Scaling to 17 Rentals by Buying $200K, Affordable Properties Episode #11749

Today, we'll hear how one investor finds single-family homes and duplexes for $200,000 or less that can gross more than $30,000 per year in a small Midwest market. She now has 17 properties and is right on pace to retire from a demanding W-2 job a full decade before traditional retirement age. And that's even after an extremely challenging divorce forced her to liquidate almost all of her assets and restart her investing from scratch. Hey everyone, I'm Dave Meyer, a real estate analyst and also a rental property investor myself for the last 15 years. Today on the show, we have Sarah King, who's an investor from Fort Wayne, Indiana, who has grown from house hacking a single property as a single mom in 2020 to an impressive portfolio of 17 deals just five years later. You may have heard Sarah on episode 698 of the show, that was about three years ago, but so much has changed since then that we wanted to bring her back on to provide an update. So today, Sarah will tell us how she had originally set an early retirement goal at the beginning of her investing career, but has already exceeded that decades before she'll turn 65. We'll hear how she pivoted part of her portfolio in recent years as prices and interest rates rose, and we'll also hear how she balances self-managing her properties, even with a family and a demanding W-2 job. Let's welcome Sarah back to the show. Sarah, welcome back to the BiggerPockets podcast. It's great to have you. Thank you so much for having me. It's exciting to be here. Yeah, it's a great opportunity to catch up what you've been up to. And I'd like to start our conversation today around 2020, because for those of our audience who didn't listen to your previous appearance here on the BiggerPockets podcast, you did some early investing, then went through a divorce, and it sounds like you sort of had to start over. Yeah. Was it from scratch, basically? It was completely from scratch. So for those of you who haven't tuned into that crazy story, so essentially my husband ended up addicted to drugs. And so when you're working through the divorce process, it's never fun. And then on top of that, you have someone that just isn't in the right state of mind to really negotiate division of assets and all of that stuff and you just don't expect to be here and you're so emotionally charged at the time. And so finally we just said, let's liquidate everything and both start over so we're not stuck in mediation trying to decide what to do. And so I'm like, this seems like the easiest option to just move on and find some peace. And so we sold five properties that we owned together and completely liquidated everything. And then each of us got a payout from the five properties we had acquired. And then I started completely over at zero houses, not even a primary residence, and was living with my parents for about three months until I decided I'm a 30-year-old adult. I needed to buy my own place and so I started over. Well, I'm sorry you went through that. It sounds like an incredibly challenging situation. It was incredibly hard, but nothing in real estate scares you when you've already been through the craziness it is at because I'm like, a foundation can be fixed. We can work through that. So you also get this delusional sense of nothing's ever gonna be that bad. Well, I appreciate that positive attitude you have. I mean, yeah, that is true. But I can imagine that it takes a little while to gain that level of wisdom and perspective after going through something so difficult. Was there ever a point when you're going through this when you just thought real estate was my old life, I'm gonna move on and do something else? Or did you know that you wanted to reinvest back into the real estate? So I was very big into like Scott Trench, Mindy Jensen, like love all of their stuff. And so I knew I wanted to house hack because I'm like, I'm paying for this expensive divorce. You have all these bills. I'm a single mom. My daughter was one. And it was during COVID. I'm like, I need to make sure I still have a job. My job is travel. No one's traveling right now. What is that gonna look like? And so I'm like, I'm gonna house hack so I can at least live for free. And through that house hack, I did a remodel of a ranch style home on a walkout basement. And I learned that I liked the real estate. I liked remodeling. And I got kind of addicted to doing it on my own, even though I spent way more money than I should have spent. And I kind of went all out from there and I've become pretty addicted. And now I have to step back and try to do less. It is so easy to get addicted to it. Yeah. I want to circle back to something you said about house hacking, because I'm a big proponent of house hacking. It's how I got started. I think a lot of people get started this way. But there's this common opposition to it, where it's like, oh, I don't want to live next to my neighbors. And frankly, I did it when I was like 26. I was dating my wife at the time, but didn't have a very complicated life. It was like pretty easy for me to do that. Meanwhile, you did it following a divorce with a one-year-old daughter. Yes. Did you ever have concerns about raising your daughter next to your tenants? Like that lifestyle element of it? I mean, people live in apartments all the time and it's fine. Thank you. I totally agree. And I'm like, what's the difference? Like I get to choose who's living next to me versus a landlord choosing who's on your floor. Like you actually get a choice and a say in the matter. And I'm like, if I'm like not tenant screening people and allowing a serial killer in my basement without running a credit check or a background check, then I'm an idiot. That'd be scary. So let's not do that. Let's check it out. And I'm like, I had like two school teachers. My first tenants are tenants that rented from one of my former homes that I had to sell. And they moved with me into my side-by-side duplex. Because I'm like, we have to sell the house you're living in. This sucks. And they were my first tenants in the basement of my house. And so they knew what they were signing up for. I'm like, full disclosure, I live upstairs. Just letting you know, I have a one-year-old and a puppy because I'm an insane person. They're probably gonna be running back and forth. And so they could tell at a certain time of night the puppy would get like zoomies and run. No matter how much soundproofing you do, it's never perfect. Man, you are ambitious taking on all of this at one point. I am very impressed. But I am biased. But I think this opposition to house hacking because you're living next to your tenant is so overblown, at least in my personal experience living next to tenants. And I had a multi-unit. It wasn't just one, you know, multiple. And like, it's fine. In some subdivisions, I had like more steps to see my tenants than people do in like housing additions that are really high density. Like we had different patios, different sides of the houses. Like they went out the backside, I went out the front. And we had our own yards, parking spaces. That's a really good point too. Like if you have an opposition to this, you can also just target a property that has a layout that is suitable for you. Like you see these side-by-side duplexes with a fence that splits the yard where they have separate driveways or different parking areas. Like I started in these like cut-up old Victorians where there's like a shared entrance and then they split off. Like if you don't want to do that, fine. Go find a purpose-built duplex and go invest in something like that. So what was the plan? So you bought it, you renovated it yourself. Like, did you already have an idea of, you know, you had five deals. So like, were you already thinking about scaling while you were doing that first one? Definitely. I mostly needed a proof of concept because that house was the first one that I raised private money because all of my money was going towards divorce and home renovation. And so I just ran out of reserves really fast. And I had a good job at the time. I'm like, thank goodness I have that. And so I was thinking to the future, but I'm like, I really just need to prove that I can do a refinance and give people their money back so I can go on and do more. And I, of course, hired like plumbers and electrician. I ended up getting a real drywall guy because turns out I'm not that good at it. And it looked really bad. So it ended up, I ended up having to hire out and do a lot of it and went through a few guys. So you basically were like, I'm going to buy a house hack. I'm going to renovate it and refinance it. And that way, when I refi it, I can pay back my private money lender. And you would still own the asset, right? So it's kind of like combining a BRRRR and a house hack at the same time. And it's funny because, you know, back when BRRRR was this big phase, like people would all like hold the check online when they'd refi out a house. It was like, this is how much money I got in addition to it. And I got a check for like $500, I want to say, or $800. And like, it really happened. I left closing with a check and it's like the littlest check ever. But I'm like, it really works. And it was just, that clicked and kind of the rest is history where I'm like, I want to do this again. I was hooked. So what was the plan for you, Sarah, after that first house hack? So ironically, I got this private money loan originally. So I was about to sign with this stranger from the internet and my parents freaked out and they're like, you're borrowing money at 12% from a strange man on the internet that you've never met before. And now I do this all the time, but at the moment they were very concerned. And so it actually pivoted where they're like, this man is trying to take advantage of you. We're going to give you a loan at 7%. And so I ended up with a really sweet deal. And I feel like I like essentially outbid the OG investor. So I had two people believing that I could figure this out and we were going to succeed in this plan. And so my first loan was actually at 7%, full disclosure, friends and family discount. And so once I realized that they would lend me, I think it was $186,000. As soon as I paid them back, I'm like, hey, I found a side-by-side duplex. Do you want to do it again? And can I reinvest this money into the next one? And so I paid all cash for that one. I refied out with a conventional loan again, paid them back. And then after that, they're like, whoa, whoa, you're moving really fast. You've bought two houses in two years. We're out. We're not lending you anymore. And they were very nervous. They're like, you're biting off more than you can chew. You have this day job. What are you doing? I'm curious if you have any advice for people who are trying to work with either friends or family and get them interested in participating in these types of loans, because I think these types of partnerships, people don't talk about a lot, but are extremely common in real estate. I think the biggest thing, honestly, is social media. And that sounds really cheesy because everyone online will say this, but truly it just built out where people could follow your journey. And it's a lot of the private money lending, when it's a relationship, they just want to know you, like you, develop the know, like, trust on social media. And so if you're oversharing your journey, they can kind of buy into, they want to be a part of that. And so from a friends and family standpoint, I feel like it tends to be a little more emotional versus a decision. Not always, like my mom eventually reinvested because she's like, I want the business benefits of this. This is pretty cool. I watched the machine working, but other people wanted to buy into it because they liked the story. And so you just have to know your audience. Yeah, that's good to know. I guess my friends and family are just business oriented people. It's great to have both. That's cool. So when your parents pulled out after the second deal, what did you do after that? Probably the best thing that's ever happened to me because then I had to go out and actually learn how to raise money. And so the next time around, I actually was about to get the money for my divorce. So at this point, we actually had all of the money from our divorce sitting in an escrow account. And for about a year, there was a lot of discussion back and forth on how to disperse this money. And so for over a year, we couldn't access a single dollar and it's just sitting in an escrow account, which is really depressing when you're an investor. Yeah, ridiculous. And so I finally am gonna get this payout and it's the end of the year. And I found this side-by-side duplex again, and I'm working it up with a conventional lender to get pre-approval. And this is what I learned. This is probably the single tip if you're a W-2 person that helped me grow my unit count like crazy was you could get pre-approved and completely clear to close off of proof of funds from your IRA. You can Google it, it's not a sham. So you can use like IRAs or investment accounts. It can't be like a current company 401k, but you can use these traditional retirement accounts or a Brookbridge account to get proof of funds and kind of get, you can get completely to clear to close on this conventional loan. And then, you know, I'm still waiting for the money and going through the whole court process. And I know it's coming, but I was able to use that to really get through all the due diligence on the loan. Oh, interesting. I had never heard of doing that. And so it ended up being really easy to do that. And then I was about a week out from closing on this house and our court process got delayed by six months. And I found out I wasn't actually gonna get any of the money. But were you able to close on the house bill? Yes. So then I ended up being like, I have no money. I'm clear to close. And then I went out and found a private money lender and wired that money in, because at that point with all the court process, I couldn't actually like pull out of my IRA. And I also like really didn't want to, like it made my investing heart really sad. And so I ended up using private capital instead of my IRA account to close it. Wait, sorry, it made you sad to pull out of your IRA? Yeah. Because that was just like a different investing category that you wanted to maintain? Yeah. I have a whole like nerdy world of index fund investing and I wanted to keep my real estate world and my index fund world separate. Honestly, I mean, you must listen to Mindy and Scott then if you do that. I mean, I do the same. I'm a hundred percent the same. I know there are a lot of people, real estate influencers who are like, oh, go all in on real estate. I'm much more of a diverse, most of my money's in real estate, but I do have other investments. So I kind of think about it as three phases. So like phase one was always like, I need to make sure I can retire comfortably at retirement age. So 67, 65. And so that is what I do with my IRAs, index funds, HSAs, like all of the Mindy and Scott world of money. And so all the traditional investing that I do really heavily from the day job is kind of phase one, like I'm not going to eat cat food in retirement. Yay. Yeah. I think everyone shares that goal. And so the second goal was how do you retire faster at 55? And there's a rule of 55 for the super nerds out there. And so how do I get there? And how do you bridge the years between retirement, traditional retirement age, and when you retire early at 55? And so real estate is my bridge. Cool. Do you have a goal? I mean, now we're getting into the nerdy stuff. I know. We'll probably go there. It's inevitable. Yeah. Have you backed into some cashflow number or equity value number of your portfolio that you're aiming for? So this is the, you keep moving the carrot further down the road problem. So my original fire number was $3 million. I think if I reworked it today, because I'm a high maintenance, it would be 4 million. So essentially I'm on track right now from just the stocks 401k portfolio to retirement age. So 65 with $3 million. And actually I got there where like I could retire at 55 and withdraw. So I'm on track of $3 million by 55 and just retirement, not counting real estate right now. And then I decided to double that number. And now I'm like, let's aim for 6 million because I kind of already got there, but I didn't want to stop investing in real estate. And so I decided, because you don't know which market is going to have a fallout or what's going to happen. So I'm like, let's do 3 million in both buckets, which sounds excessive, but I'm like, I want to be good on the stock side and the real estate side. I want to get both at the age of 55 to be at 6 million so I can retire and I know I'll be okay. I like that. You're a big hedger like me. I love the hedge approach. So that's my really overly zealous hedge plan. Well, let me, let's, I mean, this is not where I thought the conversation was going, but now I want to go down this conversation because this is fun. And I think it's super valuable to people because so many people get into real estate and they just acquire units and pursue different strategies, but don't have like a goal, which is crazy to say, but of course people have a goal like, oh, I want to retire or I want to retire early, but it lacks specificity. And if you don't have that level of detail, it's really hard to reverse engineer a portfolio if you don't know what you're trying to get to at the end. So can you tell me like, where'd you come up with those numbers? And then maybe tell us how you use that information, knowing this goal to sort of like steer some of your real estate investing decisions. First, I did it the traditional way with like the FIRE calculators. So Mr. Money Mustache and all the FIRE gurus, and like they all have these FIRE calculators. And so I worked backwards from, I would like $120,000 a year. You work that forwards, that's about the 3 million number. So once you have that goal, like does that inform your buy box, like what you're buying today? Because there's so many different options in real estate and it can be overwhelming. Has creating this goal long-term and having what seems like a pretty clear vision of what you're trying to accomplish helped you narrow down your buy box, your strategies and all that? Probably the big thing I figured out was you have to have active income and something that builds wealth. And for a while I thought real estate would be like my active income, like I'm gonna retire off my rental properties because I love cashflow. And then I quickly realized it's really, really hard to make enough cashflow on real estate because furnaces break, houses need roofs. I don't want a slumlord. I want my house to be maintained. Maintaining houses is really expensive and interest rates went up. And so there was a lot of pivots that had to happen to kind of build things out. And I learned cashflow is, you need to have it, but it's not gonna build your wealth. Like the wealth is, you've essentially built a miniature business that you can sell off and have money at the end. And tenants will pay down your mortgages so you end up with equity that you didn't have to create and then you sell it or do whatever at that point. You can kind of decide, but in theory it is sellable at that point, potentially as a portfolio. Let's get down to what you're actually doing in the real estate world today. What are the kinds of deals you're looking for in this new higher interest rate environment? So about three years ago, I pivoted from long-term rentals. So I still have my long-term rental housing portfolio. I love long-term rentals. I love side-by-side duplexes. They make me very happy, but it's really, really hard to make any amount of cashflow at a 7% or above interest rate. And so I pivoted into the world of Airbnb, which is fantastic. I also learned there's a lot of tax strategy around that. So I still have a full-time day job in W-2. And so I figured out we can get super nerdy and go into short-term rental loophole and all of that stuff. But I learned that Airbnb is a way I can save myself money on taxes because I don't think anyone loves sending thousands of dollars to the federal government every year. And so it got really depressing to see a $30,000, $40,000 tax bill and how much money you put towards that. Because you're not a real estate professional, right? You don't have rep status. Yeah, my degree's in genetics. I'm a super nerd by day. What do you do full-time? I shouldn't ask you this. So I'm a medical science liaison, which is a really fancy word for I work in corporate America and I'm like a fancy educator. It sounds cool. It does sound cool. And you're still doing that? Yeah, I still do that today. Okay, so just so everyone knows, real estate always has some tax benefits, but if you are a quote-unquote real estate professional, which has its own definitions, you can look it up, but it's basically gotta be your full-time job is an easy way to understand it. And you have to participate in every deal. You get a whole slew of even better tax benefits that are amazing. So the reason I was asking Sarah is because she works full-time, she doesn't get the supercharged tax benefits. There are still many tax benefits, which I get the sense you're about to tell us about, but it's super easy to get maximized tax strategy if you're a real estate professional. So what were the tax benefits you were attracted to as a short-term rental operator? So I think the transition to short-term rental came from I need more cashflow and also I can save money on taxes. This is like a win-win. And so really went after it for the interest rates and then also started learning about the short-term rental loophole. So as a W-2 worker with a full-time job that I work well over 50% of the time in, I found out that you can do short-term rentals. So you have to manage, so there's two qualifications. You have to manage them. They have to be rented seven days or less. And then you also have to have material participation in that property to count it as active income. So I couldn't buy a short-term rental and just have it managed. I actually had to work on the rentals. So I went back to painting stuff and doing all sorts of fun things. And it's all within the calendar year. So what I started doing was picking up a house in late Q3, sometime in Q4, and it was self-managed until the end of the year to qualify and then switch it over to a property manager at the end, like in the next calendar year, and do the same thing again. And so this will be my third year of buying a house and self-managing one specific house in order to use that for tax advantages. I love that approach. So you live in Indiana, but do you live in a market that has strong demand for short-term rentals? Surprisingly, yes, which everyone's shocked by because I don't live in Indianapolis that actually has pretty good demand and is pretty competitive for short-term rentals. I live in Fort Wayne, Indiana, which is north of that. It's the second largest city. Great market, though. Amazing market. Now we're on the list of markets to invest in. So we'll see. Yeah, I made that list. You're the reason people are coming to Fort Wayne. Sorry. Or you're welcome. I don't know what you're looking at. I'm fine. So now I do property management, so send them all my way. Okay. And you're still able to do that working full-time. You're still able to manage the short-term rental. Yeah. Is that just systems person, that kind of thing? So I pretty much have a team for all the parts of an Airbnb business, and I keep adding additional team members because I can't manage it myself, but I can develop a team to do it. And I had property managers for probably about three years where I would manage my one tax house a year, but I would throw everything else at someone else that I didn't want to do. But my reviews were slipping. My house has kind of had some deferred maintenance going on. And finally I was like, uncle, I guess I'm going to build out my own company because I don't like where this is headed. Nice. Good for you. So how many do you have at this point? So I have 10 long-term rentals and eight short-term rentals. No, I have seven. I just sold one. And then I managed three for other people. And is that the plan to just keep doing, sort of staying on this trajectory indefinitely? So actually last year I was able to pick up a long-term rental side-by-side duplex that was brought to me off market, but those deals just don't come up every year. And so the fact that you could like make that, so that one got my parents, my mom off the bench. Oh, okay. Purchase a house with me again. So just last year we bought a house together. Can I just ask, like, what about that deal stood out? Because I invest in small multifamily. It's my favorite personal asset class as well. They've been harder to find over the last few years, but I personally think in the last couple of months they're starting to get a little bit more frequent. But what about that? Like, was it just cash on cash return numbers? Or like, was there some criteria that it hit that hadn't been hitting for a while before that? So a realtor reached out and was like, hey, like me and my business partner are breaking up. I'm like, I've been through a business partnership, you know, breakup before. I feel you. And he's like, I don't want to, you know, list it and have everything like blasted on the internet because realtors, like, reputation matters in a small town. And so he's like, could you close this fast? And I'm like, I will try my best, my friend. And it was just a really good offer that they, I was in the right place at the right time and was able to close it quickly. And so it was 160,000. It needed a new roof, which I put on like the next day after buying it. And I knew both sides would rent for about $1,000. And so it was just a home run deal. Yeah. So like 1% kind of rule, even after you put in the- Above a 1% rule, I've rented each side for $1,100. So. Oh, amazing. Yeah. That's awesome. And it was very cosmetic in terms of updates. So you were saying, sort of be opportunistic about long-term rentals. Yeah, if I can find them, but otherwise I'm really bad at deal finding. So I rely on friends bringing me stuff or just finding some houses that I know can make at least 30K a year gross, which I know doesn't sound very exciting to other people, but it's like in my backyard. So it can gross 30K a year based on like the zip code they're in. We're buying houses under 200,000. Like maybe, like I think my most expensive house was like 220. And so it sounds like you're on track. So 55, you're going to have everything done? That's what the calculators say, but I'm pessimistic. Why? It sounds like you're doing great. Yeah. I just have a personally hard time with stopping because in theory, I don't need to buy any more properties. I did talk a long time with Mindy Jensen and she's fantastic. And she said, have you gone through your portfolio and look to see, do you like all the properties you own? And so I actually ended up selling off a couple that had some like big CapEx items coming and I've bought better assets now because I'm like, if I would go back in time, would I buy my first house in Fort Wayne ever? Would I buy that deal again? And the answer would have been no. And so I'm selling one in two weeks. Hopefully we close and knock on wood, we make it through closing. Nice. And some other brand new investors building their portfolio with what's a really good house. But I really like the single family houses for the Airbnb potential. And I'm a weird person that's like, I don't really do multifamily. I like the hospitality piece and it's easier to do. To your point, getting started in scaling, like you need to focus on building equity and trying to hustle your way into these things and you get to a point in your career where you are more about finding the things that you feel are sustainable for you. Like at a certain point you need to hustle and that's fine. But now, you know, I do this too, I sell property because I'm like, yeah, maybe it gets 12% instead of a 10% cash on cash return, but I'll take the 10% because it's less work. And like, that's okay because I've done like the growth hustle part of my career. I'm not saying everyone should do this, but sometimes people even start this way. I think it's a totally reasonable thing about real estate is just like finding the properties that are gonna allow you to stay in the game. Because that's really the key is just staying in the game a long time. And if these places are earning great return, but they're gonna burn you out, it's just not worth it. Yeah, and you were talking about buy box and I'm like, my buy box now is so different than it once was. I'm trying to get rid of everything that isn't that and buy assets that fit our model. And I know we can do a really good job with location really matters for the short-term rentals to get your reviews up. It's hard enough to make people happy, let alone have a bad neighborhood or a bad neighbor. Neighbors will make or break your Airbnb life. And so pruning a few has really helped too. All right, well, thank you so much for joining us, Sarah. This was a really fun conversation. Appreciate you sharing your story and your philosophy about investing with us here today. Yeah, thanks so much for having me. This is super fun. Sorry, we went down a nerdy track, but it's always fun. No, that is the whole point. I think our audience not just wants to hear about deals, but I think the philosophy and approach to real estate investing really does matter. And your perspective about sort of working backwards and starting with a retirement goal in mind, I think is a really important lesson that a lot of people listening to this podcast should heed because I'm a big on that too. I think figuring out where you wanna go and working backwards is gonna make every decision that you make in your investing career a little bit easier. Yeah. All right, that's it for our show today. Thank you all so much for listening to this episode of the BiggerPockets podcast. I'll see you next time.