Defer cash flow today in pursuit of FI in 5 years

[Adam R.]

Pursuing a buy and hold strategy of small multis in Rhode Island and SE Massachusetts with a goal of generating $40k annual cash flow in 3-5 years which would get us to our goal of financial independence. I am considering directing all cash flow generated and additional savings from W2 income to accelerate pay down of mortgages to achieve that goal. Looking for thoughts on that conservative approach. Have good credit, w2 income, cash and heloc ready to go. Just hunting for a deal to get started.

[Anthony Thompson]

Adam, a few months back we had a presenter at RIREIG who said that in his experience managing hundreds of units, at the end of the day (net net net all expenses), rentals make about $100/unit/month, and that sounded about right to me.

So using that rule of thumb you'd want to plan on acquiring about 35 units or so - just for planning purposes. And even then, a lot of times "things" happen with real estate (water heaters and boilers go, you have problems with the city or neighbors, etc.) producing un-anticipated expenses, so you might find more is actually needed (e.g., 50).

It's often been said that real estate, especially buy and hold rentals, is a "get rich slowly" strategy. I certainly think it's possible to retire on rental income, but 3-5 years seems aggressive unless you really have a very sizable chunk of cash to start with.

As far as paying down mortgages, for the first few years you'll need to decide whether you want to prioritize buying more buildings/units (greater leverage) or building equity by paying down mortgages.

If your goal is to reach a certain # of units, you may want to lean toward greater leverage until you reach that number - as long as you do so safely of course (say, no more than 75% loan to value on each property - otherwise you risk having mortgage payments that are so high you risk losing properties if the rental market turns against you in the future).

Also remember that unlike credit cards, mortgage payments don't automatically lower just because you pay down the loan balance. You'd need to refinance to actually change the payment amount - and it's possible that when you refinance, rates will be higher than they are today which will make getting a lower payment amount more challenging.

(It's also possible, of course, that the property value may have increased, allowing you to possibly pull money out which you can then use toward acquiring other properties. I think that's wonderful when it happens, but I never want to assume appreciation because that's one way to get in trouble in real estate, as many did in 2004-2006.)

Again, I certainly think it's possible to retire on rental income, but it's a grind, working up to the required number of units, and you'll need to learn some lessons along the way (many the hard way) to reach that level of sophistication. Real estate is a good investment, but it's also a complicated one compared to, say, treasuries or dividend yielding stocks.

That said, "a journey of a thousand miles begins with a single step", so I do wish you luck on your first deal. Let us know as you have questions along the way, of course :)