Formula to Buy 5 Rental Properties in 2 Years and Payoff in 7
One of the main reasons why people become interested in real estate investing is the allure of financial freedom. Purchase enough real estate to cover your personal expenses and voilà, you’re financially independent.
There are many strategies and tactics to implement in order to accomplish this feat, like Josh Sheets integration of personal and professional financing, Fernando Aires three principles to achieving financial independence, and committing to this straightforward four step process, among many others.
However, the fastest financial freedom strategy I’ve ever come across is Andrew Holmes’ 2-5-7 strategy. He has successfully implemented this strategy, which is a version of the infamous BRRRR strategy (buy, rehab, rent, refinance, repeat) on over 160 properties. In our recent conversation, he outlines, in extreme detail, his exact step-by-step 2-5-7 formula for how he purchases a minimum of 5 properties every 2 years and pays them off in 7.
What is the 2-5-7 Investment Formula?
Andrew’s investment strategy adheres to what he calls the “2-5-7” formula. In 2 years, the goal is to accumulate a minimum of 5 properties and using the cash flow pay them off in 7 years. Andrew said, “The formula doesn’t change, it’s just the number of properties, how much cash flow you want to create, and you scale based on that.”
In order to achieve his specific investment goals, Andrew has the following additional requirements:
- Deal Location – “Most people, whenever they own rental properties, they tend to buy … in areas that are rather challenging. We have a different philosophy, which is we tend to buy in bread and butter areas, right next to what we would call premium areas. Basically, if premium areas are A, we tend to buy B- or C+.”
- Minimum 25% equity– “Whenever we’re buying a property, after rehab, it must have a minimum of 25% equity.”
- Small Ranches– “We focus on buying small, three-bedroom, one and one-and-a-half bath ranches.”
- $400 to $450 cash flow– “They must cash flow to the tune of $400 to $450 per property after all expenses, including management.”
You start with the end goal, which will likely be the amount of cash flow required to cover your personal expenses, your current salary, or your ideal lifestyle, and then reverse engineer your 2-5-7 strategy to determine what market to invest in, how much equity you need (more on that later), the property type, and the monthly cash flow requirement for each deal.
Here’s an example deal Andrew provided to see the 2-5-7 formula in action:
“Let’s say you’re buying a bread and butter property: three-bedroom, one bath ranch for $65,000. You’re going to put $20,000 to $25,000 into rehabbing the property. You have a carrying cost of another $5,000 to $6,000, so you’re all in cost into the property is somewhere around $90,000.”
“This is the most critical part, which to me [distinguishes] investing versus what most people do, and that is the property needs to appraise on a conservative refinance appraisal for $120,000 to $130,000. That’s the key thing – that’s the only way you’re going to be able to get all the capital that you put into the property out, so that you can efficiently recycle the same money over and over and over.”
“So the property appraises for about $125,000. The lender is going to give you about 75% of appraised value… That’s the key thing. That’s the benchmark people have to look at. If the property appraises for $120,000 to $135,000, now they’ll give you the $90,000 to $95,000 refinanced.”
“So you take that loan, you pay your first lender off – the loan you used to buy the property and to do the rehab – and then you just recycle the same funds. Or if it’s your own money, that’s fine also, but you just repeat that process over and over and over, [with the] goal being you need to get to a minimum of five.”
How to Finance the Properties?
On the front-end, Andrew explained that there are three major ways he funds his deals:
- Partnership– “Number one, you can partner with somebody that has the capital and do a 50/50 joint venture. They buy the property, they put up the money for capital [and] you’re the driving force. You’re doing all the work, but you’re giving up 50% of the returns. That’s where I started initially”
- Hard Money Lender– “The second way to do it is the traditional route, which is you borrow money from a hard money lender, and put in some of your own money.”
- Private Money– “The third route, which we tend to use the most [is] private money… Join your local REIOs, join the local groups; whichever town you’re in, there are tons of them. There are people that are willing to make loans out of their IRAs, they have personal money, and you end up paying anywhere from 8% to 12% and that’s what we tend to do and that’s what we always try to get people to understand – there’s a lot of money out there where people are willing to loan for the front end of the transaction.”
As a multifamily syndicator myself, this last option – private money – is my bread and butter. Here are posts on the most effective methods for raising capital from private investors:
- My Four-Step Apartment Syndication Money-Raising Process
- 3 Ways to Raise Over $1 Million for Your 1st Apartment Syndication
- A 5-Step Process for Raising BIG Capital For Multifamily Syndication
- 4 Principles to Source Capital from High Net-Worth Individuals
- 4 Non-Obvious Ways to Raise Private Money for Apartment Deals
- How to Overcome Objections When Raising Money for Multifamily Investing
On the back-end refinance, the biggest challenge Andrew faced in regards to following this strategy and buying 5 properties in 2 years is that most residential lenders will usually only provide up to 4 loans. However, he has found a solution to his problem: commercial loans at small local banks.
“Basically, a five-year balloon with a 25-year amortization. It’s a commercial loan at five, five and a half percent,” Andrew explained. “The speed at which you can scale and grow is much faster.”
“We tend to go to the small banks that are in town. Typically, they’ll loan on anywhere from one to five, ten, fifteen, twenty ranches. We’re not going to go to Chase Bank and we’re not going to go to the big lenders, because they don’t really offer these programs for small investors.”
Meet the Bank’s VP
When Andrew walks into a small bank to get a loan, his goal isn’t to speak with a teller or a manager or a loan officer. He wants to go straight for the bank’s Vice-President. “You always want to go and directly talk to the VP. Typically, at these small banks, the VP is pretty much the main guy there, and that’s the person you want to approach.”
When approaching a conversation with a bank VP, the first thing Andrew does is explains, in two minutes or less, his business plan. A condensed version of his two-minute elevator pitch is, “Hey, we’re buying foreclosure type of properties or investment properties that are rentals. When we come to you, they’re going to be purchased, they’re going to be already stabilized (they like that word) and there’s already an existing tenant. We do two-year to three-year (minimum) leases only; we don’t do short-term leases.”
Next, Andrew explains his 2-5-7 formula and his philosophy of aggressively paying down the properties in 7 years. Then, he goes into more details and shows the VP a couple of successful past deals. However, if you’re brand new, just show them a property or two that you have in the works.
How to Find Local Banks
A great resource for finding a local bank in your target market is https://www.bauerfinancial.com/home.html. Also, Andrew advises, “whatever community you live in, I would draw a 10 to 15 mile radius around it, and then start with the ones that are closest to wherever you’re going to buy properties. Especially if it’s in a B-market, a C+ type of market, then the banks that are local in that area, they have depositors from that particular area and they need to make a certain amount of loans in that particular market. So that’s the first place to start.”
Advantages of Local Banks
Besides the ability to provide more loans than a standard bank, Andrew said local banks have three additional advantages:
- Building Relationship– “As you start developing relations, as you start having credibility with a particular bank, they’ll scratch their arms a little bit, but in general, the place to start always is the community banks – they want to have a relationship; it’s a relationship sort of lending, and they really like that word. If you go in and say, ‘hey, we want to develop a relationship with you’ and you tell them that you’re going to put your rental deposits in their bank, they’re all over that because that’s really what in the long run they’re looking for.”
- Flexible Loan Qualifications– “They don’t have stringent criteria. For people who may not have a W-2 income, they’ll work with 1099. If somebody doesn’t have a W-2 or 1099, but has retirement income, they’ll work with. If somebody doesn’t even that but has some assets, a good portfolio in the stock market, or just cash, they’re much more forgiving and they’re not as sensitive, even in the department of credit scores.”
- Loans to Business Entity– “As you work with these commercial banks, you can buy properties in your LLCs, you can buy properties in your S Corps, you can buy companies under a trust.”
Andrew follows the 2-5-7 investment formula: purchase a minimum of 5 properties in 2 years and pay them off in 7 years.
The three ways Andrew finances his deals on the front-end are partnerships, hard money, or private money loans. On the back-end, he refinances the properties with a commercial loan from a small local bank.
When walking into a bank, Andrew goes directly to the Vice-President and explains his business plan.
For those interested in following this strategy or just want to find a small local bank, visit: https://www.bauerfinancial.com/home.html.
The three main advantages, among many others, of using a small local bank is the ability to form relationships, flexible loan qualifications, and loaning to your business entity.
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