This method pretty much only works in a rapidly appreciating market. So you save up and buy one property and have decent equity in it. Then you take that equity out through a loan and put a down payment on a 2nd property. If that property appreciates then you can take your new equity from that property and buy a 3rd property. It's not really rocket science.
But the caveat is that if property values aren't rising quickly, you can't do it. The appraisals have to come in high enough that a bank will loan you money on your subsequent properties. And right now, banks are very, very conservative so I don't know if they'd even make the loan. You will also be highly, highly leveraged and one issue can crash the whole thing. A good friend picked up a very nice property from the bank a few years back for ~$2MM cash. The former owner was a physician and this was his office. Basically he owned this building free and clear and when the property market started going crazy, he took his equity out and started buying new commercial properties. Appraiser gave him a crazy valuation of like $5MM and he took what he could and started basically speculating. At one point, the physician had 10-12 properties with a value on paper of north of $20MM. Then 2008 happened and his tenants stopped paying on some of the properties. The issue was that he was undercapitalized and over leveraged so when his cash flow dried up, he couldn't make his mortgage payments and hold onto his properties. As the banks started taking properties back, it pretty much cascaded. All of the properties were pretty much leveraged out as much as they could go so any loss of cash flow was magnified. Eventually he lost every single property including his original one which my friend bought. He also filed for bankruptcy since some of the loans were personally guaranteed.
Leverage is great in a rising market if your collateral is appraised high. It's terrible in a falling market as your collateral loses value by the day. If you can't get out from under the payments or dump the properties because the valuation isn't there, it's over.
I think you'll find that the stuff people used to be able to do can't be done anymore. Banks just aren't going to extend that kind of credit anymore.
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Originally Posted by Ghos7N54
Great information here and very informative. Any input out there on buying rental property and obtaining loans against that house or building to buy more rental property?
My uncle has an old friend that did this repeatedly now owns 17 apartment properties.
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