You’ve Bought a Few Rentals…Now What?

0:00Henry Washington:So, you did it. You bought a property. Maybe even two or three of them. And they're even cash flowing. You listened to us. Great job. Except your life hasn't changed. You're not getting rich. So where do you go from here? And when do you actually see the payoff in your bank account? Today, we'll explain how to go from owning your first few properties to actually life-changing wealth with real estate.

0:30Henry Washington:Hey everyone, I'm Dave Meyer, head of real estate investing at BiggerPockets. And today with me on the show is my friend, Henry Washington. Henry, good to have you here. What's going on? What's up, Dave? Glad to be here. This is a fun topic because I think we all have this realization at some point. I know. I'm surprised it's taken us so long to make a show about this because this is probably maybe one of the most common questions or just dilemmas I think people have in real estate investing is like you get into the game, which is a huge accomplishment. It's probably the hardest part is just getting into the game.

1:01Henry Washington:But then you kind of just start asking yourself, what comes next? I don't know what I do now. Do I just keep doing the same thing that I've been doing? Do I try new strategies? Do I diversify? Do I double down? Do I quit my job? All of these are good questions and it's kind of hard. So I think that's what we're going to jump into today. I'll just start by asking, did you face this point in your investing career? Yeah, it was more like a thought process that I was having. but like not voicing out loud. And then I remember I sat down to lunch with a couple of other investors who were doing more than me and had more property than me.

1:40And I remember one of them said like, so when's the money part happened? And I was like, oh my God, it's you too.

1:49Yeah. Yeah. 100 % had that thought process. And then it was, I don't know, there was almost like comfort in the discomfort when he said that for sure.

1:56Henry Washington:Yeah. I think that's the money part is a big question. And you sort of run out of cash at some point. You start talking to other investors who are doing totally different things. You're like, should I be doing that? It's not the thing that I've been doing. I think what I realized is when you're doing real estate the way I was doing it and the way I still do it is I buy distressed. And so you underwrite your properties to perform a certain way. And then you buy them not at that level. And it just takes time for you to get your properties from distress to performance. And remember, I got to 30 doors in like two years.

2:34And that's not a lot of time to get things performing optimally. So I bought a lot of pain and then it was painful.

2:46Henry Washington:Like that's what happened. And then the tab came too. It just takes a long time to replace your income with rental properties. We've talked about it on the show all the time. Like on average, I think if you're doing this consistently, doing it well, you can do it in five, seven years. That's like a realistic time frame if you're being aggressive about it. If you're a little bit more passive about it, eight to 12 years, still a fantastic timeline, in my opinion. Still way better than anything else you can do with your time or money. But that's sort of just the reality of it. And so I think this sort of goes to the point of the show, which is how do you scale knowing that?

3:23Henry Washington:It sounds like you've said, hey, rental income is great. That's for later. Right now, how am I going to live? What am I going to live off of? And for you, that decision was flipping. Yeah. And that's really the realization that hit me is that, yes, I got into the business thinking I'll get enough properties to have enough cash flow to leave my job. And then the realization hit that like, I can actually get to the financial freedom I'm truly looking for faster. If I don't do that, and I use my experience in real estate to have another more consistent flow of income. And I know that like flipping houses can't be super consistent, but it can be if you are buying deals consistently and you start systematizing it.

4:07So I know if I buy a deal, that's money in four to six months, right? So you can plan that out, right? You just need to be buying deals consistently throughout the year and buying enough. So it was a little more easy for me to plan out how much money I would need to make, how many deals I would need to do. And I started to also think about real estate in these three buckets. Those buckets to me are your growth bucket, which is typically where people are starting out. And then you've got a bucket of stabilization, and then you've got a bucket of protection. When you're first starting out, you are buying assets, but they're not performing like you want them to perform because you're buying them under value typically.

4:46So you're growing. It takes money to grow, right? And so you're typically reinvesting some of that cashflow into growing more. And at some point you'll say, hey, I've got enough volume. I need to focus on making sure everything's stabilized and performing. And that's when you're taking the money that you were spending on growth and now you're spending that money on stabilization and making sure that your properties are performing. Maybe you're reshuffling some of your assets, selling some, paying off some other ones, right? And then there's this bucket of protection. And that's where you're like, all right, I've got the properties.

5:16They're performing like I want to. Now I need to start getting as many of them paid off as possible so that you're actually getting to that real cash flow that you're looking for, that unlevered cash flow. And across all three of those buckets, you need money to do these things. And so I said, all right, well, if I'm going to be growing, I need money. If I'm going to be stabilizing, I need money. And if I'm going to be paying off, I need money. Well, I'll flip houses to create my income so that I can operate in these three buckets at the right timeframe. So now I'm more operating in the stabilization in the payoff bucket more so than the growth bucket.

5:52Henry Washington:I think that framework makes a lot of sense. I have followed a similar pattern where you buy some stuff that takes a year or two to get it up to performing. Some stuff you are reinvesting in to optimize it. Other stuff you're just trying to pay off. But I think your point about needing money for all of it is very true. That's just the reality of the situation. You've obviously chosen to scale by going full-time into real estate and generate money from being a flipper to put into your long-term portfolio. I faced basically the same situation, right? I said, hey, I've been doing this for a little while, generating some solid cash flow.

6:30Henry Washington:It is not enough for me to live off currently, nor is it going to support the lifestyle I desire to get to in the next couple of years. Because I know people say don't have lifestyle creep, but when you start at 23, you kind of want some lifestyle creep because that's not the life I wanted to live for the rest of my life. I'm sorry. More importantly, that's probably not the lifestyle your wife wants you to live either. No, no, absolutely not. She calls herself a visionary. I was living in my friend's grandma's basement when we left to save money. But yeah, so we needed to do a little better than that.

7:04Henry Washington:But so I faced the same question. You know, I thought about being an agent, not really a flipper. But then ultimately decided the way I could generate the most income for myself and my first principle of how I was going to scale was to stay in my job. I decided to abandon this idea that a lot of people have, and it's not wrong, that a lot of people in this industry say, I want to quit my job in X years. I want to quit my job in three years or five years or seven years. I sort of took the opposite approach. I was like, I'm going to work as long as it takes to hit X dollars a month in real estate and have really passive income with a good DTI ratio.

7:42Henry Washington:Like, I'm going to have 50 % down on all of them. And once I do that, I'll stop working. How did that decision go for you? Why was your path to scaling through full-time real estate instead of staying in your job because you had a good career too? Or being an agent, why flipping? I had decided, okay, I know I need income. I can generate income by flipping houses. I can generate income by education and helping people. And I can generate income by my day job. And so having those three or four streams of income was kind of super helpful to me. And so I kind of made a mindset shift kind of like you did a couple of years in to go, you know what?

8:19Maybe I'll work a little longer than I was thinking about working because it'll help me grow faster and it'll help me initially get to the ultimate goal, which is to have enough income to just not have to do anything else if I don't want to. It will help me get there faster. And so I had decided to go ahead and continue to work. And what happened was my employer at some point, even though they said they were okay with me investing on doing my thing on the side, decided that they weren't as okay with it and wanted me to give them more hours. And when I did the math on what I could make and what I was making outside of real estate versus what I was making at the job, it just didn't make any sense.

8:55It was costing me money at that point to have my job. And so that's when I made the shift. But I didn't quit until I had to.

9:02Henry Washington:I think we sort of skipped over what I would maybe say is the first step in figuring out a scaling plan, which is probably like setting your own goals, personal financial goals, figuring out what you want. Whether you're one deal in, five deals in, 10 deals in, if you don't really know why you're doing this and what you're trying to accomplish, you're going to struggle to scale because that's the whole premise of strategy, right? Strategy is a means of pursuing a goal. If you don't have a goal, you can't create the strategy. I think you need to create goals when you start. and then I think you need to re-evaluate those goals once you do one to five deals.

9:35100%. Because you'll learn so much about yourself as an investor in those first few deals and you may completely change your mind about exit strategies that you like or you may change your mind about how you're going to acquire your properties or you may change your mind about how many deals you think you want to do. You could get in and do one and you go, you know what? Totally. I don't want to do 10 deals a year. I want to do two because this was a lot. And some people make it in there and say, I wanted to do two and I love it. I need to go and do 10 a year, right? Like you just need to reevaluate those goals before you really truly work on that scaling plan.

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13:51Henry Washington:I think for, I don't know, 95 % of investors, this question that Henry and I have been discussing is the next thing. How are you going to make active income? Because, you know, I've talked about this in my book, but you got to have money to invest to generate passive income. You don't just get passive income out of nowhere. You need to invest money. And so for me, and it sounds like for you, it's like, how are you going to make the most money doing something? I think you reasonably enjoy. Yes. You know, if you can make a ton of money and you're miserable, probably not worth it. But if you are in a situation like me where you can have a solid income and invest it, that's a perfectly fine approach.

14:31Henry Washington:I think if you want to do what Henry's doing and go into flipping full time, that's a perfectly fine approach. If you want to become a real estate agent and you think you can make money doing that, that's a good approach. I think the thing people get caught up in is assuming and sort of getting confused about being in real estate full time and where they're getting their active income. Because some people are like, should I become an agent so that I can be a passive investor? To me, those things are sort of unrelated. It's like if you want to be an agent because you think you'd be good at it or you think you'd enjoy it or you think you can make a lot of money doing it, great.

15:07Henry Washington:That can help your investing career. And don't get me wrong, being an agent can help you find great deals and you'll learn the industry. But if you're going to hate being an agent, you absolutely do not need to be in real estate full time to be an investor. You could do what I do or what, honestly, the majority of BiggerPockets community does, which is just keep working at the regular job and invest. But I think whatever you do, whichever decision you make, if you're trying to figure out, if you're feeling stuck in where you're going to scale, making this decision, at least for the next three years, you can always change it, but the next three or so years will really help solidify your next steps because you'll know where that money is going to come from, at what rate it's going to come in.

15:46Henry Washington:And that will help you decide, I can afford X number of deals per year. I can afford this kind of property per year. If you don't have that basis of where the capital is coming from, it's just a guess. You're just kind of making it up. It's all hypothetical. And like I said, the active income can be in real estate, but I think sometimes people confuse use house flipping and being a landlord as these passive strategies. House flipping is a job. Now, you can remove yourself from different parts of that job. You can have a project manager who manages your renovations. You can have a general contractor who does that for you, or you can do all those things yourself.

16:24But trust me, if you take your finger off the pulse of any part of the business, whether you're doing it or somebody else is doing it, you will not make money.

16:31Henry Washington:I think the other thing about, I just wanted to add about active income is that it also takes away that pressure to be like, oh, my cash flow this month was only$100 instead of$300 a month. If you are quit your job prematurely or you are expecting to live off of your cash flow immediately, those times when expenses hit, when a radiator breaks, you're frustrated, you're stressed. If you know I'm making active income and that's what I'm living off and I'm going to invest the excess money that I make into my portfolio, at least in my experience, I don't know about you, it takes a little bit of the pressure off.

17:07Henry Washington:Like it still stinks. Like you don't want these huge expenses. But if you make$500 a month versus$2 ,000 a month in a given month because of expenses, it softens the blow. Because you're like, I wasn't going to live off of that. And I'll make it up in the next three months when I have less expenses. Here's what I think people forget. Like when you underwrite a rental property, yes, you're underwriting it to cover your capital expenses because we know a roof is going to go bad at some point. We know an HVAC is going to go bad at some point, right? So you're like, well, you should be putting money away for capital expenses and you should be putting money away for maintenance.

17:38You're right. You should. But what happens if you underwrite a property to perform a certain way, you buy that property and then one month in your HVAC goes out. You hadn't put away enough money on the side from your income coming in off that property to cover your HVAC yet. You've only put away a couple hundred dollars, but your HVAC is going to cost you six to eight grand. Where's that going to come from? So if you're truly going to live off of your cashflow, you need a lump sum of cash, or you need to be in a position where you have operated your portfolio for a couple of years, long enough to have put away enough of your rental income into your maintenance or savings account so that when those expenses come up, you can cover them.

18:21That happened to me, my second rental property. The HVAC went out literally the week after I closed on it and I had to come up with five grand. And it felt like all my cashflow got eaten up. It didn't, we underwrote it to cover that, but you're not really gonna see that until year's end. Does that make sense?

18:36Henry Washington:I totally agree with that. So we've talked about in scaling, super common issue that everyone has. Starting with setting your goals, super important. When do you wanna stop working? what are you doing this for? How long is your time horizon? What level of risk are you going to take? Think about that stuff. Then go on to how you're going to generate active income, unless you have a boatload of cash, then just go buy stuff for cash and stop listening to us. Why are you here? Also, be a private lender for me. But if you're not one of those people, figure out your active income. Then though, I think there's this question of strategy.

19:12Henry Washington:Like, okay, I have my active income. What types of deals should I do? What kind of operations should I set up? I still have this. I'm going to just be honest. I'm always kind of thinking about this. But it's not that useful to always be imagining, oh, should I be a flipper? Should I be doing this? So how do you make sense of that? How do you hone in on out of all the amazing different ways that you can scale a portfolio? How do you pick the one that's right for you? I think when you're picking a strategy, you have to consider exactly what you said, your goals, and then the timeframe in which you're trying to get to your goals, right?

19:50Because you need to pick a strategy that's going to monetarily help you get to that goal in the timeframe that you choose. The cool part about real estate, guys, is that all of these real estate strategies make money. You can make money in single family, you can make money in multifamily, you can make money in commercial, some you can make money faster than others, and there's pros and there's cons to all of it, right? But how do you stray from like, hey, I should be going and doing this because I can make money faster. I should be going and do this. It's so cool. And so what keeps me grounded is you need to pick a strategy that will monetarily help you get to your goals in the timeframe you're trying to get to them.

20:25And then you also need to pick a strategy that gives you what I call the warm fuzzies, right? So for me, I don't just invest in single and small multifamily real estate because it makes me money. Yes, it makes me money. But I invest in single and small multifamily real estate because it gives me the warm fuzzies because I love that single and small multifamily real estate allows me to help people more within my investing strategy. Because single and small multifamily real estate is more about the people.

20:55Henry Washington:It's personal, yeah. When you get into larger multifamily real estate, it's about a P &L. It's a business, right? You have to decrease expenses, increase NOI, right? You're trying to make the property more profitable. And you've probably taken other people's money to do the deal. And so now you have this obligation to those investors to get them the best return. And sometimes that's going to be at the expense of people, right? Companies do it all the time. I have to get my investors the best return. That means I need to lay off these people, right? And so with single and small multifamily real estate, I can be flexible because it's less risky.