Been researching real estate for a few months, still not understanding how investors make their money!
If the cashflow is around $100 a month for a house, I would need 30+ houses to have a livable wage from the cashflow. And that’s assuming I don’t refinance any properties to scale up.
So how do some investors on here make a bunch of money doing this to live off of and buy luxuries? The cashflow just seems so low, and this is if everything goes right, no major repairs, Vancencies. The amount of work and risk involved in owning 30 leveraged houses for $3000 a month makes me consider buying a business instead. I’m probably misunderstanding this, can someone explain?
It doesn't need to be all long term rentals in your RE portfolio. We gross $220K + off of 7 vacation rentals. It took us 2 years to do this so it really wasn't a long time after we had the plan and then executed it.
Vacation rentals, corporate rentals, 1031 Exchanges (If they keep it), wholesaling, flipping, etc, are also other ways to increase the income from RE investing.
You should also factor in the benefits of all the tax write offs, principal paydown, appreciation, etc, so that you can truly gauge the value of the investments.
@John Liaaz There are many real estate strategies to generate cash flow, but your calculations are correct.
It takes time and effort to build up a portfolio that provides sufficient cash flow to live. That said, there are many ways you can use real estate to accelerate your business.
Consider the following real estate business strategies:
- Buy-and-hold: Use your own money to build a cash flowing portfolio
- Fix-and-flip: Use your own money to buy, fix, and sell assets
- Wholesaling: Find assets, put them under contract, and sell/assign the right to buy while you keep the spread between the contract and sale prices
- Brokerage: Connect buyers and sellers and make a commission on the sale
- Investment management: Use your experience to arrange deals and manage them for passive investors - you make money on fees and sweat equity (carried interest or promote)
This is a high-level selection of strategies. There are many variations on these and many others that I didn't even mention.
There are many ways to get to a passive cash flowing portfolio. Scale is your friend, but it takes effort to get there. You'll never get there until you get your hands dirty, though.
Also, don't be afraid to reach out to people in the business. You'll find that they're very eager to share their knowledge.
Been researching real estate for a few months, still not understanding how investors make their money!
If the cashflow is around $100 a month for a house, I would need 30+ houses to have a livable wage from the cashflow. And that’s assuming I don’t refinance any properties to scale up.
So how do some investors on here make a bunch of money doing this to live off of and buy luxuries? The cashflow just seems so low, and this is if everything goes right, no major repairs, Vancencies. The amount of work and risk involved in owning 30 leveraged houses for $3000 a month makes me consider buying a business instead. I’m probably misunderstanding this, can someone explain?
Thanks!
Your only talking single family here.
In commercial whether its multi family, mobile home park or office building for you to get $3000 a month $36,000 a year
all you need is an investment of $360,000 to get a 10% cash on cash return
Don't know if $360,000 can get you 30 leveraged homes.. maybe a packaged deal in the hood.
I bought one packaged deal where I invested less than $360,000 and its cash flowing $10,000 a month..
It isn't something you can do overnight and it is a matter of scaling. As others mentioned there are apartment buildings, but even for single family rentals, once they are paid off, you can have good cash flow. At some point, you can also sell the rentals giving you a larger one time payout.
You can also rent individual rooms instead of the entire house
My mortgage for my previous SFH was $1300 a month- I rented the basement for $800 and 3 bedroom/2 full bath upstairs for $1200 a month. Basement had a dorm kitchen and was a walk out so the upstairs tenant and basement tenant never interacted.
I always made sure whatever house I purchase had a walkout for rental purposes. Even in my current home, I rent the basement and live upstairs. Her rent almost covers my entire mortgage :)
Yeah, this takes time. Plus, a house that cashflows only $100 a month does not seem worth the trouble in your scenario. If your goal is to live off of rental property income and your goal is $3,000 a month, you need to adjust your strategy to get you to your goal with less than 30 houses. At $200 a month per house, you only need 15 houses. At $400 a month per house, you only need 8 houses. You need to look for houses that are selling at a discount - particularly distressed houses that need work. If the house is already fixed up and move-in ready, then your margins will be razor-thin.
Also, consider buying a two or three unit building. Live in one unit and rent the rest. This would save you a bunch on down payment, since it would be an owner-occupied house (3%-5% down) as opposed to an investment property (which requires 15%-25% down). And best of all, the tenants would pay all, if not most, of your mortgage. So for example - you buy a triplex with a mortgage, taxes, and insurance of $1,500 a month and you rent the two available units for $750 each, you would make $1,500 a month in rent and live there for free. Now you can save those $1,500 a month and save them for a down payment on your next houses. :)
unless you have cash, the money is made by the difference between the interest you pay and the cash flow. So to make money you have to go big. But to go big you need 20-25% down.
Or, just have a large sum of cash to invest. Where I live we earn 3-7% on our cash so 1 million$ will earn you 60k/yr ish
You also can make money over time by buying low and selling high but that does not affect cash flow
Also, dont forget rent increases over time, renovating and charging higher rent etc it all adds up
The overrepresentation of successful REI's on BP is a prime example of survivorship bias. In reality, many REI's do not generate enough cashflow to live on. Some choose to boost cashflow by deferring maintenance and running their rental properties into the ground.
If those are your metrics, then yes, you'd need 30 SFH's to accomplish this goal. As mentioned earlier, you could fudge your numbers around and defer maintenance and cap X to increase your monthly cashflow but you put yourself at higher risk (not a question of if but always a question of when something comes up). You can rent per room to improve cash flow. You could put a tent in your backyard and AirBnB that. There are countless options out there!
There are a lot of things we can break down in this hypothetical scenario, but you need to determine what strategy works best for your market (you can look at other markets if you want if you're focusing primarily on cash flow).
Cash flow diminishes in some markets compared to others. Typically, more cash flowing properties do not appreciate very well. Some areas you can buy houses for $50,000 and cash flow really well but 10 years later that $50,000 home is now worth $40,000. Rent may not increase at all either.
If $100/unit is not realistic for you, ideally you have two options: buy them at prices that meet your cash flow goals ($200/unit?) or look at different markets.
When I first started, my main goal (and only goal) was cashflow. By the time I bought my first home and finished renovating it, cashflow wasn't the most important thing anymore because my market shifted and was appreciating drastically. I pivoted and now I have cashflow BECAUSE I took advantage of appreciation, and it took less time and less units than I thought when I first started.
To answer your question though, yes, according to that hypothetical question. You have more risk with more mortgages and more houses, especially with only $100/door. Maybe you buy them off market and renovate everything so you can keep Cap X and Maintenance down since everything is new and done right (because you did it or hired someone to do it right). Maybe you go out of state and cashflow $300/door. My advice would be is to be flexible. You may have an opportunity to partner with someone to get your first deal and only get $50 in cashflow. It may not be worth it right now and you might turn it down, but if that property appreciates and you can get $50k in equity in a year, you made almost $4200/month in one year from one deal. How much cashflow could you get with $50k now? I hope that helps and clarifies things for you! Keep pushing, always make offers, don't be afraid to ask, and look at every deal from different perspectives.
Hi John. I just this year am surpassing my W2 income with just 5 single family homes. Two are mobile homes which cash flow more than regular houses. The other three are stick built 3/2s in the best school district that would make great long term rentals if I ever need to pivot, but my husband and I have these listed on Airbnb. I was very purposeful in trying to maximize cash flow. I will continue to work my W2 job for the next two years in order to build up some more cash reserves, buy a couple more houses, and build up two years of really strong rental income history to show to banks in the future so they will keep lending to me! In the meantime it feels good to know I am going to work because I choose to and not because I have to. And I am starting to see how people live off cash flow.
It doesn't need to be all long term rentals in your RE portfolio. We gross $220K + off of 7 vacation rentals. It took us 2 years to do this so it really wasn't a long time after we had the plan and then executed it.
Vacation rentals, corporate rentals, 1031 Exchanges (If they keep it), wholesaling, flipping, etc, are also other ways to increase the income from RE investing.
You should also factor in the benefits of all the tax write offs, principal paydown, appreciation, etc, so that you can truly gauge the value of the investments.
Hi @John Wijtenburg. Investing in buy and holds, or rentals, has 2 advantages. Being able to get to the point of living off of the cashflow and establishing a retirement account by having the properties appreciate in value while someone else, your renters, are paying down the mortgages. Personally I stay clear of SFH. They make great flips. When a tenant moves out you are on the hook for the mortgage. And if you jump at the first person that comes along who wants to rent it you run the risk of learning all about evictions. If you invest in 2-4 family units the cash flow is usually better and you are protected against those times when someone moves out. But you will still need more than 1 property. And it doesn't happen overnight. So you are on the right track but its going to take work. You should start, or continue if you already doing this, reading everything you can on the subject. There is a really good book the BPs bookstore on on Amazon called "Buy, Rehab, Rent, Refinance, Repeat" by David Greene. And if you become a Pro Member of bigger pockets (no, I don't work for BP) you have access to past webcasts that talk about this topic at length. Education, just like cash, is king.
...or, you just analyze properly, buy correctly, and live off the CF while you move your cash through the rental properties by selling them as they gain equity to get compounded returns.
First, profit isn't made on the spread between the interest you pay and the cash flow. It's made on the spread between the cash you use and the cash flow. Once you've recovered all the cash you used on that property (your cash, not someone else's), the rest is profit. Of course this demands the property be cash flow positive. If it's not, then you make your profit when you sell the property and it's the difference between all the cash you spend (DP plus accumulated negative CF) and the difference between the total cost and what you sell the property for. Equity isn't your profit...until you convert it to cash. Equity is the property's profit.
2nd, buying low and selling high may not impact CF, but buying low does as it has an impact on the loan payment. It also has an impact on future profit (selling property) because it minimizes how much you pay for it (cash/DP).
3rd, rent increases more than not don't increase CF since your expenses (tax, ins, etc...) also go up with the rent.