Possibility of Financial Independence via Real Estate

[Scott Taylor]

I'm new to investing in real estate (and investing in general).

I've got a small amount of cash piled up, and right now looking to make moves into buying my first property for long term, buy and hold cash flow with leveraged property. This will have to be out of state as I'm in California which is out of my budget.

I've been poking around the forums, but haven't been able to find some spreadsheet / projection of how one can achieve financial independence via real-estate. I'm using financial independence to mean "making back my salary so that I don't have to work".

It looks like the conservative estimates right now are around 7-10% per year cash-on-cash return for a leveraged SFH. How am I going to achieve financial independence any time soon with those rates? I'm not looking for get-rich quick scheme - I know it will take time, but at this rate it looks like it will take over 15 years.

For simplicity's sake, let's say I have $100k to invest. I buy 5 leveraged properties, each for $100k with 20% down and 30 year fixed mortgages. After all is said and done, I make 8% per year, cash on cash return, even with leverage.

With the "rule of 72" it's going to take me about 9 years to double my money.

72 / 8.0 = 9.0.

So now in 9 years I have $200k (a 200% return). Assuming the same rates, it will take me another 9 after that to go from $200k to $400.

Most of the books out there seem to suggest that with leverage you could make about 12% per year, which cuts down the number of years substantially. But of most of the deals I've analyzed, (assuming I'm budgeting for safe 10% maintenance and "regular" rates of tenant vacancy - 5% or 1/20 months), there's no way to achieve those sorts of returns, even with a 80% LTV leveraged position.

So am I missing something? Are rates of return actually much higher? Am I looking in the wrong markets?

[Chris Washington]

@Scott Taylor

I think you may be hitting on something here...while buying SFH is a nice start for a lot of people due to the affordability and simplicity of the asset, you would need a small army of SFH to get you where you want to go financially through straight buy and hold.

My recommendations are as follows:

1. Look at commercial multifamily property (i.e. apartments, mobile home parks, etc). It would take quite a while do get to 100 doors through SFH, but you could close 100 doors in 1 day through an apartment deal!

2. Evaluate different strategies. You may be able to rapidly build cash through a different strategy (i.e. fix-n-flip) for the first couple of years and then go aggressive after cash flow once you've got a bigger piggy bank to work with.

3. Start somewhere! Remember, with the cash flow from investments (as well as the tax benefits), every year you should be able to save/invest more money than the previous year. This should allow you to accelerate the velocity of your money and grow your passive income exponentially.

Hope this helps...best of luck!