Goal Setting Basics

[Josh R.]

Im a goal setting novice.

When starting out in real estate investing how have some of you successful investors out there broken down your goals, especially when starting out.

I am trying to gain traction in my personal investment plan but I am having difficulty putting it into written form with a personal action plan to achieve weekly, monthly, and yearly goals that I have.

Any suggestions or examples of how you guys started doing this?

[Jon Holdman]

OK, so you have a couple of overall goals. Now you need to make smaller goals to get you there.

You're looking for a specific amount of income. With rentals, as with most investments, returns are produced by investment. That's why the call it ROI. Now, I'm not sure what sort of deals you can find in your area. So, let me just guess that you can find good enough deals to produce 10% ROI. In real estate, that's often called "cash on cash return", which is simply how much cash do you make for the cash you have invested.

For example (again, pulling numbers out of the air) say you could buy a house for $100,000 that needed $10,000 in fixup and would rent for $1,300. If you put down 25% and get a 4% 30 year loan, your P&I would be $358. Now apply the 50% rule to the $1300 in rent and you have $650 in NOI. Subtract the payment and you're left with $292 a month, $3,500 a year, in cash flow. You have a total of $35,000 invested, so that's a 10% cash on cash return.

If you want $3000 a month, you need about 10 such properties. And with those loan terms, you'll need $350K of your own cash to invest.

If you self manage, you can collect the PM's portion of the rent. That would get you closer to $487 a month, $5843 a year, in cash flow. So, six properties would get you close to your $3000 a month goal. And would require only $210K.

Now, you're not going to get loan after loan at those terms. At some point, you're looking at commercial loans. The rate might be a little higher, but the real problem is that they're going to have a shorter term. If I redo that example assuming a 15 year term and using a PM, my cash flow drops to $95 a month. Now you need 30 such properties and over a million bucks invested!

But once those are paid off, 15 years from now, they're going to net you $650 a month. So you would only need five of those to reach your $3000 goal. So, your plan might be to scrape up $35K at a whack, buy those five and wait until they're paid off.

I know these numbers won't match your situation. But figure out what you can get in your area. Then start putting together deals. Ask yourself what you're willing to do. Self managing will bring in more income, but it is "buying a job." You willing to do that job? Finding subject to or other sort of seller financed deals might make the financing piece easier. But they involve more risk and will take much more work to find. What are you willing to do?

Once you have some ideas about what you could do, start building a time line. For instance, if you want to invest you must be saving some money now. How long does it take to save up enough for the first deal? Now, can you continue saving and roll the income from the first one into the next? How long to get that second one? What about the third? What about the tenth that you have to buy with a commercial loan? When do you hit your goal and stop rolling the income into the next deal and start spending it? If you do that at $3000, how do you get for $10,000?

Start working out the deals and building that timeline and you'll have your plan.