Six years ago, Brady stumbled across BiggerPockets, and realized he’d found his exit route: rental properties.
He read articles on rental investing (sadly, it was before my time writing for them!). He started listening to their podcast. “I even installed a Bluetooth speaker/receiver setup in my shower and bathroom, so I could listen to the podcast when I was taking a shower and getting ready in the morning.”
He picked through every free landlord resource he could find.
Brady’s now 36, with a wife, three children, and 12 rental units. His 12 doors bring in about $40,000/year in net rental income.
So how did he get there?
Here’s Brady’s journey, complete with the hiccups and mistakes he made along the way, from wide-eyed newbie to veteran landlord.
Brady’s First Rental Property
“For my first property, I was looking for properties that hit the 2% Rule.”
(You may have heard me grumble about the 2% Rule in the past, but that doesn’t mean it doesn’t work well for some landlords!)
“I found a duplex in Grandview, MO (just south of Kansas City) that was rent-ready, with a purchase price of $55,000 and possible rents of $1,100 per month (2% Rule, score!).”
Of course, he didn’t only count on the “2% Rule” to analyze the numbers. He forecast his cash flow using a rental property calculator to make sure he’d earn a high return.
As he was searching for properties, Brady had also researched lenders. He compared different lenders’ terms using tools like LendingTree, and quickly found a bank he liked.
“I worked with a local bank in town and put down a 20% down payment and was off and running.”
It’s worth noting that Brady had to save up that down payment first. While he was reading rental investing articles and researching free landlord resources, he was also saving money and living on a fraction of his income.
Property Management Misfires
“Early on, I thought I was smarter than the system and figured I would self-manage to save the property management fees.”
Sound familiar? This is why we always push landlords to include property management costs when calculating rental cash flow: it’s a labor expense, whether it’s your labor or someone else’s.
“I quickly realized how valuable property managers are when I listed the property for rent and went to a trade show for my full-time job. I was managing our booth at the trade show and received over 60 calls over two days, from prospective renters wanting to come check out the property.
“After the first week of driving out to the property multiple times for showings, I saw a property management company sign off the side of the highway. I quickly pulled over, called them, and hired them on the spot.”
Hmm… what’s missing here?
“I didn’t vet this property management company, I just assumed since they were close to my rental property that they would do a good job.
“The property management company ended up filling the duplex with tenants, but communication was a constant struggle. It was pulling teeth just getting information out of them and getting kept in the loop with the things that were going on with the property.”
Movin’ On Up: Properties 2 & 3
“A few months later, I was ready to add another rental to my portfolio. I took out a $50,000 home equity line of credit (HELOC) on my personal residence from my local bank, and purchased a short sale single-family rental in South Kansas City for $36,000 which needed $7,000 in repairs.
“I was able to pay ‘cash’ for the house and rehab out of my HELOC, used a trusted contractor to handle the renovation and quickly rented out this house for $850/month.”
The fact that Brady could make a cash offer, able to settle quickly and with guaranteed funds, made his offer much more attractive for the short sale. If you’re looking for a HELOC to use this strategy yourself, you can also use LendingTree to compare HELOC terms.
“I thought ‘Man, this rental business thing is easy!’ Once the house was rented, I refinanced the house with a permanent landlord loan and paid back my HELOC in full.
“Property #3 I bought off an online auction website for $23,000 cash (again using my HELOC), and ended up using the same contractor for renovations. I put $27,000 into the property over three months and it rented out for $875/month.
“At this time, I was running into a lot of problems with my property management company. I had a tenant run out on their lease contract in the middle of the night on my duplex, which now needed turnover and tenants placed in it as well as Property #2.
“Fed up, I called the owner of the property management company, had an amicable breakup, and got recommendations on BiggerPockets for a reputable property manager. I interviewed a couple candidates and hired our new property manager a few weeks later and haven’t turned back.
“I refinanced the house with the same bank and paid back off my HELOC once again.”
Growing His Portfolio (and What Changed over Time)
“I used this same process for the next seven properties I bought over the last several years and have taken the income from the rentals and just put them all back into the business, paying down principal on the houses.
“I now have a total of 12 units (eight single-family rentals and two duplexes), and only have debt on three properties using this technique. My rental portfolio is now generating $7,700/month in gross rental income, netting around $40,000/year after all expenses and my rental property loans.”
I asked Brady what he’s done differently over time, as he’s gained more experience. One answer he was quick to give? The kinds of neighborhoods where he invests.
“This is changing as my portfolio grows. I primarily have invested in B- & C class neighborhoods. They are not in war zones and have relatively low-crime and are working class neighborhoods.
“As my portfolio has grown, I am starting to focus on B+ neighborhoods as they are a little less transient and there is less turnover.”
And we know how tenant turnovers ruin your rental returns!
Brady’s Advice for New Rental Investors
“The 50% Expense Rule that everyone talks about? It’s definitely true.
“Over my first 6 years of investing in rental properties, our expenses have averaged 45-55%/year.
“I highly recommend having a reserve fund in place as you never know when a bad month or couple months is going to hit your portfolio. Here is a good example of what we have run into at the end of 2017: As the weather got cold and furnaces were needed, we had three furnaces that went out and needed replaced at an average of $2,000 each.”
That’s where so many landlords run into trouble – your returns are not determined by what happens in a typical month, but the long-term average of your occasional-but-large expenses. (For a quick read about this, check out our article on visualizing real estate cash flow.)
“One of our rental properties had a small undetectable leak behind the sink for an extended period of time causing mold to build up behind the wall. We ended up letting the tenants out of the lease contract, hiring a mold remediation company who also found asbestos behind the wall, hiring an asbestos abatement company, and then rebuilding the kitchen wall.
“Four months of lost rental income and $10,800 in repair costs later, I am glad we had reserves in place!”
Any other pieces of advice Brady?
“Start learning now. Read real estate investing and landlord blogs, listen to all of the BP podcasts, save up for the down payment and jump in! It seems a lot scarier from the outside looking in, and once you have your first property, it is much easier to scale from there.”
Brady on Investing in Hot Real Estate Markets
“As the market has heated up in Kansas City, it is becoming harder and harder to find great deals and we have had to get creative. My tip would be to form as many relationships as possible with your local wholesalers.
“Every time you see a bandit sign on the side of the road, call it and leave a message for the wholesaler that you are a cash buyer and would love to be added to their buyers list.
“Go on Facebook, and search for investor groups in your area. In Kansas City alone, there are over five local real estate investor groups that I have joined where people are posting deals all the time at a discount.
“Network with fellow investors at meetup groups, REI clubs, and talk to people you know about real estate, because you never know where your next deal is going to come from!”
Financial Independence, Retirement, and the Good Life as a Landlord
Brady continues to work full-time in the financial services industry. He’s continuing to build his portfolio, through his Mill Creek Home Buyers company.
I asked him what’s coming up on the horizon, as he builds passive income.
“I plan on “retiring” from my full-time job when I am 50 years old. I enjoy what I do at my job, so I am not in a hurry per se, but want to retire when I am still young enough to enjoy being active in my retirement.
What motivates you, to build passive income and escape the rat race? What specifically are you looking to do/achieve?
“My motivation is to provide for my family and free up my time so that I can spend my time helping out in the community and with my church. I am looking to build a passive income of at least $10K/month so that I can use my abilities to help others.”
What are your plans, once you reach full financial independence?
“Take a year off of “working”, spending time with my family, church, fishing, golfing, and working out. Once I am going stir-crazy, I plan on helping others invest in real estate and focus on larger scale real estate investments while spending time helping out in my church.”
What are your plans, once you reach financial independence? The more concrete they are, the more you can visualize them, the more likely you are to realize them!