How would you get to a yearly cash flow of 150k?

Question

With an initial budget of 250k, and the ability to contribute savings of 30k eash year, how would you generate 150k in 10 years?

Account Closed · Answer

No, about single family homes! Multi-units is where the big money is. There are about 100 advantages for multi-units.

The larger the number of units the better the positive cash flow.

Dollar-for-dollar, multi-units are less expensive that single family homes and dollar-for-dollar you make a much higher  ROI.

One roof to repair, one tax bill, one gardener and one trip to collect the rents.

Multi-unit properties have both present and future income that is unbelievable. In fact, I own several apartment buildings and I love to evict tenants when they look at me cross-eyed because every time I evict a tenant I earn a $36,000 profit.

Here is some simple math and this math is something that does not apply to single homes. These numbers are very doable in California and may not be as much as in other areas, but this is the type of math investors should use when trying to decide whether to buy and hold, of flip, or whether or not to do multi-units.

1) Multi unit buildings always cash flow better when you know how to buy them at the right price.

2. Suppose, you own 50 units in Tennessee that you purchase for $750,000.

Each unit is earning you only $75 per month after paying every expense = $3750 x 12 = $45,000 / year

That is an ROI of approximately 18% because your down payment was only $250k. Not bad and very difficult to with with a single rental home.

But, here is where the huge money is in multi-units and I prefer not to hear from people telling me this is not doable, or bad advice, or whatever because I have been doing this for the past 50 years.

Rental properties are not like homes when doing the math. They are like a liquor store, or a gas station. The more income the business takes in the more it is worth. Apartment buildings are worth about 8 to 15 times their annual gross income and it is called a Gross Multiplier (GM) The number for the GM depends on the quality of the area the building is in. A higher income neighborhood will have a GM of 15 to 18.

Lets assume your building in Memphis is in the ghetto and the GM is 9.

Your current income is 50 x $750 x 12 = $450,000 per year and your building is worth 9 x $450,000 = $4,050,000.

How do you earn thousands of dollars when you evict a tenant? Suppose, your tenant is paying you $750 per month and he (or she) gives you problems. You evict the tenant and raise the rent $100 per month for the next tenant.

You just earned $100 per month x 12 months = $1200 x 9 Gross Multiplier = $10,800 x 10 yrs = $108,000 + your still did not add the $1200 per year extra you are collecting for 10 years = $12,000.

In 10 years you earn a total of $120,000 just by raising the rent for one tenant by $100 per month.

Raise the rent for 50 tenants and you earn $6 million on just one building.

Try doing that with single family homes.

I have Microsoft Access software I developed for purchasing and flipping properties. Anyone, can have it for free, but you will need MS Access 2003 on your computer because I will never make the software self- loading. But this software has a lot of math investors should use before making any type of real estate purchase and you can customize it to do whatever you want it to do.

I love to argue with investors, not because I want to prove that I an right, but because I want to be proved that I am wrong. For example, I was arguing with a mentor as a workshop and he said the best business model for new investors was to buy and hold. Personally, I find the worse advice anyone can give unless the new investor is already a multi-millionaire.

My advice to new investors who are not already multi-millionaires is to have a mindset, goal and business plan to double your investment capital every one to two years. So, if you have $50,000 to invest you need to find the right property at the right price that will reap you a $50,000 profit within 1 to 2 years and this is very possible. Especially, when you purchase a property that is a steal and worth $50,000+ less than the purchase price, or when you buy multi-units, raise the rents and increase the value of the property and the GM.

I call my business model earning 50% to 100% on your money every year and you will never do that in the stock market.

Jim K. · Answer

You could buy a small strip club way out in the boonies for that. The good salty peanut and pretzel mix. Wing night every Thursday. Better money than REI, that's for sure.

Morgan M. · Answer

@Roy Gottesdiener this is more so thinking out loud than a direct answer.  After all, I’m not an expert:

-If I want $150,000 CF per year what does that mean I need in cash/equity?

-If I expect 10% cash on cash I’ll need $1.5MM in 2029

-$30,000 per year X 10 = $300,000

-$300,000+$250,000= $550,000

So your question becomes:

How would you make $250,000 work along side these savings contributions to produce $950,000 in 10 years.

Frank Gallineli points out 4 basic returns in real estate:

-Cash Flow

-Appreciation

-Loan Amortization

-Tax Shelter

If we go back to 10% cash on cash your $250,000 can be earning you $2,500/month or $30,000/year so that gets you 1/3 of the way there.  Now you need to decide what to do in addition to your current portfolio to earn $650,000 in 10 years.  I'm with @Geordy Rostad.  I think the BRRRR method offers the scale you need without having to hit a home run.  I would just add that broadening your approach to maximize the other three basic returns listed above eases the burden on cash flow and it doesn't sound like you have a burning need for additional income right now so that could open opportunities that other investors hyper focused on cash flow would pass on.

Account Closed · Answer

$250k is not a lot of money to start earning $150k per year right away, even for an experience investor. I would look in the Memphis Tennessee area for apartment buildings where units are selling for $15k to $20k per unit. $250k can get a $750,000 building with 37 units that rent for $700 to $800 per unit. 37 x $700 x 12 = $310,000 annual income - expenses. Then, add in rent increases, appreciation. Add your $30k per year and you will be smoothe sailing on Easy Street. You can get property management companies for about 6%. Look for apartment buildings for $15k to $20k on loopnet.com.

Geordy Rostad · Answer

@Roy Gottesdiener

Theoretically the BRRRR strategy should easily be able to achieve this. There are a couple challenges people don't always talk about with BRRRR:

1) Finding the deals in the first place. You might have to look out of state.

2) Double financing. You'll either have to use hard money initially or maybe your cash and then refi it at the ARV.

3) Refinancing. There is a 6 month seasoning period most of the time when you use this strategy.

Do you have home equity you can tap with a HELOC? This will give you even more flexibility and cash to work with.

Joe Villeneuve · Answer

10 years?  That's all?

Starting with $250k in cash, and adding an additional $30k per year?

I just figured it out.  Here are the steps:

1 - Flip the $250k seed money over a 4 month period, sith a return of 10% (so you started with $250k...and 4 months later, you're at $275k.

2 - Repeat step #1, with the additional $25k, same return and time period.

3 - Repeat Step #2, including the profit...same return and time period.

4 - Add the $30k to the total from the flip in Step $3, and invest it all again...same return, same time period.

5 - Repeat steps 1 - 4, 5 times (equals a 6 year period) and you should have a total of around $1.77M (gotta love the power of compounding...)

6 - Take the cash, and buy a NNN('s) for cash, at a 8.5 CAP, and you have just over $150k in cash flow/year.

Joe Villeneuve · Answer

Account Closed

How do you figure one roof to repair?  When you repair a roof on a multi, doesn't that roof actually cover more than one unit?

Isn't the cost of a parking lot more expensive than a driveway?  Size and material?

Aren't the rents typically less per sq ft than that of a SFH in the same area?

Isn't the cost of the money (loan terms) higher for the commercial loan you need for a Multi than for a SFH?

Don't you have to add the cost of the common areas (hallways, larger lawns, more sidewalks, commercial lawn care and snow removal costs, etc...) to the multi that don't exist in a SFH?

Isn't the cost of insurance, taxes, etc...higher on a multi per Sq ft than on a SFH?

When you compare parking options, isn't the comparison of a carport (multi), vs a garage, less attractive to the potential tenant...and more expensive to fix...since you need to repair/replace all the carports that are attached at the same time (roof for example) at a higher cost per sq ft (metal vs asphalt/fiberglass)?

These are just a few of the comparisons I have mulled over when I look at the decision between the two.

Also, you're comparing a great multi with a really bad ($75/unit CF?...really?) SFH...that I wouldn't even consider.  I can do the same thing and reverse the numbers by picking out a great SFH market, and compare it to a bad multi.  If I was only projected to get a CF of $75/month per SFH, I wouldn't be buying in that market...so why use it as a comparison.

Apples to apples.  You're comparing apples that have fallen on the ground and the animals have been at them to ones that are still on the tree above.  Not fair.  Not accurate.

Account Closedundefined

Account Closed · Answer

I am going to stop posting for a few days, or weeks and will not answer any messages or arguments. I am working on my analysis software that will be 100% free and it is going to answer every question about real estate an investor can ask. No! I don't have all the answers. Hopefully, the majority of answers will be through teamwork and cooperation for with the purpose to make investment choices simplerand more risk-free with the ability to do investment calculations on-the-fly.

For an example. Last week, a homeowner called and said he wanted to sell his home, immediately, and move to Texas. I went to his home with my computer's calculations and was going had an Offer To Purchase pre-printed in my hand. My guess is that the home is worth $760,000 and my offer was $500,000. I asked the homeowner what he thought it was worth and he said $600,000. I left his home and went to a fast food restaurant. I opened my table, re-calculated all my numbers at $550,000 and printed a comprehensive breakdown showing my expenses and profit. I printed a new Offer To Purchase at the restaurant, took it to his home, showed him my low profit margin on a neat and organized printer report and closed the deal. Yes! I still buy homes when the numbers make sense because apartment buildings are over-priced, in short supply and I don't always have a million dollars just sitting in an account.

Maybe, I am a strange duck, but I cannot make decisions without going over numbers a hundred times and I think it is impossible to do numbers on paper, or even in excel and be accurate. I have to be able to tweak the numbers a hundred times, print reports and go over the numbers 100 more time because one mistake can cause a loss that puts you backwards for several months, or years.

See you in a week or so.

Account Closed · Answer

Dollar-for-dollar, the expenses for multi-unit buildings are far less for every type of expense.

Roof? Every roof needs to be replaced, or repaired and a roof on a single or multi last the same number of years.

Incidentally, I am a roofing contractor and the prices I am quoting are very low. I have California contractor licenses for 8 construction trade specialties.

Take 28 homes (because I own a 28-unit apt bldg.)  The average sq ft of a single house roof is 3,000 sq ft x $400 per square = $12,000 per home X 28 = $336,000

Take 28 apartment units. Every apartment building is 2 or more stores. Since apartments are much smaller than homes and there size is condensed the square footage of my roof is 12,000 sq ft x $400 = 120 squares x $300 (because it is a flat) = $36,000. Even at $400 per foot the total is only $48,000 compared to $336,000.

Lets look at maintaining water heaters since landlords usually pay the cost for all repairs. The average water heater lasts about 15 years.

The cost to replace a 30-gallon gas water heater is California when using a real licensed plumber (not a handyman) is $1400+. I will use the national average of about $1100.

28 water heaters every 15 years  28 x $1,100 = $30,800Apt building water heaters do not last as long as small residential heaters. I cut the life expectancy in half.A commercial 100-gallon 299,000 btu (apartment building size) water heater costs about $3,500. There are companies that will install them for $600. I will even add $900, insteat and make the total cost $4400.2 x $4400 = only $8,800 compared to $30,800.

Look at property insurance. In California, Idaho and Las Vegas I pay $400 to $550 to insure every home.Lets split the difference and say the average is $475 per house.28 x $75 = $13,300 every year.The cost to insure my 28-unit building is $7,000 per year.

Sure! Apartment buildings have larger driveways and parking lots, but don't forget that every time I make even a small improvement I raise the rents $50, or $100 per month. I replaced the concrete for my entire parking lot about 18 years ago. It was exactly 8,000 sq ft and the cost was $5 per sq foot to both remove and replace = $40,000. The lot should last about 50 years. So, I raise the rents $50 and I don't want to do the math, but look at the previous post. I paid $40,000 and earned about $5 million by increasing the rents and the gross multiplier at the same time.

I have several single family homes in Idaho I purchase about 15 years ago. One of the worse real estate moves I ever made. I purchase the homes for an average price of $130,000. I was hoping that property values would increase at least 4% per year. The maintenance, ROI, annual income and management was a disaster. Furnaces would only go on the blink when temperatures were below zerow. Of course, every time a furnace wen out the cost to repair was 3 times what I charge in California. I paid $850 to replace inducer motors and I charge my customers only $450 in California.

I will shorten story, immense. When a tenant vacates an apartment it takes about 3 days to strip the apartment to the bone, re-paint, install new blinds and maybe even replace one or two appliances. I will ho high and say the average apartment costs me $2500 every time a tenant stays 2 years and moves.

I just came back from going through an 1800 sw ft house in Idaho. I did all the work by myself with one laborer. The cost, not including my helper's labor was $14,000. WHY? Because I had to go the the dump 6 times with trash, carpets, appliances and several trees that had to be trimmed. I had to clean rain gutters for the entire 2-story house. I had to paint 4 bedrooms, 3 bathrooms and ceilings, repair fences, install a new dishwasher and stove. I had to put new faces on the kitchen cabinets, replace 3 cracked bathroom sinks, granite kitchen counter tops and replace all the carpets and linoleum. I had to make repairs to stop rain water from going under the house and the rest of the list is too long. I had to make 3 trips from California to Idaho and the total time was 13 days working from 5 am to 11 pm every day. I own several apartment buildings and never worked that hard on an apartment building. I gave the property in Idaho to one of my kids about 10 years ago. He sold the property last month. So, I wrote him a legitimate bill for the repairs for the one house and the bill was $32,000.

The numbers and profit for multi-units is amazing. You will never ever convince me that single family units are better than multi units. I am a serious real estate investor and a number crunching fool when it comes to figuring out where and when to invest for maximum profit.

Holly Williams · Answer

@Roy Gottesdiener I did it lots faster than that with passive syndications. I have a couple of blog posts about it here on BP.  Happy to give details if you want to ping me privately.

How would you get to a yearly cash flow of 150k?

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