since I do have a W-2 job, this wasn't my full-time gig. And it kind of helped me along the way with the goods, the bads, and the uglies. But it really got me a great, I guess, dive into the pool of real estate investing.

3:34That's the best way to do it, man. The number one goal for your first deal should just be to learn. It's not to hit a home run. Ideally, you do both, but yeah, absolutely just to learn. How did you finance it? Well, I mean, good question. After our vacation to Capri in Italy, I did have to build up those funds back. But I kid. No, I had enough saved. And luckily, with 25 % down, we were able to finance enough to purchase that house. That makes total sense. I think it's a great way to do it. As I talk about on the show a lot, having a W-2 job does have some of its benefits. And I assume being a pharmacist, pretty solid paycheck comes in.

4:12So that's a great way to start getting into real estate investing. So you did this first deal here, Prateek. What did you do after that? So after that, I was playing basketball with the same investor that I bought the first deal from. You guys do a lot of fun stuff. This sounds like a good guy to hang out with. It's all by chance, you know? And so we're playing basketball and we're sitting on a side and he's telling me about another house that he's offloading for a 1031 exchange. And I'm like, hey, first one went all right. Let me hear it. And we talked offline and I bought a second property off the same investor as well that I met in Capri.

4:46Another multifamily around the block from the first one. Okay. So very nice. And was it a similar situation with inherited tenants? Was it Section 8? Section 8 tenants, both up and down, both units. And these tenants were a little bit more challenging than the first unit that I bought. Okay. What was going on here? Was it non-payment or just personalities? Yeah, personalities more so. Section 8, you're pretty much guaranteed payment from the government. So that part was always covered. It was getting entry into the unit, the upkeep of the unit. I was constantly getting summons from the township for litter outside the house.

5:22So they weren't keeping up the unit as much as I would like them to. Oh, sorry to hear that, man. I mean, I know there's always risk. There's risk and reward, I think, with inheriting tenants. It's not always bad, but these things definitely can happen. So what did you do about it? Did you hold on to the property? No, this is too much of a headache. Like I said, I have a W-2, don't have the time to manage bad tenants, bad properties. So I actually went and tried to sell the property and had it listed to sell in 2019. Honestly, I love it. I think, you know, I rant about this all the time on the show, but people say like, buy real estate and never sell.

5:57I just completely disagree. Like if there's a deal that's just not working for you, get rid of it and go do something else before you burn out or lose your money on a bad investment. It's better to recognize that this isn't working for you, whether it's financial or lifestyle wise. Like if it's not working for you, just go sell it. That's a better thing to do. So what was your plan? You went to go sell it. Were you going to just 1031 or move it into something else? Yeah. I had started going meetups in different markets. Pennsylvania is not too far. So I started hopping into Pennsylvania as well.

6:28But to be able to do that, I wanted to offload this property. Yeah. Okay. That's a pretty good solution. Did it work out? It would have. We were set to close on July 31st of 2019. I'll never forget the date. And on July 27th, three, four days prior, I get a call late night and it's the fire inspector of the city calling me to let me know my house is on fire. Everyone's safe, but the entire unit is damaged, fire, water everywhere. Firefighters are breaking through every window. Yeah, that's the call I got three days before closing. Obviously, the deal fell through. And so I was not able to sell a burnt down property.

7:09And that started my journey from just being a new investor to essentially a flipper in a sense, because I do have to learn construction in that sense at that point. All right. Well, clearly that's a very different business, being a buy and hold investor and having to rebuild a property from scratch. Sorry you had to go through that, but I think there's probably a lot of lessons that our audience can learn from given that you had to do this. So let's dig into that, but we do have to take a quick break. We'll be right back. This episode is brought to you by Accenture. When your advertising operations fall out of sync, Everything else follows.

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9:37Welcome back to the BiggerPockets podcast. I'm here with investor Prateek Shah, talking about how Prateek had a really pretty tough start to your investing career with, it sounds like a difficult tenant situation that moved into an unfortunate catastrophe where you had a fire burn down your entire property. So help us understand this. How did you go from not having any experience to rebuilding a multifamily property? Where did you even start? What are the steps that you had to go through? Well, first, obviously, it was the insurance company. So I worked at the insurance company to line up just claims, et cetera.

10:11Started interviewing contractors. I had never done that before in my life, but understanding what to ask, the right questions. The biggest stories you hear now are just the trustworthiness of contractors to really getting references from other people through forums like BiggerPockets itself. That's how I started that process. And once I locked down a contractor, working with the insurance company to make sure their systems match for, of course, payments and stuff. And from there, it was just selecting material from scratch. I mean, when I'm saying material, I mean your handles that you want in your kitchen cabinets.

10:48What type of towel holder do you want in the bathrooms? What type of flooring, et cetera, that meets the insurance company's needs as well from a financial standpoint. But then something aesthetically pleasing you want for your own unit as well. So it's kind of marrying the both and learning how to work within a budget of an insurance company, but within the style of the current state, right? Because the unit was about 20 years old. So you wanted to kind of transform it since you now have the ability to. For sure. Yeah. So I spent a year until we got it completely rehabbed and updated. I had the house listed and to sell July of 2019.

11:20A year from that is the summer of COVID. And that was when the market was just starting to take off. And so fast forwarding a year when that unit is ready to be sold, I had it listed and, and at a, at a six figure increase from what I had initially listed the year before. Oh, damn. That's awesome. I mean, so I, I know it's hard to say, cause there's probably a big pain in the butt, but like all told financially, did it actually work out better that the fire existed? Financially? Yes. I mean, I would wish this upon nobody. It took several years off your life, I'm sure. Oh my God. Got a bigger check at the end of the day.

12:00Yes, yes. It worked out for all intents and purposes. And I learned a lot, quite honestly. I mean, it's not a lesson I would want to learn, but in hindsight, I learned so much. It made me so much more comfortable continuing my investing journey through other markets. Yeah. Just from the experience I gained from just tenant management to construction, to selling properties and working with insurance companies. I just learned so much just within this one deal itself. Yeah, man. I mean, sometimes the forcing function is actually beneficial to you long term when you're investing career. You're never going to set out and set a goal for yourself to have to renovate a property like this when you're that early in your investing career under these exact conditions.

12:40But there is a way to spin these things that sometimes happen in real estate. If you have the right perspective, it sounds like you do, Pratik, you figure out a way to make this work for you and to help you sort of build your portfolio. So once you got through this, it sounds like it took a full year. But once you were almost back to square one where you wanted to be in the summer of 2019, what did you do from there? Yeah. So during this whole time, I wasn't just sitting and managing and crying. I was networking on BiggerPockets, looking for meetups. and I found a meetup in the Lehigh Valley of Pennsylvania, which is only an hour away from me.

13:15So it wasn't too far, even though it's a different state. Great market. Great market. And I started going there, networking with investors. That's one thing I love to do, just talk real estate. And I met an investor there and rinse and repeat of my first story. I networked with him and I bought a deal off of him. It was my first deal in the Lehigh Valley, new market, new area, whole new clientele. And it was great because I was able to, in a sense, just like the first time, transitioned to a new space, but with the comfort of just having someone there to be kind of like a mentor or coach if need be.

13:49And that was my first unit in that space. Built my comfort for the area. I inherited tenants. They were great tenants this time around. Wow. You went back to it. Okay. I went back to it. Touched the fire once. You're like, I'm just going to do it again. So my wife would say, I don't learn, but I like to say that I'm just more comfortable. And so - Well, you learned how to deal with it. You knew that you could probably deal with the worst case scenario if it happened again. Yeah. But it was the best case. So I took on and I learned the intricacies of the area. Every market has its own specifics.

14:23Lehigh Valley has a lot of inspections from townships, but I learned how to network with the inspectors, et cetera. And lo and behold, from there, I ended up buying 11 more units. So now I have 12 units in the Lehigh Valley. Let's talk about this because a lot of people in today's market live in areas where finding cash flow or the type of deal that they want to buy is inaccessible, either because it's too expensive or there's just not that kind of inventory on the market. So you basically said you chose Lehigh Valley, but was there other markets that you were looking at as well? I was looking at Indianapolis at the time and Cleveland, which are all great markets still to this date.

15:00But I think I like the aspect of still being able to self-manage to a degree because I was still smaller at the time. where I take 10 % typically is property management costs, sometimes 8%. And that was a big chunk of change. So I was able to place my own tenants. And what I've identified by placing my own tenants in that area is if I do the legwork early on and really identify the best tenant for that unit, that will make my real estate investing journey so much easier because I'm not just putting someone in there that meets a credit score, a background check, et cetera, I'm talking to the people.

15:37I'm getting a feel for why they need the unit. And I think that speaks so much more in the long run because they treat your house better. They pay on time. There's so many less issues down the road where I don't really need a property manager for that area itself. Yeah. And it creates mutual benefit, right? It's good for you. Obviously, you're probably going to have less turnover, less wear and tear on your property. Yeah. But you're also finding someone who's going to be really happy in the unit that you're offering, which is just a win-win situation. This is, I think, a really important pivot point for a lot of investors is really getting people in the fastest and at the highest rate is not always the best situation.

16:18If you find people who are going to truly love living in your house and who are going to take care of it, that's like a mutual benefit that will make your life easier, but it also will improve your returns. You'll have fewer vacancies, you'll have less wear and tear, less maintenance costs, and that's just a benefit for everyone. And I'll share a quick story. One of my tenants in one of the houses in the Lehigh Valley that I placed, and it's a high rental market. So I've never had a vacancy in that area amongst all 12 homes. You have people wanting to rent the next day. And so I had a unit open.

16:48I had a bunch of applications, and I went there. I'll do phone screens from my house, and I'll narrow it down to maybe five or ten folks that really want to move forward and have them see the unit. and I found this guy that wanted to rent the place and I did a background check and it came up with some red flags, right? And the red flags were from prior drug use and selling, et cetera. But when I talked to him, I really found a sense of genuine nature and authenticity from speaking with him. So I confronted him. I'm like, hey, David, I like you and I really want you to rent this unit. However, I saw that there's some red flags and he explained it to me.

17:25He's like, hey, this was in the past, full disclosure. I'm a better person. I've changed my ways. I just can't get a house because this comes up and no one will rent to me. And some of it's just through a conversation. That's where I'm able to do it myself and physically see the person. I was sold on a sense of genuineness and I rented it out to him. And he's one of my best tenants. He's put in backsplash in the kitchens. He's redone some of the flooring, painted the walls, pays on time every month. He's been there for five years, if not longer. And he's one of my favorite tenants and all because I gave him a chance.

18:01And that's something you're not going to get from a credit score check, a background check, et cetera, when you're checking boxes, because he would have never met those. Yeah. Well, good for you for doing the work of being a landlord and actually meeting people, talking to people, doing the networking. We talk about it all the time, but it's a relationship business. It's a people business. And you were able to find a great tenant who likes your properties taking care of it. That's the type of mutual benefit that we are always trying to promote here. All right. So that was what? 2021, you say? 2018 all the way till current.

18:32We're still going. Okay. And like I said, I was just throwing darts at a map, honestly, looking for other markets. So I did dive into another market too. And 2020 was my first year. And this is a complete left field because this is not near my backyard. It was not drivable. I still have never been to this area. Really? It was in North Carolina. There's a big army base in North Carolina. Fayville? Fayville. Fayville. Yeah. Okay. Yeah. All right. Fort Bragg. Fort Bragg. Yeah. Nice. And so, I had a buddy. Shout out to Travis. He was a buddy of mine. And he's like, he lives in Raleigh. And he's like, it's an hour away.

19:06Did you meet him somewhere super cool? Like paragliding or backcountry skiing? I wish. I wish. This is more boring as in we work together. It's complete opposite. But it's funny you say that. where we were listening. We both had mutual interests, not only from work, but from real estate investing as well, or at least intrigued about it. And we heard there was this lady on bigger pockets and she was from Fayetteville. And he's like, hey, that's like an hour away from me. Let's look at this market. I'm like, sure. And we dove in there and have a bunch of units in Fayetteville as well now. I want to talk to you about this though, too, because when we talk about out-of-state investing, I think it's intimidating for people just to do one market that they are not intimately familiar with, but you're doing too.

19:49And I'm curious like the pros and cons and how that's working out for you, but we got to take one more quick break. We'll be right back. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply.

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22:01Welcome back to the BiggerPockets podcast. I'm here with investor Prateek Shah talking about how he scaled his portfolio first by pivoting to the Lehigh Valley in Pennsylvania. Then you just picked a market in North Carolina that you'd never been to to have a second out-of-state market. So tell me first why you wanted to find another market where there's just not enough deals in the Lehigh Valley or did you want to diversify? What led to that decision? Because it can be a lot of work. It was honestly both. I think just increasing the deal funnel, right? And as the years progressed, it was getting harder and harder.

22:37Numbers were getting shorter and shorter in terms of cash on cash returns. You have more investors that are more interested in the market as well. So you have a lot of competition through other investors that are trying to get in. So I figured if I look for multiple markets, I have a better chance of getting some deals and increasing my deal flow. Did you have some certain amount of units you were trying to build towards per year, or were you just basically trying to take any opportunity you saw? Any opportunity. I didn't care much for the numbers or how many doors I had. I was more so just trying to increase the passive income.

23:09Like I mentioned, I have a W-2 that I love, I enjoy, I have no desire to give it up. But I feel like I'm a real estate junkie. I just love crunching numbers. And when it makes sense, just why not pull the trigger, right? So it's been working out so far. Man, this is like the kind of investing I love. It's like we're talking about keeping your W-2 job and being really analytical about investing. We share a lot of philosophy around real estate investing. So what was it like? I actually always advocate for people to go to these places before they do long distance investing. How did you get comfortable with a place you had literally never been?