Investing in Rental Properties is NOT for the Faint Hearted
There are literally thousands of real estate investing books available, so if you would, raise a glass to me as I attempt to write a high value post about investing in rental properties.
Because that’s why I’m here. To bring real value to anyone looking to grow their wealth by buying rental properties.
The Basics of Getting Started in Real Estate
Here’s a summary of what you need to grow from zero to 20+ units:
- How to find and analyze deals. (prospects, leads)
- How to close on those properties. (close)
- …Manage and lease your rental properties.
- …Finance all of the growth.
- Drive, Stamina, and a Vision Map.
How I Fast Tracked My Growth
The one thing that I really have to offer you, reader, is the experience I have fast-tracking my real estate growth.
Over the years, I’ve witnessed an entire spectrum of reactions when I talk about my real estate portfolio (at a young age).
Everything from inspiration to dismay, to be real with you.
Even my closest friends look at the life I’ve lived in my twenties with a tinge of bewilderment. I am commonly asked technical questions as if they are somehow the keys to my success, such as: “How much cash down will a bank require?” or “What happens if there is a fire that burns down the rental house?”
This blog post is my return answer, finally laid out clearly and in a format that can submit to your attention level… written on a screen that you scroll at your own pace.
I think the question that most of my friends want to ask but quickly skip over is, “How did you do it?”
Specifically, “How did you get 22 units of rental real estate as a 27-year old?”
They saw my portfolio grow to over $4.5 million in assets, and assumed I was a real estate magician, who had found a secret bank that offered better terms, or that I discovered some golden equation for analysis that allowed me to buy 1 property in year one, generate so much profit from that one property that I was able to buy 7 in year two, and then another 14 the next year.
- “How do you work so little, but have so much?”
- “Why are you so free from the control of work?”
- “Was it a book you read? Was it your Master’s in Real Estate degree?”
I hear these questions directly, and I hear them even more often indirectly.
I hear them through the tones of desperation in my corporate analyst friend’s inquiries, as he asks me to draw out on paper for him, one more time, how my acquisition analysis works.
I see them in the eyes of hunger and confusion from my buddy that’s working 6:00 AM to 6:00 PM every other day, who I can only meet for coffee at the local Kettle at 4:30 AM if we are going to try and make progress toward his goals.
I feel them in the bitterness and contempt of those who waste their breath telling me that they aren’t interested in money at all… they’d rather be doing something good with their lives. (“I didn’t bring up money, you did,” I want to say, but prefer to leave the beast to his own rage rather than selfishly benefit from the entertainment of provoking it further.)
What if I told you that the answer to all of these questions is incredibly simple?
That perhaps my disposition of hunger and inquiry made my “luck” more likely than the person sitting next to me, but that I stumbled upon the answer by nothing more than pure luck?
Behind all of the questions I hear, see, feel, which I mentioned before… I suspect there is one more question that needs answering. “Can I do it too?” I hope that this post is the answer to that question for you, reader– if you find yourself connecting with anything I’ve said thus far.
The simplicity of achieving fast-track success.
I’m not saying it’s EASY… but it’s definitely not complicated! And it’s not a secret. It’s not mysterious.
And for you readers, it’s literally smack dab in the middle of the domain name for this website. Partnerships. Partnerships, partnerships, partnerships.
A Brief Introduction to Partnerships
I first heard this idea from Steven K. Scott. I listened to his audio tapes while driving, and he hooked me in as he described the acceleration of a car…
To this day I still think of that metaphor.
A partner is anyone who has something that you need to get where you want to go.
Forrest Webber, rentalpartnerships.com
The Big Three Partnerships: Keys to Growth
- Knowledge Partners
- Credibility Partners
- Money Partners
Which ones do you lack? If you’re at the very beginning, you probably are thinking… umm… ALL OF THEM! And that’s completely O.K.
(I did too).
For some reason, we don’t notice that this is what’s holding us back from progress. Isn’t that fascinating? We forget that we aren’t isolated individuals living on an island.
Don’t let what you don’t have hold you back. Let it focus you.
That’s what partnerships are all about. You don’t let the things you don’t have stop you. You let them direct you.
Forrest Webber – rentalpartnerships.com
What you don’t have is your next step. It’s where you go next on your path to wealth creation through real estate.
- Partners that help with knowledge are mentors, which you can meet in person or find through books, blogs, and the internet.
- Partners that help with credibility establish your trustworthiness for the biggest partners we focus on in this blog post (and this website)… money partners.
- Partners that help with money are the ones that make the grass grow.
What Kind of Partners Do I Need?
You need whichever ones you need (thanks, Forrest… big help). So if you lack knowledge, you need to find someone who has it and acquire it from them.
If you lack credibility, you need to establish a partnership with someone who adds verifiable trustworthiness to your pursuits (and marketing).
But in this post, we’re going to primarily focus on financing partners. Money partnerships.
There are two kinds of money partnerships in real estate.
- Debt Partners
- Equity Partners
Debt Partners (Lower Cost of Capital, Higher Risk)
Debt partners are the easiest relationships to handle, in my personal opinion. Your loan documents spell out a clearly defined structure of repayment and it just makes things cut and dry.
Typically the only questions you have to answer are related to your debt-service coverage ratios, your personal financial statements, and your tax returns.
In contrast, equity partners want to know everything about what’s going on with the rental properties (we’ll discuss equity partners in more detail below).
The Options for Debt Partners
Of course, you could throw credit cards and other collateralized, creative solutions in here, but I’m sticking with the basics here.
You have banks, and you have private lenders.
Breaking down the two types of banks, you have Fannie/Freddie lenders and then you have basic banks. Regional banks offer portfolio loans, in house loans, real estate loans, etc.
The perks of working with FNMA and FMCC are the loan terms. And that’s it. (I freaking hate the red-tape they require), but the brass tax is: Thirty years of amortization, fixed rate interest for the entire term, and the lowest rates available on the market.
To be clear, I think it’s worth it to go nab your maximum allotment of 10 FNMA/FMCC mortgages.
But basic banks are so much easier to work with…
The perks of working with basic banks are: no cap on the number of loans, underwriting flexibility, and dare I say, dealing with competent human beings.
Loan officers and mortgage brokers are checking boxes, pushing you through paperwork, and submitting to governmental regulations (FNMA and FMCC). They are focused on your W2 salary, and are looking at the individual borrower (person) to determine if they will lend money.
Bank VP’s, and basic banks have a rudimentary knowledge of how real estate works, and are looking at the asset AND the individual borrower.
The common private lenders that most are familiar with are hard money lenders and private money lenders. (The money becomes “hard” is if the lender has a lien on the property).
Other private lenders are simply individuals loaning you money. They could be strangers, acquaintances, friends, family, and so on and so forth. These lenders hand you money in exchange for a return and their recourse is typically a Personal Guaranty (PG). The PG, in sophisticated legal jargon*, explains that you must go bankrupt before failure of repayment.
*Note: I am not an attorney and this information does not constitute as legal advice.
Tips for Finding the Best Banks
The simplest way to begin pursuing bank relationships is to pick up the phone and start making calls. Quantity trumps all in this arena.
But there is some preparation work you must do to maximize your return on time when reaching out to banks.
- Create a presentation document with two parts. (A) an introduction to YOU and (B) an overview of the asset you’re looking to borrow on.
- Set up a face to face meeting. (go to the bank, get lunch with the point of contact).
Sourcing Private Lenders
Finding private lenders that will loan to you on your terms isn’t rocket science, but it won’t happen overnight. It’s a HUGE win for entrepreneurial real estate, especially at the beginning, to have fast access to cash.
It often comes as a surprise (and nearly an offense) to people when I tell them that over the years, I’ve developed relationships with people who have loaned me money at 7-10% interest rates, accrued interest, with nothing but a personal guaranty.
“What?! That’s unethical,” I’ve heard dozens of times.
“Hard money lenders with first lien charge more than that!”
But I’ve also never failed a private lender, so I’ve never done anything but honor their trust with my work. And there are multitudes of people who are looking for consistent, stable places to invest their money.
The keys to developing relationships with private lenders are TRUST and INTEGRITY. Never take for granted how much trust this person is placing in you.
Forrest webber, RentalPartnerwships.com
Private lenders are relationships. And money relationships thrive with time, consistency, and clarity.
As you pursue these relationships, remember, quantity is your friend. You want to begin with a wide net, but sift through the relationships systematically.
YOU CAN FIND INCREDIBLE PRIVATE LENDER RELATIONSHIPS. Especially when the media terrorizes investors about the future and volatility of the stock market.
So my advice in this blog post is to (A) create a standard promissory note and personal guaranty with interest rate terms that are doable for you, and (B) systematically develop relationships with people who have the ability and willingness to lend you $50,000+ for at least a 2-year term.
This will offer the consistency and clarity needed to sustain and build a long-term business relationship.
Equity Partners (Higher Cost of Capital, Less Risk)
In my early days of partnership recruitment, I sourced 37 equity partners in 2.5 years, bringing in a net sum of $3.4 million in equity for partnerships.
The minimum investment was $25,000 and all our partners had to do was write a check.
We took care of everything else. Loans, legal documents, accounting, property management, leasing, asset management… the whole enchilada.
Equity partners are entrusting their money to you with no promises. Deals go bad and it’s not always your fault.
It’s very important that both you and the capital partner both understand and confront this.
Forrest Webber, RentalPartnerships.com
My biggest mistakes are all summed up in the quote you just read. The errors that haunted me for years, that kept me up at night (and gave me nightmares), that induced the sweaty palms prior to making difficult phone calls, the racing heartbeat when I saw an incoming call from an equity partner…
All of it is summed up in this one quote. There are no promises. And deals go bad for reasons outside your control sometimes.
- Work ethic can’t make every deal go right.
- Integrity can’t make every deal go right.
- Brilliance can’t make every deal go right.
I swear, by the end of my capital-raising early days… I spent time trying to talk people out of investing. I’m not saying that was a good thing, I’m being real with you.
Personal Story on “Trust” From Equity Partners
At age 22, I walked into his office.
He was a high-school friend’s Dad that I already felt intimidated by. I still remember the feeling I had when he told me, “I haven’t read the marketing packet you sent, Forrest. It’s too long. I just want to do a deal with you because I trust you. You’re smart, you’re a good kid, and if this goes the way you say it will go, there’s more money where that came from.”
He handed me a $100,000 check.
I was floored. Grateful. Encouraged. Inspired. Honored.
I knew I would never break that man’s trust. It was time to go to work, and make him proud.
But then the deal ended up going poorly, despite every effort I made.
In hindsight, this man would easily have understood if I’d called him up, told him the straight facts, and explained my thoughts.
But I didn’t. I just became more and more nervous. I sweated every time he wanted an update on the project (it was a development project). I had nightmares of running into him unprepared, without the right words to say.
The truth is that I had nothing to be ashamed or afraid of, but I. had something really important I needed to learn.
When an equity partner places all their trust in YOU, it’s an ego stroke, but simultaneously all liability is placed on YOU too.
(Relational and personal liability)
Forrest Webber, rentalpartnerships.com
How to Find and Build Equity Partner Networks
Countless real estate entrepreneurs have achieved massive success without approaching their sales and marketing systematically.
They go about it like this:
- Meet everyone you can
- Tell them what you’re doing
- Ask for their money
And to be blunt, that works sometimes.
But what if it doesn’t? Because it doesn’t MOST OF THE TIME.
There is no one way to find equity partners. There are people with money who need opportunities and you have to find them. The question is how?
My success came largely from developing a systematic sales and marketing system.
Forrest webber, rentalpartnerships.com
This entire website is designed to help individuals build their wealth in real estate. We want to help money partners looking for deals (unwed capital) and entrepreneurs looking for capital (unwed opportunities).
Systemizing Your Marketing and Sales
(This is where I make my pitch).
Because this is the single most valuable thing I have to offer, I’m going to ask you to (1) sign up for the email list for this website and (2) buy the course materials that I offer you (coming soon).
Here’s what you’ll get: (coming soon)
- System for campaigning. You will design a brand-suitable system for your outreach to people you don’t know.
- System for coalescing. those people from unawareness to awareness (and moving toward trust).
- System for converting. Consistently connecting with your network effectively and regularly leads to an ever-growing pool of equity partners for your real estate business.
(We do have some surprise bonus materials that we tack on as well).
The CCC Program Will Level-Up Your Game (coming soon)
The above is just a glimpse into our “CCC” program. Systematically campaigning to unmet potential partners, coalescing them into people who are aware of what you have to offer, and converting them into equity partners.
Basic Math Demonstrating the Power of Partnerships
Before we jump into math, let me state clearly why I believe so strongly in the power of building partnerships, and frame it enticingly.
Money Partnerships are where the big dollars are. If you follow this website and master this “trade”, you will be tapping into the same principles as New York City investment bankers.
What Does the Math Look Like for DEBT Partners?
I know it’s a big assumption, but let’s pretend that you already have 10 outstanding real estate acquisitions lined up, ready to go.
Assume all ten of these properties are undervalued, fit your investment thesis, meet your criteria, and would cash flow phenomenally even with 100% debt on the property.
What’s stopping you from buying them all? Well… lenders don’t lend on 100% debt terms, right?
They cap out at a loan to cost (LTC) or loan to value (LTV) ratio of 80-85% (and even then, that’s not easy to come by).
But just for the sake of illustration: imagine that you found a bank that would fund 100% of the acquisition cost. Your portfolio would get a nice boost, wouldn’t it? (Assuming you truly were purchasing under market value property, etc.)
If each property was worth $250,000 then you officially just added $2.5 million of assets, and 10 outstanding rental units to your portfolio. With some napkin math, you’re likely earning at least $10,000 of passive cash flow + another $20,000+ is being paid down on your debt annually.
What’s my point? Finding debt partners can accelerate growth. That includes bank partners. There’s a lot more to it than the above example demonstrates, but I wanted to whet your appetite with a voluptuous example.
What Does the Math Look Like for EQUITY Partners?
That’s a load question. But an oversimplified answer is that everything is negotiable with equity partners.
Hypothetically, if you found (you won’t) an equity partner who said, “I’ll put all the money in, let’s not even use a bank. I’ll buy everything in cash, and we’ll split everything 50/50,” then… you’d be crushing it (thanks, Captain Obvious).
The simple math would look like this:
$250,000 * 8% * 50% = $10,000 of net income per property.
Assumptions*… 8-cap properties, 50% split with equity partner.
If you found an equity partner like this and had those 10 deals, you’d personally have popped into the six-figure income category, coming in at $100,000 of annual passive income. This does not include property appreciation (long term wealth building, or tax-savings from depreciation).
In reality, you can find equity partners who will work with you like this:
“OK, I’ll give you 50% ownership of the property, but you’ll have to pay me back all my capital first. Then we’ll split 50/50.”
Enticed yet? I hope so.
What Does Forrest Know (About Rental Properties)?
I know enough to have assembled a $4,000,000+ portfolio of 20+ units in a handful of years and to do it in my twenties. Wholly owned real estate, meaning no equity partners (but plenty of cheap bank debt, to boot).
I also obtained an undergraduate degree in Finance and a Master’s in Real Estate from Texas A&M University (2009 and 2010).
Ultimately, what inspired me to start writing about real estate was a quote I read online. (There wasn’t a reference pointing to the research or data behind its claim, unfortunately)… but here’s what it said:
The statistics show that 95% of investors will only ever buy one property. Of the remaining 5%, only 4% will own more than one and only 1% will own more than 5 properties.
When I read that, my jaw dropped. Only 1% of investors will own more than 5 properties? I didn’t realize that what I’d accomplished was that rare.
I acquired my first real estate rental property when I was 20 years old.
And in just under 7 years, I grew my personal portfolio to 20+ units of wholly-owned real estate. What percentage does that put me at?
But here’s the thing… am I phenomenon? No way!
Did I have a leg-up in certain areas of the game? Yes, of course. And so do you, I’m guessing if you’re reading this blog post.
One of the things I had going for me was that I knew exactly what I wanted. I knew I wanted to retire early and I knew I wanted to do that by investing in real estate rentals.
Growing a rental property portfolio is a lot of work
Look, you can go buy the best books on real estate investing, learn all that there is to know in your head about building a rental property portfolio… but when it comes to actually building a rental portfolio, it’s going to take REAL WORK.
What to Expect (going from 0 – 9 Units)
The first rental property probably won’t be the best deal you ever find, but it will likely be surprising to you how easy it feels (once you’ve closed and leased the property).
Actually, the first 5 rentals are typically simple to manage and lease. It’s once you pick up that property with challenging tenants that you start questioning things.
From 5-9 units, I was personally getting stressed. Some of you are going to laugh at this, I do hope it encourages you, but managing and leasing 9 units on my own felt incredibly trying for me. As a young 23-year old kid, my nerves went crazy when anything went wrong.
Especially if I had to call a parent of one of the tenants (and they were upset with me for XYZ mistake I’d made). It happened a lot. A decent percentage of my properties were high-end student rentals, which meant things like:
- Sophomore college girls asking for me to come change their light bulbs
- Freshmen college guys calling at 4:30PM on Fridays over a wasp in their bathroom (“Please come kill it for me!”). No joke here.
- Broken washer-dryers were the end of the world.
Personal Story About Challenging Tenants
One of my luxury duplex rentals near campus housed 8 college fraternity guys. Four in each unit of the duplex. They were two-story duplexes, 4 beds and 4.5 baths per unit. Upstairs there was a washer/dryer AND downstairs there was a washer/dryer.
One day, one of the washers broke. I received the maintenance request, and called a handyman. He tried and failed to fix it, same day.
So I called another appliance repair man (more expensive). He claimed to fix it, but the parts were pricey and a week later the kids called again– broken.
Of course it’s no fun to have your washer break, but the narrative started to escalate. A tenant’s father called me, for some reason felt it was important that I knew right away that (A) he was a CFO of a big company, (B) he was a member of the Jesuit Society in Dallas, Texas, and (C) he was very bothered by the washer situation.
I told you I was kind of a nervous kid, right? This guy terrified me. He was angry, and I was stuttering to confirm that he knew… there was… in fact… another washer IN THE SAME UNIT!
I won’t bore you with the rest, but he accused me of having cash flow issues, being the “worst property manager he’d ever encountered” and so on and so forth.
Why do I share this story? Because you can expect to have situations like these crop up as you grow into your first 10 units of real estate.
What to Expect (going from 10 – 20 Units)
At this point, and I know some of you again will scoff at me, I think you should make your first hire. It’s time to start delegating and focusing on what makes you money: growth and financing.
Financing is the single most important key to scaling your wealth and building your rental property portfolio. And to be transparent, that’s what this website is really all about.
My suggestion is to try to shift your focus aggressively toward financing, and away from property management and leasing at this point, even if you can handle it.
It’s an energy and focus thing.
I hope this post has been helpful to you
As you grow, keep RentalPartnerships.com in mind. If we aren’t a good fit today, maybe we will be down the road. Best of luck– Forrest
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