Financial independence from passive rental income: how long does it take?
Like many other real estate investor, I seek to buy and hold real estate, and enjoy the cash flow and any possible appreciation.
However, since my target properties are lower end properties that often requires rehab before I can attract the best tenants at full market rent, I find myself doing a lot of work. The work consists of not just hiring contractors to fix up the properties, but also of a property manager: marketing/vetting for great tenants, repairs, paperwork and tax preparation for my LLC (or researching if I should even use an LLC)..etc. It's a full-blown business - it's not passive income anymore in my opinion. It's work, and it's work on top of my already full-time job. I'm in awe that some own and manage 100+ units.
My question to all of you veterans in this business: what is your income range, and how many hours/week do you work for this income? If you could start your response with the following 2 pieces of info, it would help me (and a lot of others who think real estate is easy BIG and FAST money after going through their guru-course) :
1) Annual revenue (pre-tax) of under $100k, $100k-$400k, over $400k
2) # of hours/week spent for this income
From my estimates, I would need to own 50+ single family homes, all paid for free and clear, and all rented before I can even start sipping anything on the beach and not worry about finding a full time job to support me in addition to rental income. Although it's possible to own 50 units fairly fast, to own them out-right with no debt would take many many many years. Or am I just a failed guru-course student?
...and the problem with taking many years to do this - 10 to 30yrs in my calculation - is that many low-end properties are already 100+ years old. How long can a home possibly last? How much left is left on these homes, where I can pass them onto my kids as an "asset" instead of a crumbling pile of 2x4s?
@Jay Hinrichs I know you have a lot of experience with owning a lot of low-end rental units. I'd be very interested for your input on this. And what kind of income range (under $100k, $100k-$400k, over $400k) can one expect from owning, saying 100+ low end rental units?
#4 All Forums Contributor
- Plymouth, MI
If you're doing this in Michigan, why are you focused on low end rentals? You can do 15-20 rentals, with Property Managers, and be doing $80k pre-tax. Move up a notch, and you could do 20-30 and be doing around 200k. To get over 400k you shouldn't need more than 45-50 homes.
@Joe Villeneuve I agree with you to some point, especially for appreciation purposes. But I've found as you go up the food chain say from Dearborn Heights to Plymouth, the increase in acquisition cost does not equal the same percentage increase in rent.
Either your rents are extremely low where you are or your idea of financial independence is much more glamorous than mine. I am planning on 10-20 units probably towards the upper end for my FI point. If I had those all free and clear I would be cash flowing at least $500/unit a month which is $60k-$120k a year pretax. As it is I have four units cash flowing about $800 total because I have loans on three (two will be paid off in five years one in seven) which drops about $1600 out each month.
The last two months I have put a LOT of work into two units since I was getting them ready but once they are good to go at the end of the week on the last touchups, it is less than an hour a week in property management tasks for the four. The time is invested on the front end getting the places ready and rented. Then hopefully little unless I have a move out or something breaks. I try to keep well maintained properties and am in the replace with high quality components rather than slap dab patches that need to be redone every few months. That is one reason I got rid of my old PM and am doing everything myself now.
@Joe Villeneuve I'm going with low end properties because their ROI can be as high as 15-20%. The nicer homes - with less headaches - generate about 10-30% higher rents, but costs 100% to 200% more, lowering ROI to about -10% to 5% instead of the 15-20% on the low-end homes. Exactly the point made by @Dan Gheesling . That's why I'm sticking to lower-end homes: higher rates of return, but more work. I'm speaking for the Lansing area.
You also mentioned I could be doing 30 non-low-end homes and profit about $200k/year. That puts cash flow at about $7k/year/home, or a net income of about $550/month/property. The only way to get that kind of monthly cash flow is to own the units out-right, which takes years (15-30yrs).
So to make $200k/yr as you suggest, that's only possible after putting in 15yrs+ of work. I can't imagine someone making this kind of cash in 2-3 years starting out with no-money-down buying subject-tos. Unless they are doing active real estate investment: flipping, wholesaling..etc.
@Paul Ewing I'm in almost the same boat as you, but with less properties. The mortgage eats up a big chunk of the cash flow. There is equity build-up from the mortgage payments, but the payments consists mostly of interest unless your mortgage is 10yrs+ old where the amortization starts to work in your favor and most of the payment is principle instead of interest. Again, 10yrs+ for this to start to become in your favor. Nothing points to 2-5yrs of work and $100k annual revenue as the guru programs seems to imply.
Originally posted by @Bao Nguyen:@Paul Ewing I'm in almost the same boat as you, but with less properties. The mortgage eats up a big chunk of the cash flow. There is equity build-up from the mortgage payments, but the payments consists mostly of interest unless your mortgage is 10yrs+ old where the amortization starts to work in your favor and most of the payment is principle instead of interest. Again, 10yrs+ for this to start to become in your favor. Nothing points to 2-5yrs of work and $100k annual revenue as the guru programs seems to imply.
Which REI educator is spouting 2-5 years work and $100K annual cash flow?
@Bao Nguyen I know it can seem like a lot of work at the beginning (and it is, because I'm going through it right now as well) but the more disciplined and committed you are to it, the more it will pay off sooner rather than later.
Since you will (presumably) have better tendencies (research and commitment to making RE your passive income to financial independence) and resources (good PM, contractors, LLC, personal experiences from numerous properties) what you see as a full blown business now, will transition into that passive income state allowing you more time and freedom that you are looking for.
I too currently have a full time job and RE (buy and holds, with my first fix and flip soon to be going) has now become my second full time job, but I tell you what, I love it because I know that all of the late night reading here on BiggerPockets, looking over various real estate website sources to gather leads, and trying to find any and all ways possible to further this adventure, is going to lead to my financial independence and passive income one day. I do not expect to "get rich quick" as many of the guru's like to portray. I know it's going to take time, A LOT of time, but if I utilize the most of that extra time I spend now, I know it will pay off eventually.
Also, once you get to a certain point you can begin passing out responsibilities to other people. Sure, some people like to manage 50 or 100 of their own properties and keep that extra bit of income in their pockets, and more power to them because that's great and its what they like to do. But, if in your case you would like to truly make it more passive, you can begin to give out responsibilities to others in order to lessen your load. Sure, it may cost you more money, not giving you the highest amount of return on your properties, but guess what, with that extra time you can go research and find even more properties for even more passive income!
Wanted to add that you also don't necessarily have to own the properties free and clear to have a passive income. @Joe Villeneuve has written some excellent posts on the power of leverage and as long as you know how to maintain and control your leverage, you could turn that money you would normally put towards getting a house free and clear, and turn it into multiple other properties.
Sorry for the long winded response but just wanted to share my personal philosophy and approach to my ultimate goal of achieving financial independence and hopefully it can help you in one way or another!
Oh and to answer your original question, I would say I put in about 30 hours per week on average - after work and on weekends - and sometimes during lunch :) and my goal is to be around 15K in pre tax cash flow by the end of this year, and only movin on up from there!
#4 All Forums Contributor
- Plymouth, MI
Redford. All in at less than $50k. CF w/ PM 450-700/month
Ypsi. All in less than 60k. CF w/PM 500-750
Livonia. All in less than 120k. CF w/PM 1000-1250/month
@K. Marie Poe
"Which REI educator is spouting 2-5 years work and $100K annual cash flow?"
They all do;-)
I guess one key decision you need to make is whether you need a large cash flow from the beginning or later in life. I am aiming to pay off all my properties in 5 to 10 years. One reason for that is since I currently have a FT job with a good income I can divert almost all the cash flow after expenses to paying off the properties. This means in 3 to 5 years when I leave my current job I will have a pretty good monthly cash flow coming in from a smaller number of properties. If you are trying for cash flow now you will need a lot more properties to make up for the mortgages even if you stretch out to 30 year ones. I really don't like the idea of that much debt hanging over me even if they are cash flow positive from the beginning.
Sorry, financial independence at the 100-200k level in 2-5 years through real estate is an absurd assumption unless you are starting with a very large sum of money.
Real estate is a a great way to generate real wealth but it is not a get rich quick scheme. IMO your timeline should be at least 10-15 years. I started investing 13 years ago and I am just now getting to the point that the income is becoming significant enough that my friends have stopped asking me why I was even bothering with this. That said, there are A LOT of ways to streamline your systems and a lot of ways to maximize your efficiency. For now I'd suggest you work on figuring out what your strengths and weaknesses in this business are and find a way to hire help in the areas that are your weakness (for me, that was property management and accounting).
#4 All Forums Contributor
- Plymouth, MI
@Jean Bolger Couldn't disagree more regarding your timeline for success. I've watched many investors reach the numbers Bao mentioned in as few as 2-3 years. It all comes down to what you have to work with, and are willing to work with.
Depending on the market you invest in, the system you use and the team you work with, you can easily reach Bao's numbers in a very short period of time.
Originally posted by @Joe Villeneuve:
@Jean Bolger Couldn't disagree more regarding your timeline for success. I've watched many investors reach the numbers Bao mentioned in as few as 2-3 years. It all comes down to what you have to work with, and are willing to work with.
Depending on the market you invest in, the system you use and the team you work with, you can easily reach Bao's numbers in a very short period of time.
Joe Villeneuve
REcapSystem
A2REIC
@Joe Villeneuve, That's great that you are doing so well. I am not trying to argue about theoretical returns, (or I suppose I shouldn't call them theoretical since it's been easy for you to hit those numbers...). I am just trying to answer Bao's actual questions about his struggles with the realities of finding the time to build his business while employed full time. And let him know what most non-wizards might expect in terms of an amount of time to grow actual passive income from a real estate portfolio.
Your comment "It all comes down to what you have to work with" is right on. My own timeline to success may seem glacial to you, but to me it's something I am quite proud of :)
@Kyle Kelley Good points, and I agree with you. I spend about 10-15hrs/week on just 3 properties (I'm rehabing 1 of those units), and it's hard for me to imagine my properties as a "passive" investment, at least not like stocks, where I do literally nothing except review my holdings once a year. Thanks for sharing.
@Jean Bolger I would have to say I agree with you, as my experience shows so far. But perhaps I'm not as efficient or as creative as I can be (good chance since I'm newer in the business), and I keep hearing about people who've gone from living in their car to filming their guru programs at their beachfront mansion in Florida. Even real-life, more credible people such as @Joe Villeneuve attests to this. I guess that's where I'm trying to get at with this post. If $200k/yr passive income is possible in 2-5yrs with buy-and-hold strategies, I invite the veterans to give some examples of strategies and paths to achieve this. I just can't imagine a way yet.
Originally posted by @Joe Villeneuve:
@Jean Bolger Couldn't disagree more regarding your timeline for success. I've watched many investors reach the numbers Bao mentioned in as few as 2-3 years. It all comes down to what you have to work with, and are willing to work with.
Depending on the market you invest in, the system you use and the team you work with, you can easily reach Bao's numbers in a very short period of time.
Joe Villeneuve
REcapSystem
A2REIC
"It all comes down to what you have to work with." I'll bite. Can you say more about the investors you watch that are hitting those numbers (annual CF of $100K in 2-5 years)? What's their angle? Putting cap rates and ROI aside, almost anybody can hit those numbers with cash all-in and no debt service. Is that what you mean?
I like cash flow discussion and details since people can buy groceries and gas with cash flow.
So IYO what do these investors have to work with to get $100K annual cash flow in 2-5 years?
@Bao Nguyen Well, BP is a great place to learn to be more efficient and creative. It's certainly helped me. I think real estate has some great advantages over stock investing, but passivity is not one of them! One of the biggest of these is advantages is leverage, and that is an area where @Joe Villeneuve excels. Your Michigan market is a great one for what you are trying to do but I still think there is usually a period of walking before you start running.
Most of the stuff on TV is sensationalist BS. I think the way they promote the idea that RE investing should inevitably be quick and easy is doing a disservice to those genuinely trying to learn. Also- in the past several years there have been some who were in the right place at the right time to make a killing off of the housing meltdown. To model your expectations on those kinds of results now that the market has shifted (as it has, in almost all areas of the country) is setting yourself up for disappointment.
@Account Closed Thanks for asking exactly what I was trying to get at, but couldn't because I tend to be too long winded and never get to the point. :-)
Originally posted by @Mike Hurney:@K. Marie Poe
"Which REI educator is spouting 2-5 years work and $100K annual cash flow?"
They all do;-)
@Bao Nguyen
I am not a REI educator, but it is possible. I will say from my personal experience. It took me about 4 years, but it takes a LOTTTTT of discipline, focus, and sacrifice among other things to get to that point.
One thing that has helped me get there fast is living on lower of the two incomes between my wife and I and saving and investing the higher one. Generating income from other sources and investing them into rental properties. Once you have enough properties, it's a snowball effect.
I have 5 middle of the road units that bring in $24,000 (net) annually. I've received no calls in the last 5 months. I usually text and pick up checks, so I would guess I spend 4hrs a month for that extra income.
@Sharad M. Excellent point, and makes a lot of sense to me. Thanks for sharing.
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Jean Bolger:Originally posted by @Joe Villeneuve:
@Jean Bolger Couldn't disagree more regarding your timeline for success. I've watched many investors reach the numbers Bao mentioned in as few as 2-3 years. It all comes down to what you have to work with, and are willing to work with.
Your comment "It all comes down to what you have to work with" is right on. My own timeline to success may seem glacial to you, but to me it's something I am quite proud of :)
A well you should. Success isn't measured how long it takes since it is something that can last forever once your get there.
@Peter Dascoulias II Of my 3 units, 2 are at the stage you're at with your 5: very few calls, I usually just collect rent. However, my units are lower-end, and takes a lot of work to fix and get them in shape to the point where I get very few calls. Until then, these units require 5hrs+/week for me to work with rehab contractors. Again, I go with low-end because they offer higher returns than middle/higher-end units, which are offering low ROI (single digits) in my area, and at those low rates, I would rather put my money in an index stock fund that returns 6-7% average over 10yrs and not have to deal with a single phone call. Maybe I'm in the wrong location?
Hi Bao,
I am in the same boat as you just getting started with buy and hold, albeit in a very different market (DC/NoVa.) What i am finding in this market is that focusing on cash flows / income projections, etc., seems to yield less than looking for great deals. In the DC market, it's largely impossible to find a deal on the MLS, whereas in Baltimore or Richmond there are still some deals like you mentioned that will require lots of time and $$ up front to get them rent ready.
I'm curious to know what you currently do to find deals? This question leads me to my 2nd point, that shorter term notes are much better. When I look at principal paydown comparing 30/20/15 year terms, a 20 year term will paydown principal nearly twice as much per month as a 30 yr, and a 15 year even more than that. Not too many folks talk about equity when discussing investments, but to me this is huge, especially if you'd ever like to get into flips. I have made several contacts who have been buying and holding for 15-20 years, and they now have the ability to use their own HELOC's to fund their flips. Imagine paying 4-6% for financing a flip as opposed to 3-5 pts and 15-20% with hard money.
I guess what I'm getting at is that with great deals you can put them on shorter notes, still cash flow, and eventually become the bank.
The cashing checks on the beach visual is a hilarious one. I don't know too many wealthy RE investors that actually live that way, most are looking for their next great deal! However many do take long vacations (2-4 weeks) several times a year, or have nearby 2nd properties on the beach or in the mountains where they can get away for long weekends. I don't think being in a real estate business and being 100% passive is realistic, unless you only invest in commercial leases with NN or NNN terms, or liquidate your whole portfolio and give the $$ to a money manager. I forget who the gentleman was who did the podcast on managing your property manager, but it was awesome, and he gave a lot of details on how to vet out a great property manager.
Have you considered multi-unit investing? Deals are hard to come by like I say in my market, but if I can find a 4-unit all 2BR unit at a good enough deal to put on a 15-20 year note and have a little equity to start, I'm looking at 6-8k in gross rent depending on the neighborhood. If I can do that once a year for 5 years, then 30-40 k per month in 20 years would be more than enough to cover my expenses and lifestyle requirements after they are paid off. I'm looking to be in RE Investing for the long haul though, and will probably never fully retire.
@Account Closed
I agree with Joe. It can be done. I dont think it happens with cash flow/NMD properties only. You will need to marry a couple of different strategies: short term and long term.
You need to be buying under-valued properties below FMV, adding value and then rolling those proceeds into long term holds for income.
For example... buy and fix SFR flips, roll the profits into buy and hold SFR (with mortgages if necessary- but using future flips to aggressively pay down the mortgage).
Or similarly.. buying an under-managed multi, renting it up and re-financing. Then pyramid that cash into future purchases.