Financial independence from passive rental income: how long does it take?

[Bao Nguyen]

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?

[Bao Nguyen]

@Annette Hibbler Thanks for sharing Annette.  I can definitely see how flipping/wholesaling can generate huge amounts of cashflow.  But that to me is not investing, but rather a full-time job without much income from passive activities.

@Bill Gulley Thanks Joe for re-emphasizing that the scale-able system is one which uses leverage, and that's the drawback of low-end homes: banks won't finance or refinance them.  I'm learning.. thank you.

[Joe Villeneuve]

Originally posted by @Larry Flanagan:

I'm not sold on the merits on buy & hold.  The local guys I know with lots of units (100+ houses) work like dogs.  They may not swing a hammer or show units anymore, but they still have to keep their employees (and we are talking 5-8 employees typically) on task and make tons of financial decisions (like buying carpet by the container load).  If you met the biggest operator in my town with over 200 units, you'd think he was a homeless person.

They'll tell you its all for the future, but what will they have in the future - a bunch of run down, worn out houses that will only be able to be sold to other investors looking for a steal, and probably at prices near what they were purchased for 20-30 years earlier.

 It's not "buy and hold" that's the problem.  It's the market...or the properties that are chosen.  You can get rich by flipping, B/H is the way to wealth.  The difference is "rich" has a shelf life.

[Jean Bolger]

Originally posted by @Jay Hinrichs:

I find it funny , strange , and plane weird that 10k a month is the goal of so many ivestors IE if I can just get to 10K a month all my problems will be solved and I can live the life I dreamed of etc etc... I don't know about the rest of you RE folks.. but that seems a little light after tax's why are you folks not saying you need 20 to 30k a month. .after tax that will be closer to the 10k... Just curious really.

 It's all relative, Jay. Someone making 30k a year is not going to respond positively to a goal of 30k a month, it would just feel impossible distant and self defeating. 10k is a psychological leap already! But not completely overwhelming. BTW, did you know that some very sound studies have shown that the "magic number" at which money stops being a major stressor for most people is only 65k a year? In general, people's baseline happiness did not increase after that  based on their income. (Not completely relevant, but a fascinating tidbit, I think) Now, I think that study was mostly of salaried workers -- being a self employed investor/entrepreneur is a different thing, and I think if a study focused on those folks the results might vary quite a bit.

BTW, my current income goal is $12,750 a month (yes, I have a reason for picking that specific number). But, this will be more than anyone in my family has ever made. Certainly far more than I have made to date as a self employed musician. It has taken me quite a while to get to the point that this goal (modest as it will seem to you) feels real and reachable to me. It's kind of like when I have budding violinists who come to me and say "I could NEVER do what you do!" Well- yes and no. Some of them never will. If they really don't/can't see it as possible for them then no, they never will. If they set intermediary goals that that they think are possible and expand from there, they probably will. If they assume that they can eventually blow right by my level of skill and are willing to put in the work work work then yes, for sure they will.

One of the great thing about BP, IMO, is that it brings together people with such different  financial realities -- like you and me. Hearing about people doing highly profitable deals think has really opened my eyes it's helping me see possibilities where I wouldn't have before. And it's definitely grown my business skills. I don't know if hanging out with the "poor folks" does anything positive for you folks who are used to making the larger sums, lol! But I hope so.

[Jay Hinrichs]

@Larry Flanagan 

  IN that asset class your dead on .... Its also known as slum lording in some circles.

In my mind if one is starting off and wants to build up this cash flow from rents or whatever. its a 3 pronged approach.

1. get a RE license so you can also make income in the field that you want to ultimately retire in be it with rentals or a developer or a lender or whatever.

2. start acquiring what ever it is in your market that make sense. From a cash flow perspective..

3. Look for the bigger flip plays without pigeon holing your efforts into say low end SFR's maybe you sell a big Multi and knock down a 50k fee.. Or you rehab and sell to a homeowner and make a nice 20 to 50k profit.. Or maybe you scout up a land deal for a developer and make a nice commission all legally.

4. In a hot Market the Most passive way to make income is simply be a Listing AGent  get listings...they are money in the bank and not a lot of time or effort  IE in a HOT Market not a run down low value market you got to work for those.. But you can be known as the go to agent for wholesale deals as well and that is super simple money far easier than land lording.  And all of you with any experience buying rehabbers or run down rentals know how little time an agent puts into those deals its easy money and all cash for the agent with no risk or repairs  :)

[Richard C.]

Originally posted by @Jay Hinrichs:

@Joe Villeneuve 

@Account Closed 

Joe how could you possibly be netting 400 to 800 a month on a 40k asset after all cost and mortgage.. What is your gross rent.. whats your management cost are you figuring in 1 months rent for tenant placement what is your vacancy factor what are tax's and insurance and of course maintenance that every mid west landlord underestimates by a huge margin.

Joe lets be fair here .. I know mid west stuff brought right for those that live there can be cash cows but lets not lead the CA investor into thinking they can achieve the same results you do living there and being right on top of the asset that is grossly unfair to the community

 I had this discussion with Joe, at length, on another thread.  He uses an absurd definition of Net Cash Flow.  Basically schedule rent - P&1 = Net Cash Flow.  And he advertises properties for sale on that basis.  He has a standard response about how it depends on your location, but has never been able to explain how and why the word "Net" means something different in suburban Detroit than in the rest of the world.

[Account Closed]

Originally posted by @Richard C.:

Originally posted by @Jay Hinrichs:

@Joe Villeneuve 

@Account Closed 

Joe how could you possibly be netting 400 to 800 a month on a 40k asset after all cost and mortgage.. What is your gross rent.. whats your management cost are you figuring in 1 months rent for tenant placement what is your vacancy factor what are tax's and insurance and of course maintenance that every mid west landlord underestimates by a huge margin.

Joe lets be fair here .. I know mid west stuff brought right for those that live there can be cash cows but lets not lead the CA investor into thinking they can achieve the same results you do living there and being right on top of the asset that is grossly unfair to the community

 I had this discussion with Joe, at length, on another thread.  He uses an absurd definition of Net Cash Flow.  Basically schedule rent - P&1 = Net Cash Flow.  And he advertises properties for sale on that basis.  He has a standard response about how it depends on your location, but has never been able to explain how and why the word "Net" means something different in suburban Detroit than in the rest of the world.

I find this hard to believe. Even most newbies who often miscalculate use Scheduled Rent - PITI. (no vacancy, no repairs). Even turn-key sellers who use a lot of hype include PITI and PM.

What say you Joe?  What are you using to get to net?

[Bill Gulley]

Originally posted by @Joe Villeneuve:

 It's not "buy and hold" that's the problem.  It's the market...or the properties that are chosen.  You can get rich by flipping, B/H is the way to wealth.  The difference is "rich" has a shelf life.

Joe Villeneuve
REcapSystem
A2REIC

 Not really Joe, a good flipper can make more in a year than a LL, at the end of 20 or 30 years they may just buy nice properties, pay cash, turn it over to their PM, hold properties in their Trust and go fishing. Wealth is certainly cash on hand, invested and held, it doesn't have to be represented by having dirt and improvements. :)

[Eric Taylor]

The other thing to keep in mind is that concept of financial independence shifts over time as we age, have children and indeed grand children.  While a small umbrella might suffice for an individual or couple without children, a larger one will clearly be needed once children are in the picture.  My life long rule is that you do not have bills until you have children.

[Joe Villeneuve]

@Bill Gulley ...except, if I understand your answer, I have to wait 20-30 years to get to where I have a source of cash flow?

[Steve L.]

Originally posted by @Bill Gulley:

 Not really Joe, a good flipper can make more in a year than a LL, at the end of 20 or 30 years they may just buy nice properties, pay cash, turn it over to their PM, hold properties in their Trust and go fishing. Wealth is certainly cash on hand, invested and held, it doesn't have to be represented by having dirt and improvements. :)

This answer makes no sense to me.

• A "good flipper" has to pay the highest tax bracket every year.
• A "good flipper" cannot sustain the market cycles the same way a more balanced business can.
• If the goal is passive income to retire, why not start with that goal in mind in year 1-2 and benefit from inflation, fixed interest rate debt, tax benefits and what you really like versus waiting 20 or 30 years for that.  

From my perspective, the best way to create wealth in real estate is a mixed model.  Flip/wholesale some properties to generate cash and hold some properties/notes for the long-term.  Banks like landlords way better than flippers.  

My rental business has become way bigger than my flipping business (on purpose), but it took 5 years for the profits of it to rival the profits from my flipping business.  In 2014, we are on track to collect over 2 million in gross rents.  The great thing is both businesses together allow you to afford infrastructure and systems for landlording to be more passive.  

[Richard C.]

Originally posted by @Account Closed:

Originally posted by @Richard C.:

Originally posted by @Jay Hinrichs:

@Joe Villeneuve 

@Account Closed 

Joe how could you possibly be netting 400 to 800 a month on a 40k asset after all cost and mortgage.. What is your gross rent.. whats your management cost are you figuring in 1 months rent for tenant placement what is your vacancy factor what are tax's and insurance and of course maintenance that every mid west landlord underestimates by a huge margin.

Joe lets be fair here .. I know mid west stuff brought right for those that live there can be cash cows but lets not lead the CA investor into thinking they can achieve the same results you do living there and being right on top of the asset that is grossly unfair to the community

 I had this discussion with Joe, at length, on another thread.  He uses an absurd definition of Net Cash Flow.  Basically schedule rent - P&1 = Net Cash Flow.  And he advertises properties for sale on that basis.  He has a standard response about how it depends on your location, but has never been able to explain how and why the word "Net" means something different in suburban Detroit than in the rest of the world.

I find this hard to believe. Even most newbies who often miscalculate use Scheduled Rent - PITI. (no vacancy, no repairs). Even turn-key sellers who use a lot of hype include PITI and PM.

What say you Joe?  What are you using to get to net?

 It should be hard to believe, it is ridiculous.  But please review this thread:

http://www.biggerpockets.com/forums/311/topics/142...

[Joe Villeneuve]

@Richard C. 

My cost to Buy/Rehab = $47k
ARV after rehab $64k
75% ARV (in 2mths)       $48k

Rent                   = $1100
R/I                         $  245
PM (10%)              $  110
MTNC (5%)           $    55
D.S. on REFI         $  254
NET CF             =  $  436/month

I just did 3 of these deals in the last two weeks.
***************************************************************

My cost to Buy/Rehab = $  75k
ARV after rehab $160k
75% ARV (in 2mths)        $ 120k

Rent =             $ 1500
R/I                   $   350
PM (10%)        $  150
MTNC (5%)     $    75
D.S. on REFI   $   400   (only did 75k refi)

NET CF        = $   625/month      

****************************************************************

[Dawn Anastasi]

Originally posted by @Jay Hinrichs:

I find it funny , strange , and plane weird that 10k a month is the goal of so many ivestors IE if I can just get to 10K a month all my problems will be solved and I can live the life I dreamed of etc etc... I don't know about the rest of you RE folks.. but that seems a little light after tax's why are you folks not saying you need 20 to 30k a month. .after tax that will be closer to the 10k... Just curious really.

Some people don't even need $10k per month to be happy.  I don't need it and I'm happy.

[Joe Villeneuve]

Originally posted by @Dawn Anastasi:

Originally posted by @Jay Hinrichs:

I find it funny , strange , and plane weird that 10k a month is the goal of so many ivestors IE if I can just get to 10K a month all my problems will be solved and I can live the life I dreamed of etc etc... I don't know about the rest of you RE folks.. but that seems a little light after tax's why are you folks not saying you need 20 to 30k a month. .after tax that will be closer to the 10k... Just curious really.

Some people don't even need $10k per month to be happy.  I don't need it and I'm happy.

 Have to agree with you @Dawn Anastasi.  Where I'm at, $4k seems to be the magic number.  Very little of the income is taxable after deductions are taken out...especially depreciation.  

The way we figure it is this way.  We list all our monthly expenses, and our one time or yearly expenses.  We use cash outs on refis or flip profits to pay off the yearly or one times (a byproduct of this is in many cases it reduces the monthly expenses too).  The cash flow we need is based on the total monthly bills.  We take the typical cash flow for the houses in the market the investor is holding in, divide that into the total cash flow needed, and you have how many holds you need (all things equal).  Want a raise, buy another CF property.

Joe Villeneuve
REcapSystem
A2REIC 

[Richard C.]

Originally posted by @Joe Villeneuve:

@Richard C. 

My cost to Buy/Rehab = $47k
ARV after rehab $64k
75% ARV (in 2mths)       $48k

Rent                   = $1100
R/I                         $  245
PM (10%)              $  110
MTNC (5%)           $    55
D.S. on REFI         $  254
NET CF             =  $  436/month

I just did 3 of these deals in the last two weeks.
***************************************************************

My cost to Buy/Rehab = $  75k
ARV after rehab $160k
75% ARV (in 2mths)        $ 120k

Rent =             $ 1500
R/I                   $   350
PM (10%)        $  150
MTNC (5%)     $    75
D.S. on REFI   $   400   (only did 75k refi)

NET CF        = $   625/month      

****************************************************************

Joe Villeneuve
REcapSystem
A2REIC    

Are you denying that you listed a house for sale on your website showing zero expenses?  Just Schedule Rent - Taxes and Insurance = CASH FLOW!! ?

And as was pointed out before, you budget ZERO for capex, an absurdly low amount for maintenance on old houses in the North, you assume zero vacancy (even for tenant turnover),  your ARVs are not supported by actual comps, and your rents are, charitably, higher than most might expect to get.

You don't even throw the "home warranty as a replacement for capex" stuff into those numbers.

One wonders, if you are doing this sort of deal all day long, why you need to sell seminars and mentor services.

[Jay Hinrichs]

@Joe Villeneuve 

  if I could keep my wifes monthly credit card bill down to 4k... I would be a happy camper :)  I could live on that in the late 70's  ... but I guess that's why we are all here in the RE game as we don't get stuck in a rut with the same wage coming in month after month and we are able to work ourselves into raise's as often as we want.. We do trade that for the security of that monthly income.. Many a family can't do what we do because one or the other just has to have the reliable repeatable income even if it creates a situation where like many they just get by.

If I look back on being raised in Cupertino and during the rise of computers and internet I think I maybe should have gotten into marketing and sold Apple computers world wide or Intel chips I would be long retired with tons of dough...

[Jon Klaus]

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;-)

 Works just fine if you have a million $ to invest. 

[Chris Lynch]

@Bao Nguyen 

 Great response's, I just spent the last half hour reading through them all. With that said I feel like getting the gains you desire in the time frame you want to achieve them will require you to get involved in the commercial space. Residential can be great, however commercial property's can be much more financially rewarding.  They can also be more efficient to manage as well. 

Apartment building's are a great place to start, but you can also venture into things like storage units and office space which can be extremely lucrative. They all have different positives and negatives. 

After much research I feel like residential is a good place to go get your hands dirty and learn the fundamentals of REI. However imo commercial RE is where large fortunes are made in a smaller time-frame.

[Bill Gulley]

Originally posted by @Joe Villeneuve:

@Bill Gulley ...except, if I understand your answer, I have to wait 20-30 years to get to where I have a source of cash flow?

Joe Villeneuve
REcapSystem
A2REIC

Cash flow is gross income received from any business operation, monthly sales at an ice cream shop provides the cash flow for operations.

I'm in the real estate business, I buy, fix and flip a 40K range properties, on the average I put 12K in them, I have 3.5 K in in holding and transaction expenses, I sell them on the average 67,500, I net on the average 19,000 and I do 5 houses a year. My cash flow from those operations is 85K a year.

A B&H guy buys a 40K, puts 2 K in it, rents it and nets $200 monthly, that's 2.4K a year, he buys 5 houses a year, from the date he bought the first house and buys another every 2 months. House 1 earns 2,400, 2. is 2,000, 3. earns 1600, 4, makes 800 and 5 generates 400.   Total is $7,200.

The greatest cash flow is the flipper, the greatest net worth goes to the landlord, assuming he paid cash, he has 200,000K in RE, but if he borrowed 75%, his net worth drops to 25,000. If that is the case the flipper wins on both fronts, 85K in income and net worth increases by the same.

If we are living on that income or cash flow, the landlord is way below the poverty line, the flipper is in a solid middle income range. Assuming neither live off the income and all earnings are constant, in 10 years the flipper pulls in 850K in cash.

The landlord has from P1, 75,000, P2, is 67,500, P3 is 60,000, P4 is 52,500 and 45,000. is a total of $300,000 over 10 years in cash flow.

Either can invest along the way, you'd assume that each would invest having the same knowledge and opportunities.

That is a very simplified approach, the landlord will have maintenance and vacancy, so I assumed the LL would have no maintenance and no vacancies. On the add side, let's increase rents 10% as rents increase on the average of all properties in 10 years. Add, 33K, amortized increases, that's 333,000K, still not close to the flipper.  

It will take a landlord over twice as long to match the income generated by a construction rehab sales operation.

The LL can invest in a passive manner, the flipper is active, but an investor could invest in a flipping operation in a passive manner. Tax benefits go to the landlord with depreciation, the flipper has regular income. I'd suggest it would be hard to say the LL would really be in a passive mode buying 5 houses a year over a ten year period, so the take home bite would be about the same.

The LL has the advantage of appreciation, over 10 years he bought and improved his holdings to the tune of $420,000, the amortized increases may add another 15% so at the end of ten years the value could be (long shot at that price level, but giving the LL the up side) $483,000.

If the LL liquidated and kept all his earnings, he's at  $816,000, the flipper is still at $850,000, he's ahead by another house.

Now, if you were to move both RE operations up in price range, say to 80K purchases, the flipper won't double his profit, he may increase it by 30% or so, the LL may still does not make more than 200 buck a door, but appreciation will be higher, tax benefits will be greater and net worth more than doubles. Just commenting as to the topic of low priced holdings. 

This is all very simplified, basic cash flow observation.

Then consider a flipper who buys and sells 4 houses and keeps a one. Or, lives on 45K and buys a keeper every year. You can have all kinds of models.

The LL can buy for cash, rent it, after one year borrow off the appraised value and obtain another property. 2nd year he buys 10, 3rd year he buys 10 and so on. But reality sets in too, the assumption is that he can qualify for and obtain financing over that period.

But, starting out, as to cash flow or income from operations, the flipper will win the race. :)    

Hope numbers are right, I started this at about 3 AM, no coffee yet.....LOL   

[Joe Villeneuve]

@Bill Gulley There are a couple of things you left out.

1 - The Flipper has to keep doing the flips in order to maintain the cash flow from the profit.  They have exchanged living from check to check to living from flip to flip.

2 - The flipper depends on having enough sellers to buy the flips when they come on the market. The Holder that buys with cash simply refinances when ready. In my case, at 75% the ARV... I'm assuming I'm doing the same thing with the same house rehab wise as the flipper is with the flips, so I'm getting the same benefit in increased value.

3 - I can hold 10 mortgages in my name with my funding source.

4 - If I did the same 5 houses a year as the flipper in your above example, but held them instead, ...and I got around $400/month NCF from each house, in about 2 years I have those ten houses doing almost $50k/year...and I don't need to do anything else...but, why would I stop?  As a flipper, you would need to continue flipping to keep that cash flow from the profits coming.

5 - After I did my 10 mortgages, I take on a credit partner and do 10 more, and then another, etc...If I split the returns (CF) with the credit partner 50/50, I end up doubling my CF in 4 more years to almost $100k/year...and I can stop buying Holds, but the CF keeps coming.  Repeat again with new Credit Partners (my cash, same cash) and in 4 more years (10 total) my CF becomes over $140k....and so on, repeating the use of my cash with different Credit Partners.

6 - The flipper would need new money for each flip to buy/rehab.  I use the same money over and over since I recover it in each refi.  If the flipper did 10 houses flipping, at $50k cost for each, it would cost them $500k if they did it with all cash.  It would cost me nothing.  I would need only the initial $50k for the first house, "roll it over" for each house after, then after I refi the last house I get it all back.

7 - At the end of ten years the flipper has accumulated a total cash flow higher than the holder, but would need to continue to flip or the cash flow from the profits stop.  The holder is done (unless the holder wants a raise in which case they would add another hold house or two), the CF keeps coming from the holds.

All the above is assuming having only enough cash at hand to start for one house.  If the cash on hand at start is enough for more houses, then the timeline is accelerated using credit partners.

Having said all the above, we still flip...to generate the cash from the profits to start a new "string" of houses with new Credit Partners.

Now comes my disclaimer.  It's 7am my time, just got up, and I don't drink coffee.  LOL.

Joe Villeneuve
REcapSystem
A2REIC  

[Bao Nguyen]

@Chris Lynch I agree with you.  Given my risk appetite, access to funds that is more appropriate for residential than commercial, lack of knowledge in commercial real estate, and the desire to stay focused and be specialized, I will have to stick to residential for now.  Maybe one day when I have a million to gamble with, I'll move up.  :-)

@Bill Gulley

[Walt Payne]

@Bao Nguyen  Another consideration in favor of mid-range and higher properties. If you want to sell that C or D class property, who is your target buyer? Investors. Think about it, do you want to sell to investors when you cash out? In A, B and even C+ neighborhoods you can sell to homeowners at retail. A much classier group of people ;)

[Bill Gulley]

Originally posted by @Joe Villeneuve:

@Bill G. There are a couple of things you left out.

1 - The Flipper has to keep doing the flips in order to maintain the cash flow from the profit.  They have exchanged living from check to check to living from flip to flip.

2 - The flipper depends on having enough sellers to buy the flips when they come on the market. The Holder that buys with cash simply refinances when ready. In my case, at 75% the ARV... I'm assuming I'm doing the same thing with the same house rehab wise as the flipper is with the flips, so I'm getting the same benefit in increased value.

3 - I can hold 10 mortgages in my name with my funding source.

4 - If I did the same 5 houses a year as the flipper in your above example, but held them instead, ...and I got around $400/month NCF from each house, in about 2 years I have those ten houses doing almost $50k/year...and I don't need to do anything else...but, why would I stop?  As a flipper, you would need to continue flipping to keep that cash flow from the profits coming.

5 - After I did my 10 mortgages, I take on a credit partner and do 10 more, and then another, etc...If I split the returns (CF) with the credit partner 50/50, I end up doubling my CF in 4 more years to almost $100k/year...and I can stop buying Holds, but the CF keeps coming.  Repeat again with new Credit Partners (my cash, same cash) and in 4 more years (10 total) my CF becomes over $140k....and so on, repeating the use of my cash with different Credit Partners.

6 - The flipper would need new money for each flip to buy/rehab.  I use the same money over and over since I recover it in each refi.  If the flipper did 10 houses flipping, at $50k cost for each, it would cost them $500k if they did it with all cash.  It would cost me nothing.  I would need only the initial $50k for the first house, "roll it over" for each house after, then after I refi the last house I get it all back.

7 - At the end of ten years the flipper has accumulated a total cash flow higher than the holder, but would need to continue to flip or the cash flow from the profits stop.  The holder is done (unless the holder wants a raise in which case they would add another hold house or two), the CF keeps coming from the holds.

All the above is assuming having only enough cash at hand to start for one house.  If the cash on hand at start is enough for more houses, then the timeline is accelerated using credit partners.

Having said all the above, we still flip...to generate the cash from the profits to start a new "string" of houses with new Credit Partners.

Now comes my disclaimer.  It's 7am my time, just got up, and I don't drink coffee.  LOL.

Joe Villeneuve
REcapSystem
A2REIC  

Joe, I've read several of your posts, I understand your method and it's not new and it is hard to duplicate by beginning investors, there are also assumptions that may not hold true. I'm not arguing with you about which is "best" for someone, if the goal is to create wealth, that includes just making money and not blowing it. Mine is not from being a LL so much as operating in various areas or RE and finance, not really comparable. Nothing says that money made in RE must stay in RE, there are many opportunities to put money to work.   I have two perspectives from landlording and property management operations, my own and management of over 1,200 units under the PHA. 

To your;

1. the LL needs to keep finding the properties to buy, like from a flipper and they need to find and keep qualified tenants, that's not a small task either.

2. your improvements are depreciated or amortized over the holding period, the gain by the flipper is immediately recognized in that year, there are also advantages of putting that cash to work much sooner and it may be working for you longer.

3. The ability to finance effects both the flipper and the LL. Each will be unique. A LL has 20-25% tied up, it costs money to tap into equity, you also can never pull all the equity out. The flipper pulls out all his funds and profits, rinse and repeat.

4. To believe anyone can buy a 40K house, borrow 75% as you implied and pull 400 as profit per door, I'd have to see tax returns, through thousands of loans and LL deals, I've never seen that.

5. I think what you're saying is that with a partner your interest is accelerated at a faster pace, the velocity of money thinking, in a perfect world that may be, in reality, you're dealing with partners, I assume you don't have all the say as to what to buy, hold, manage, tenant selection, use of funds, etc. You have partner issues with the best of partners. The same can hold true for flipping, they can have partners as well, split profits reduce capital requirements and knock out twice as much in business. Market factors apply to both. 

6. Theory is a tad flawed and the assumption is made that the flipper must use a loan each time. Money wise the flipper can be buying the 5th house from profits. He also gets all his money back to use again. To say you get all your money back on a refi is overstated, you can borrow 70-75% on a cash out refi from conventional sources, that's not all your money. You're trading equity for a liability and cash, I understand leverage pretty well, you can increase your cash flow, you're on a very slow pace increasing net worth.

Back to the velocity of money, the quicker money move the more efficient the capital is used. Any LL operation of any kind or under any strategy is nothing more than annuity income, small amounts received over time. Doing other operations, flipping, just selling and earning a fee, lending money, buying notes and selling them or refinancing them generates quicker profits that are used over and over again. If I can't make more off of 40K than 1,200 in 90 days, I'd stop doing what I did, if I couldn't make more than twice that I'd consider stopping.

Sounds like you might be "selling" or promoting your method of buy and hold as the optimum method, it might be for you, might be for others, it won't be, all things being equal, "better" than using funds for short periods of time and profiting and receiving all your money back to repeating that same function, it's financially and mathematically impossible. Study accelerated cash flow, velocity of money, opportunity costs and effects on net worth.

My market is just over 600,000 in population, small compared to 100+ other markets, I'd be hard pressed to find 5, 40K properties in any year, to rent or flip, reality doesn't work with pro forma estimates, can't realistically have a model of buying the same price range +/- a couple thousand 5 times a year for ten years, it only demonstrates the theory.

We haven't discussed the headaches in landlord operations, the difference in nicer more expensive homes and the cheapies. Who is the target market for those lower end rentals, vacancy, late rents, property damage, evictions, debt collections, etc. I have done about everything one can do in residential properties, nothing comes to mind that hasn't been done and of everything accomplished, for me, being a landlord is at the bottom of my list, even though we hold property. Highest stress and required attention is lower end residential then better properties then multi family, then high end residential and commercial, IMO. Commercial is better than residential, less stress and headaches, but when it hits the fan in commercial it makes a bigger mess.

The best way to gain wealth in RE is not in doing anyone strategy, the fastest way is to go with the flow of the market knowing how to employ all methods to any given opportunity. Just do a transaction, flip a contract, flip a property, flip a note, make a loan, buy and hold, use lease options and seller finance when you can.....it all adds up, that will be quicker than doing any one thing. The most profitable thing related to RE is buying a note and refinancing it in short order, nothing comes close for a small (under a 5 million) operator. The reason you can't do that every day is due to the market, now, if you were in a 2 million population or more, that could be a reality. Learn it all!  :)   

[Bill Gulley]

Originally posted by @Jon Klaus:

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;-)

 Works just fine if you have a million $ to invest. 

Jon, not hard to do at all for any newbie to make a million in 5 years, just start out with two million! :)

[Jeff S.]

@Bill Gulley the thing is flippers come and flippers go. You almost have to have a perfect storm (like now) for this business to work. When the economy hiccups it is over for flippers and it happens quickly. A good example was a developer/builder I knew that was big but went BK after may successful developments. Had something to do with cash flow and bills. He recovered and started buying up little houses, even built a 100 unit to keep. He became financially bullet proof eventually giving up developing and building. He has gone through crashes and is not fazed.

Another thing is they say one way the rich get richer is through unrealized capital gains. The trick is finding a way to eat while not realizing those gains. Plus you collect rent on the unpaid tax bill.