Goal to make $50,000/ year in cash flow

[Matt Burgess]

Hi everyone, I am a complete newbie but I have been listening to as many podcasts as I can and I also read "The Book on Rental Property Investing" by Brandon Turner. I found the chapter on planning to be especially useful. I have been running in place, trying to get started on my real estate journey and a plan seems like a great start. This seems super obvious now that I am writing this, but for whatever reason, I didn't think of it before! I sat down to choose my goals and then try to work through them backwards. 

My first goal is to achieve $50,000 per year in cash flow before my 27th birthday (I just turned 21). For anyone who has already gained experience, does this seem achievable? Also what kind of financing would you recommend? Any feedback would be greatly appreciated!

[Bill F.]

@Matt Burgess

Congrats on your first BP post and on learning about RE! 

No one can say with any degree of certainty if your goal is achievable for you specifically. We simply don't have enough info.  

We can do some pack of the napkin math to change your cash flow number into a metric that has some more use. 

First off, I'm going to make the assumption that when you say cash flow, you mean free cash flow(FCF), ie after all operating expenses and debts have been paid. 

Some basic metrics let us arrive at an amount of money/number of units you'd need to get $50k/yr FCF. 

First off we will assume you have mortgages on these properties and that they have at least a Debt Service Coverage ratio of 1.2. That means the NOI is 20% greater than the mortgage payments. If you want to have $50k left over after paying your mortgages, you'd need to have a NOI of $300k/yr (1.2x-x=$50k, where x is your mortgage payment and 1.2x is your NOI)

Next, if your NOI is $300k,and from my experience SFRs have between a 50-65% total expense ratio over time, that means the gross rents will have to fall between $600k-$857k/yr or 50k-$70k/month.

Since median rent in St Charles MO is $1,675/month, that will put you at around 30-40 units, probably a bit less since you won't buy all of them right now. 

The median home price in St. Charles sits around $200k, so with a 20% mortgage, you'd need $1.2-1.7M in down payments. 

That number is admittedly on the high side, since nothing says you need buy only SFRs, you could go into 2-5 unit multi family which will drastically lower your per unit cost. If you can get each unit for $100k and use some lower down payment products in the beginning, with some forced appreciation, you could get 30 units for around $500k in down-payments most likely. 

The big issue I see is time. your 27 yo for you is in 6 years. (congrats on the birthday btw) You'd need to save, on average $83k/yr. If you set the goal at your 30th birthday, that savings requirement drops to $55k/yr. Bear in mind that is an average. You could do $55k a year like clockwork or start off at $30k/yr and growing it 15% every year. 

Again, these numbers are back of the napkin ideas and are just a reference point. With sweat equity, hard works, a solid strategy, and luck you could need 20% less units. 

Best of Luck.