Make it make sense (Trying to SCALE into purchasing SFV Rentals)

[Henry Bagh]

Hi all, 

I have about $1M saved and I am looking to get into buying rentals out of state. I live in Los Angeles. 

I don't mind doing the dirty work, I don't mind working hard. I just want numbers to make sense. 

I also prefer not using all cash on deals, so that I can scale faster. 

So, with current rates, I'm just doing some number crunching and it just doesn't make sense to me (see picture below)

Whether you buy SFH or multifamily, lets say you can get a purchase price of $80k, with $1200 rent. This is stretching it because most places don't even have this rent to price ratio. I was planning on renting to Section 8 which technically have above market rents. So this is best case scenario. With all expenses added, you're looking at $180/mo in profit. Just to cover my $5k in closing costs, it's going to take 2 YEARS.

This would be a similar case if i were to buy a i.e. 4 unit for $350k and $1100/rent per unit. 

So my question is, how are people getting wealthy? What am I missing? I've always wanted rental income, but it seems like the appreciation play makes more sense. Buy properties that don't cash flow, and sell a couple years later for profit. 

Because if you buy an $80k property that cash flows in i.e. Cleveland, OH, you're not banking on appreciation. 

ANY input would be appreciated. I do NOT want to come across as a know it all, because I don't know ANYTHING. I'm just trying to run the numbers. 

Thank you!

[Yu Liu]

Hey Henry, property taxes seem a little high for a 80K property. I would expect it to be closer to 1-2% in most areas which would be $130 at the max but nuances aside, 

For some people a 10% annualized return is good. SP500 is 7-8% annualized return 

So with real estate there's 4 main ways you slowly build wealth. You hit on the first 2, cashflow and appreciation with appreciation being the long term lever typically. You are missing the other two big benefits that real estate provides: tax benefits (depreciation) and principal paydown. 

There's also multiple different strategies, SFH, flipping, BRRRR, multifamily, STRs

You say you have $1M in savings, let's stay with this SFH for $80K example:

if you bought say 10 of these $80K properties and look at it from a 10 year time horizon, you can definitely start to see the benefits of real estate. 

If you're in an appreciation market (which 80K doesn't sound like it will be but you never know), in 10 years, your properties will have doubled so now you have a $800K gain in equity and all the $180 *10 = $1800 a month you collected which is ~$21K/year or an additional $210K of cash flow you brought in. You have collected over $1M of additional income and that cash flow is most likely tax free, not including you are 1/3rd done with your mortgage and a good chunk is going to principal now. 

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Example 2: You go multifamily.

You buy a 10 unit building for $800K, rents are $1K a month, you fix it up and increase rent over time. Let's assume a cap rate of 6% meaning NOI = $48K. After 6 or so years, your new rent is $1.5K and assuming everything else stays constant, your new NOI is $90K meaning your multifamily building is worth 90K/6% = $1.5M. Also not accounting for tax benefits and etc

Example 3: You do STR

This is my current strategy. STRs can give you 20%-50% CoCR if you do it right. I've seen people do 100% CoCR. More upfront work and management intensive but it's all a matter of what you are willing to sacrifice to get to where you want to be. 

On and on, you can go. Choose the strategy that you would be most comfortable with and gets you to the place you want to be at in the next 5-10 or what ever time frame you are looking to achieve.

Hope that helps! Good luck and happy to chat!