A Slow, Boring, & Awesome Strategy for Building Wealth Through Passive Real Estate

I want to apologize.

You see, BiggerPockets has a LOT of information. Like, more than you could ever hope to read in your lifetime, and that’s growing every day. Now, while that seems like a great thing (and it is) it does have a negative: shiny object syndrome. And I’m part of the problem, with my blog posts, podcast contributions, and forum posts.

Sorry.

But I know the same thing happens to me. I hear a Podcast guest chatting about their strategy for doing this or that and suddenly I’m intrigued and want to do it also. From flipping to wholesaling to turn key rentals to direct mail and more, I just love learning these new strategies. I love the hustle that these real estate investors have and their commitment to building a big business through real estate.

It’s SO exciting, isn’t it?

But what about those strategies that no one talks about? The not-so-exciting ones? The old-fashioned, simple buy and hold real estate for building wealth?

Ready to invest in rental property? BiggerPockets’s guide to the buy and hold strategy will teach you how to analyze rental markets, budget for your investment, choose the best property, and finance your purchase. Ready to start investing in rental property? Here’s how.

That’s what I want to focus on today: simplicity. What would happen if you just invested in real estate, simply?

Well, let’s find out!

Below I’m going to walk you through a fairly basic strategy for building wealth through real estate using the fictitious example of Howard and Jane Johnson, both 33 years old. Let’s follow The Johnsons on their journey.

(P.S… Are you on Twitter? Why not click here to Tweet this article and let your followers know about it!)

The Strategy

First, let’s lay out some basic principles of The Johnson’s life, so we can get a base line for getting started. Perhaps the numbers are different in your area, but don’t use this as an excuse for why “this strategy won’t work for me.” You don’t know what will work until you start playing with the numbers! But let’s see how they work out for Howard and Jane, and then you can do the math for your area to see how it looks.

Let me introduce you to Howard and Jane.

Howard is a high school science teacher, currently making $55,000 per year while his wife Jane works part time selling items on eBay for another $12,000 per year (while working the world’s hardest job- raising 3 beautiful children at home) for a total annual income of $67,000 per year. After taxes, the two clear $4,000 per month in take home pay from both sources of income. They have approximately $25,000 in savings, in a Roth-IRA. They currently own their own home and pay $1,000 per month for their mortgage payment and are able to save roughly $1,000 per month by living below their means.

The Johnsons begin to listen to the BiggerPockets Podcast and realize they need to do more to secure their financial future, rather than simply relying on Howard’s small future pension. They decide real estate investing will become their path to financial freedom.

Howard and Jane decide that they want to own rental properties, but they do not want to manage the properties themselves. They decide to begin with buying nice properties that need a small amount of cleaning to get rent ready, but no major rehabs. They simply want to buy properties and hold onto them to gain an early retirement.

The Beginning:

The Johnsons find their first rental property located a few hours from their home. The property is a side-by-side duplex on the market for $120,000, but because it needs a little bit of work, they offer $110,000 with the seller paying closing costs. They put down 20% on the purchase, (leaving a few thousand left for reserves) Each unit rents for $800 per month, for a total monthly income of $1600.

The Johnson’s run the numbers through the BiggerPockets Rental Property Calculator and discover the following: (click the image to see the full report.)

Notice above in the red, the Johnsons can expect to receive around $456 in cash flow each month, after accounting for utilities, property management, repairs, capex, and all other repairs. The find a great property manager and within a month, they have the place up and running, building cash flow and climbing in value.

Rather than spending the cash flow to live, the Johnsons decide to save all the cash flow and use it to buy the next property…

Year One and Year Two

After 24 months of renting the duplex out (all of year one and all of year two), Howard and Jane have saved up $10,958 from their rental and have now saved another $12000 from their personal savings for a grand total of $22,958. They are ready to purchase again.

Year Three

Howard and Jane decide to take their finances and make another purchase. For simplicity sake, let’s assume they buy the exact same deal as before, with the same numbers. (In reality, it could be something different, but it’s the numbers that matter. Perhaps it was a 4 plex, or a single family. Who cares. It’s the math that counts!)

The Johnson’s purchase the second duplex and are now able to save $912 per month in cash flow from the 2 properties and $1000 per month from their jobs, for a total of $1912 per month. Over the next 12 months they are able to save a total of $22,944 in combined cash flow and savings from their jobs. At the end of year three, they are ready to purchase again.

Year Four

Again, for simplicity sake, let’s assume they buy the same property again. Why change the formula when it’s working?

The Johnson’s purchase the third duplex and are now able to save $1368 per month in cash flow from the 2 properties and $1000 per month from their jobs, for a total of $2368 per month. Over the next 12 months they are able to save a total of $28,416 in combined cash flow and savings from their jobs.

Year Five

This time, for the heck of it, let’s say they take a year off and just save all the cash flow they receive and all the savings from their job. Another $28,416 this year as well, leaving them with $56,832 at the end of year five. It’s time to purchase another property. This time, they decide to go a little bigger.

Year Six

At the beginning of year six, thew Johnsons decide to keep $6,832 for reserves and use the $50,000 remaining to purchase a nice four-plex, currently listed at $200,000, a few hours from their home. Each unit will rent for $800 per month.

Using the BiggerPockets Rental Property Calculator, we can estimate that the property will produce approximately $1,034 per month in cash flow (click the picture below to see the full report.)

Just to recap: At the end of of year six, The Johnsons now have 3 duplexes, each producing $456 per month in cash flow, and now a fourplex, producing $1034 per month. They are also still saving $1,000 per month from their personal jobs for a grand total of $3402 per month or $40,824 by the end of the year of year six.

Year Seven

The Johnsons decide to not purchase anything in year seven, but just save more cash. They are able to save another $40,824 to add to the $40,824 they saved during year six.

Year Eight

By the beginning of year eight, they now have $81,648 saved. And you guessed it, they decide to invest in another property. This time, they decide to purchase another fourplex with the same numbers as earlier AND another duplex with the same numbers as earlier. This requires a little under $75,000 in down payments, leaving them a little extra for reserves.

After the two purchases are made at the beginning of year 8, the Johnsons now have 4 duplexes and two fourplexes, bringing in a total monthly cash flow of $3892. Combine that with the $1,000 per month they are saving from their jobs and the Johnsons now have just over $5,000 per month adding to their savings or $60,000 per year.

Year Nine

At the beginning of year nine, The Johnsons decide to buy one more fourplex, using the same numbers as earlier. They put approximately $50,000 into the deal, leaving them a little extra for more reserves. At this point they now have 4 duplexes and three fourplexes, plus the $1,000 per month for a grand total of $4,926 per month in cash flow. They are still saving $1,000 from their jobs, leaving them $5,926 each month to save, or $71,112 per year.

Year Ten

At the beginning of year nine, The Johnsons decide to buy one more fourplex, using the same numbers as earlier. They put approximately $50,000 into the deal, leaving them a little over $20,000 for more reserves. At this point they now have 4 duplexes and four fourplexes, plus the $1,000 per month for a grand total of $5,960 per month in cash flow. They are still saving $1,000 from their jobs, leaving them $7,160 each month to save, or $84,192 per year.

Now What?

At the end of year ten, The Johnsons take a look at their portfolio and see the following:

Total Units: 24
Total Monthly Cash Flow: $5960
Total Mortgages: $925,689
Total Value: (assuming no appreciation) $1,280,000
Total Equity (assuming NO appreciation or decline or loan pay off) $354,311

At this point they have a decision to make: should we keep moving forward with this same strategy, or work to pay off the loans?

The Johnsons decide to start paying off the properties, using the “Debt Snowball” method advocated by financial expert Dave Ramsey. This means they will make the minimum payments on all their loans except the smallest balance, and throw everything they can at it until it’s paid off. Then they’ll use the extra money to pay off the next smallest debt and the next smallest debt, and so on until it’s all paid off.

Also, they decide to stop saving the $1,000 per month from their jobs so Jane can quit her eBay business, but will only use the cash flow to pay off the properties.

While the calculations for this would take some time, luckily Dave Ramsey offers a free-to-use “Debt Snowball Calculator” so we can simply plug in the numbers and see how they work out. This is how it looks, for Howard and Jane, at the end of year 10:

When I went through and applied an extra $6000 payment per month toward the first debt, followed by the next, followed by the next (and so on) I was able to see exactly how long until ALL the debt was paid off:

9 years.

(actually, 8 years, 7 months, but who’s counting!)

Additionally (as pointed out in the comments below from Lucas, because I forgot!) the couple no longer needs to make mortgage payments. They were paying $472 per month for a mortgage on each of the four duplexes and $859 per month for each of the fourplexes. Therefore, at year twenty, the couple would have $5324 MORE each month in positive cash flow, bringing their total monthly cash flow to $11,284 per month or $135,408 per year (again, assuming no increase in rent over those twenty years!)

Year 20

We started this journey with Howard and Jane when they were just 33 years old. Now, 20 years after starting their journey, they own all their rental properties free and clear. Assuming NO appreciation, whatsoever, the Johnsons now own $1,280,000 worth of real estate that produces $11,284 per month in income at 53 years old.

Now, you may be thinking to yourself “you know, $11,284 per month in income doesn’t seem that great for 20 years of work.”

However, keep a few things in mind:

This accounts for ZERO appreciation. We’ll touch on this in a moment.
This doesn’t take into account the rise in rents over the years. However, my assumption in this example was that inflation will rise at the same rate as rent, so eliminating both kept things simple.
This strategy required just 8 purchases over a 20 year time frame, all with property management in place. This is not a time-intensive process- this is passive!
With the “free and clear” properties, The Johnsons could now sell them with seller financing to increase their cash flow significantly.

The Icing on the Cake: Appreciation

I like to look at appreciation as something special that gets added later – like icing on a cake. I never buy a deal hoping appreciation will bail me out, but it doesn’t mean I don’t hope for it. For this reason, I want to look at the numbers, accounting for appreciation. To do this, we’re going to use the BiggerPockets Rental Property Calculator again. For the calculations, I assumed a 3% average increase in income and a 3% increase in property values, with a 2% increase in expenses (I chose 2% for expenses because the mortgage amount would never increase, so I could do a little less.)

At the bottom of the results page of the calculations, there are some graphs and charts. Using these, I can see that in year twenty, the properties will be worth the following:

Duplex 1: $217k
Duplex 2: $204k
Duplex 3: $198k
Duplex 4: $171k
Fourplex 1: $200
Fourplex 2: $206k
Fourplex 3: $218k
Fourplex 4: $231k
Total: $1,645,000

In other words, if we are able to achieve a 3%, on average, appreciation over the coming 20 years, The Johnsons could expect to have a net worth of $1,645,000 from their real estate because of the 8 properties they bought years earlier.

Conclusion

This strategy required no direct mail work for The Johnsons.

It required no driving for dollars.

It required no middle of the night phone calls from tenants.

It required no motivated seller phone calls, no house flipping, no “day in day out” dealing with contractors.

This plan was … boring.

However, the math doesn’t lie. Sometimes boring can be incredibly sexy, and this strategy demonstrates the incredible power of real estate over the long term. Wealth can be built through real estate investing on the side if you just make a plan and stick to it. I hope this post has given you a few new insights into how to use real estate to grow your portfolio. Just remember one final tip: this was all possible because Howard and Jane shopped for a great rental property. They learned how to properly find and analyze an investment deal rather than just buying anything. And that’s the secret to success with real estate: being smarter than the average investor. And that’s what BiggerPockets is here for: to help you become a better investor.

So jump into the community and start networking, talking, debating, asking questions, and analyzing deals. Become the better investor and see your personal wealth grow.

Questions? Comments? Let me know in the comment section below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.