How does small positive cashflow turn into real money?

[Tim W.]

So I have been reading and reading about REI and wanting to get into it. Read ABC of Real Estate Investing and now on Cashflow Quadrant, to be followed by BP's UGB. From all the podcasts and all the reading I have done here, I just dont see how people are truly cashing in as small to mid size REIs.

$100/door would put me at 30 units a month just to cover my bills. Im assuming appreciation and cashout can help with some but then you just owe more money and have higher NOI on that property. You can offset that with more properties generating $100-200 cashflow but it seems cyclical. Long term (once your investments are paid off) there is large money to be made but until then...what is everyone doing?

I have a lot (2.5acres) in the DFW area of TX that I bought foreclosed for $90k. I think I can sell it in the $300-350k range. I have had multiple letters wanting to buy but Im not sure if I should cash in now and start with landlording. Honestly would rather get into commercial properties ($1M or so) with NNN and not have to deal with small stuff. Not sure if that would happen or not.

So where does the "now Im making more and Im going to quit my full time job" money come from?

[Mike H.]

I would add to some of the previous advice that the key is to target homes that cash flow more than $100/mo. That seems very tight to me. I have a total of 39 homes right now and am closing on #40 this friday and #41 in another 2 weeks. 

For all 41, my gross profit (Rent minus PITI) is $450/mo. If you figure 200/mo for vacancy, repairs and capex, you're at 250/mo net or even at 250/mo for the above, 200/mo net profit.

And every penny of that is tax free. So even at 200/mo, I'll be at 8k a month in my pocket. No taxes. Thats like making 120k/a year if you were to equate that with someone with a regular job (which I have one of those too).

And I actually have another buddy that is doing this and he's got an average of 600/mo gross profit. He's putting more money into his deals than I am (I'm putting very little if anything on some).  But thats how you get to that safety number where you don't care if your company lets you go or not.  You no longer have to worry about losing your house if you lose your job.... And then you'd be surprised how much more you enjoy your day job without having that fear.

One other thing I'd mention though. You don't necessarily have to wait  20 years before you see a boost in your net income.

Keep in mind that rents are going up and property taxes are staying relatively flat. So you should be getting more income per house every 2 years or so. Even at $25/mo increase in rent per house, that adds up when you have 10 or 20 houses. 

And in, say 10 years, you can always refi your remaining balance into another 20 year loan and reduce your payments that way as well.

Lets say you buy a house and your mortgage is 100k as a 20yr loan at 5% - which is pretty typical for my local banks these days. And lets say you're making 200/mo with the payments of 649/mo. In 10 years, you will owe roughly 61k. Now lets say you turnaround and refi that at 6% as a 20 year amortization again. Your new payments would be $437

Thats a boost of 210/mo right there. Multiply that by 20 homes and you're talking about a raise of 4k a month!  In 10 years......

So you can see that, yes, it may be tough to quit your job today based on 20 or 30 homes if you're only making 100/door or 200/door. But the true wealth building opportunity is in the buy and hold.

If you owned 30 homes and made 100/mo today. Then refi'd all 30 in 10 years and started the amort clock back at 20 yrs again, you'd be going from 3k a month net income to 9k a month net income.

And thats not including any rental increases that occurred during that time period either. Another 100 to 150 in additional net income from those? And now you're looking at 12k to 14k in net income from those same 30 homes.

So my advice would be not to think of real estate investing as a way to set yourself up for today. I view it as a way to set myself up for a phenominal way to built real wealth over time. And a way that will easily provide me with a lifestyle that I could have never achieved any other way.......

Heck. Even if you were to buy 3 or 4 houses, those 3 or 4 homes could truly change the type of lifestyle you can lead both now (the added rental income) and in the future (as those things really kick off cash flow).

Yet another beautiful thing about real estate. It pays you today. And it pays you even MORE tomorrow. :-)