How much potential does real estate really have?

Question

Hey BP Forums,

First timer here and was just wondering how much potential does real estate really have? More specifically, I'm wondering how long it would take to get your passive income to be roughly $100,000 a year if you start out with $50,000 for multi-family homes in the mid-west. I'd plan on investing a base of $50,000 every year plus the additional income that the properties would generate yearly.

Also, anybody have any tips to be as efficient and quick as possible when building your portfolio?

Thanks,

Thomas

Roshan K. · Answer

Assuming you are following the 1% rule, and you are putting down 20% for down payment this just becomes a math problem. Let's also assume you are getting 10% cash on cash on your investments.

50,000 down means 250,000 invested. 250,000 invested means 2,500 a month in gross rents.

At 10% CoC, you are getting $5000 a year in income.

Through the magic of fractions, multiplication and math, we can now find out that you must invest 1,000,000 to reach your goal of 100,000 in passive income.

The process to investing 1,000,000 is much easier if you use the profits from the previous investment added to your 50K to invest yearly.

For example:

Yr 1: $50,000 invested                                                                    Total: $50,000

Yr 2: $55,000 invested ($5000 from profits last year)               Total: $105,000

Yr 3: $60,500 invested ($10,500 from profits last year)            Total: $161,000

Yr 4: $66,100 invested                                                                    Total: $227,100

Yr 5: $72,900 invested (let's add $200 more to make it easy) Total: $300,000

Yr 6: $80,000 invested                                                                    Total: $380,000

Yr 7: $88,000 invested                                                                    Total: $468,000

Yr 8: $97,000 invested                                                                    Total: $565,000

Yr 9: $107,000 invested                                                                  Total: $672,000

Yr 10: $117,000 invested                                                                Total: $789,000

Yr 11: $129,000 invested                                                                Total: $918,000

Yr 12: $142,000 invested                                                                Total: $1,060,000

Yr 13: $0 invested                       10% CoC returns annually : $106,000

In this model, it will take 12 years of reinvesting all your profits and 50K a year to get to $106,000 annual passive income.

You can accelerate this by taking advantage of tax benefits, BRRR strategies, and living below your means to invest more money. The more you invest, the faster you will reach your goals. Also getting better than 10% CoC will also help your goals.

Hope this helps!

Sam Shueh · Answer

In the more desirable part of US like coastal regions, homes here have appreciated 2-2.5X last 5 years from the trough to nearly peak. Never had a positive cashflow case with 20% down. So investors need to run negative flow for several years.  For multi-family the appreciation upside is about 75% of SFH.  As for income there is rent control, vacancy and recession to deal with, to generate a 6 figure income -mortgage and other expenses it will still take 12-15 years assuming you buy at the bottom with 25% down.  The cap rate here is like 2-3% for MF people often buyers pay cash and collect rent to supplement their retirement income with perhaps 70-80K income for duplex and more for duplex. Most bet on higher home valuations or equity which is solid compared to others parts of the US.  Anyone wanting >10% return that is hassle free should invest in notes.

Joe Villeneuve · Answer

...and when you start using words and phrases like, "...I'm not looking for anything too specific..." or "...guesses...", you define yourself as a speculator...not an investor...and you lose me.

Those phrases rank right up there in my "wasting time" wheel as using the 1%, 2%, 5%, 50%, ...(did I miss any?)...rules. Basing any decision I make, or any direction I take, on guesses or bad analysis (see rules), is a complete waste of my time...and my time is more valuable than money since I can always get my money back...time, not so much.

Joe Villeneuve · Answer

Then Maybe.  It depends on how much of an impact CAPEX has on the overall income.  In my experience (1st, 2nd, etc....hand, which is why I don't invest in multifamily, is you really need to have your income (cash flow) equal to at least 150% of what you need per year to make sure that on any (?) given year you at least reach your minimum needs.

Alina Trigub · Answer

@Thomas Weber The answer is: it depends. You need to come up with a long term plan of how much money you want to make passively and in how many years. Then break it down into smaller time chunks, and then go even more granular.  Also, I believe one has to constantly work on improving oneself. You have to work on one strategy until you master it and it works on autopilot (more or less) for you. Once you get to that level, then add another strategy to your business and work on it until you excel in it as well. And so on.

Best!

Thomas Weber · Answer

@Joe Villeneuve I'm not looking for anything too specific, some information or guesses based on personal experiences would be excellent

Joe Villeneuve · Answer

Hard to answer if you're investing in multi since multi is one of the most volatile REI you can use.

John Warren · Answer

@Thomas Weber I think the simple answer is that it depends on how good of a return you are getting from your portfolio. When I was starting out with my first few purchases in the Berwyn area, I was shooting for 15% COC returns. This has been harder to achieve over the recent years (obviously!), so I am more inclined to shoot for 10% COC at this point. Doing some quick math, in your scenario you should be able to achieve your goal in around 5 to 6 years. This is assuming you are using leverage, buying good deals that allow you to BRRR, etc.

How much potential does real estate really have?

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