High income earner seeking to quit his day job- What to invest in

[Vincent Meoli]

Hi all-

Let me start out by saying I've been following this site for a little while now and I love the insight that you all provide.  This really is a fantastic resource.

About me-

I've been blessed with great parents who provided me a great education and now I earn well into the 6 figures. Unfortunately it is all W2 income. I also live in the lovely state of Taxachusetts where a tiny run-down shack can sell for $600,000. I currently own 2 rental properties, each cash flow about $200/month. I was considering a third purchase- out of state turnkey property, short term vacation rental, SFH, codo, etc then I started doing some thinking...

My ultimate goal is to own enough property within the next 5 years to supplement my income and cut back substantially.  I'd like to see real estate completely replace my income within the next 10 years.  I'll probably never stop working because it's not in my nature but like most people, I'd prefer to work because I want to, not because I have to.  That said, I find it almost impossible to meet these goals with my current plan on picking off these properties that are cash-flowing between $200-$500 a month.  

So, my question to the group is, where do I put my money?  What kind of investment portfolio do you think would help me replace my income?  Do you think my timeline is realistic? Any help is greatly appreciated.

[Ian Ippolito]

@Vincent Meoli , I live completely off my investment income and I own both single-family rentals directly myself, and commercial real estate (including multifamily/apartments) through passive syndications/crowdfunding. In my opinion, both have their pluses and minuses, neither is 100% superior to the other, and I think a prudent investor has both in a well balanced portfolio (in addition to public stock market holdings as well).

My single-family rentals are my bread-and-butter and make up the core of my real estate portfolio. I'm currently netting about 9% on them (income only and not including price appreciation), but I had the advantage of purchasing them a couple years ago in Tampa, which was good timing in an excellent market (and also had a good year last year with very few capital expenditures and repairs. That won't happen every year.). It can be difficult to get this kind of yield today in many markets. You didn't say how much you purchased your rentals for, but I suspect it is impossible to get that kind of yield where you live. So I would recommend taking a look at other markets. For example, you can use a company called Roofstock that lets you choose from hundreds of properties that are already rented across the country. They source from private equity firms, so theoretically the quality should be a bit higher than what a typical turnkey provider might get (although it's important to do your due diligence).

You can also go the return key provider in another state. Of course the question here is how do you trust the provider? In managing my own properties, I've seen numerous times where I could've taken shortcuts that would have temporarily saved me money, but in the long term cost a lot more. And there would've been no way for someone to tell the difference if I was a turnkey provider and simply sold them the property. So that's why I simply can't use one. But I'm also more conservative the many investors and others will go to a turnkey provider. Some people will check references, etc. to get a comfort level with them. It all depends on your level of risk tolerance.

Another option is to invest passively via syndication/crowdfunding. As I said above, I think a well balanced portfolio needs to contain this as well as directly owned real estate. The yield here should be higher than your single-family rentals, because you should be able to have access to much cheaper debt, etc. And it is passive so it is much less work. On the downside, you may be taking more risk, depending on what you choose to invest in. More importantly, you have to be able to feel comfortable with the vetting a person to take full control of the investment. Many people can never get that level of comfort, and if that is you, then this option is probably not for you. But if you can, then it also allows you to get into real estate asset classes that most people simply can't afford when buying on their own. Right now I am getting 7 to 8% on my most conservatively underwritten debt funds. I'm getting 10 to 11% on conservative debt construction funds. Equity funds yield anywhere from 6% to 11 or 12%, depending on the strategy and asset class. And then if they are value-added, typically the bulk of the equity return comes when you sell it at the end of the holding period which is on top of the previous return.