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?
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Agreed Jeff, they come and go, at least they have skills as opposed to others in RE that crash and burn. If you could just give up eating and live in a paid fir tiny house trailer, off grid, you should be able to build wealth even faster. :)
Originally posted by @Mark Del Grosso:
@Bao Nguyen Don't spend too much time comparing yourself to others. In RE there are multiple ways and multiple definitions of success. Find out what works for you. Your skills, your time constraints, your risk tolerance all play a part in what will work for you.
I too am a buy and hold investor that has a full time job. When I get home from work I change my clothes and get to work on my properties, AND I LOVE IT. You see I come from a hands on trade (tool and die maker) and now have a desk job (Engineer) and enjoy both. My wife works many evenings and my kids are grown so it works for me. But I know that many would hate it.
I did this so my wife and I can retire early ( in two years) at 56.
Good luck to you.
I think Mark and I have a similar line of thinking. I too am an engineer with a desk job. However yesterday after I left work, I went to go supervise workers flipping one of my units. I enjoyed every minute of it. I am in my mid 30s but am doing this so I can be in a very comfortable position by the time I reach 50
@Bill Gulley Market conditions make or break flippers, agreed. I'm pretty sure I'd be the unskilled flipper that gets wiped out, so that's why I choose to focus on ROI and cash flow from LL. My focus is stable income, without having to constantly switch "jobs" or careers due to market fluctuations, and I think LL is one of those few ways to bad times, assuming you are realistic about all costs - upfront and deferred (such as cap ex and vacancy).
@Mark Del Grosso @Jarrett Harris Thanks for the reminder guys. I'm not posting this thread to compare myself to others: I have 3 units, hardly anything to compare to. My goal was to get a pulse of where the veteran investors are at so I can have an idea of where my path will lead to should I chose to be a flipper or buy-and-hold, and if so, what units to buy and hold. So yes, I am comparing, but only in the sense to get an idea of what I can expect: very much like when you guy to buy a car you compare so you can pick the right car. I'm doing the same, but for my retirement.
You're talking to a Vietnamese immigrant that has grown up in America being different to everyone in small-town Lansing, MI in almost every way - from my background to stinky lunch food. :-) I really don't think much about others and their ways beyond "comparing" what they are doing to make sure I don't have the road map upside down the entire time. So far, the experiences shared on this thread by more experienced investors have made me think twice about investing in low-end properties purely for high ROI and cashflow - it may have saved me a decade in going the wrong direction. Kudos to @Bill Gulley and numerous others on this thread for sharing their experiences that gives me a more holistic view of real estate investing, despite them possibly not agreeing 100% on everything.
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There are very few threads on BP where everyone agrees, you just need to put your waders on and go through them and select what's in your best interest.
B&H is great for folks with another life. like a job, everything else is pretty much a job if you're playing in the dirt.
Another way, Keep your eyes open for higher valued properties, see what your minimum loan is and divide that by .75, (.70, depending on the LTV) that will give you the minimum price that will be bankable. Figure out your best hold period, should be around 7 to 12 years, sell, rinse and repeat. Your second or third property should be in the best location you can find for the money, and solid, then if your goal is to pay it off for future income. I always suggest a 30 yr amortization since the lower payment requirement hits your ratios and when it's rented you can make additional payment to hit any free and clear date.
If you leverage with refinancing, check the break even point with costs and rates, down side is the contribution to principal begins all over, so if the goal is to have paid for units, think twice before putting new mortgages on it. :)
Bao, to answer your question:
1) Gross Revenue $165,000 net about $90,000 depending on how you figure it.
2) Average 10 to 15 hours a week. That is active managing taxes to toilets.
This is on 9 properties, 20 units. I owe about $625,000 on properties worth about $1,500,000. I've been at this for almost 20 years.
I've never been to a guru's class and I'm not claiming to be all that smart. I spend the rest of my time and more than half of my net on the acquisition of new rentals. I very rarely sit on the beach and sip anything, but I wish you all the best.
@Don Coumbs Thanks for sharing Don. Your numbers and time frame makes sense to me. Again, it reaffirms to me that this stuff takes years (15+ as I estimated) to get to where you are. You net $90k/year in passive income. Quite smart if you ask me.
Just to clarify, no need for specific net income - but sharing it is definitely appreciated. I'm hoping for people to share:
1) Net income selection from these 3 options: Less than $100k annually....between $100k and $300k..... or $300k+/year.
2) how long you've been doing this.
3) which property types (low end, mid-end, high-end, duplex, apartments..luxury homes, commerical) are your favorite and why?
Thanks to all those who are sharing so us newbies have a realistic expectation and don't get discouraged because we didn't make a $million our first year.
Thank you. My point is that it isn't really passive income, or not mainly passive income since I manage myself. speaking of..
3) mid to higher end properties since (as has been mentioned frequently in the podcasts) the lower you go on the spectrum, the more management it will take. I personally rent in a college town and rent to about half college students.
Originally posted by @Paul Ewing:
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.
Excuse me as I learn... FI point? Thanks, Paul!
Originally posted by @Sharad M.:
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.
Hi Sharad,
Can you lay out how you started?
Cindi
Originally posted by @Bill Sargeson:
@Bao Nguyen I feel I need to chime in on this one...Yes it can be done...I am getting very close myself to reaching my goal of financial independence after 2 years(not counting my first purchase). @Joe Villeneuve is correct it all depends on what you have to work with. I work a 60-70 hour/week a job with a a six figure salary so this has helped me getting started as well as absorbing financial mistakes along the way. Timeline short and sweet.
2006 - Bought my first property - Condo in Raleigh near NC State(nice area) 10% down financed the rest, Barely cash flows each month. Lesson learned in buying condo investment.
2012- I bought 4 SFR, paid cash for the first one($25k), then secured a credit line on that property to help fund future purchases, used my cash flow to pay down the credit line and repeated the process, and financed the rest with a portfolio lender.(10%) down
2013 - Bought 6 SFR, financed all them, 10% down again
2014 - YTD I have bought 7 SFR and 3 Duplexes, the bank upped the down payment to 15% down.
It was and still is a TON of work. I spent numerous vacation weeks and days off fixing up properties to get them rent ready. But once they were ready and rented I really don't get many calls. I have 21 properties now and they range in price from $18k-$52k. No war zones, mostly blue collar working class neighborhoods here in central NC. Right now I am at about $80k pre tax income...I never bought these properties for appreciation, I bought them for cash flow.
@Walt Payne I completely understand what you are saying and yes I have had to replace furnaces, roofs, main plumbing drains, etc....but at the end of the year I still come out very well. I know two years is probably not enough time to see how the expenses will average out over time, but the properties that I have fixed should be good for a long time before they will need repairs again, but in the mean time I take those cash flows and save them in my reserve account or buy more properties.
I have never found a way to make a lot of money with out hard work and real estate is no different.
Hi Bill,
We're all the homes you purchased foreclosures?
Originally posted by @Jay Hinrichs:
your my partner : well not specifically but your the person I do business with.. I currently have lots of these working in 11 states... I am the JV you are the partner that does the work.. Even better than Hiring a PM.. because there is a huge pay day at the end of the line for you.. and your efforts are directly related to my profits...
AS for the goal of how much one would need to comfortably live on.. that in my mind has a lot of moving parts.. it all depends on where you live.. where you are in the your life cycle.. IE are your kids raised and on their own or are you still feeding them and saving for college or bailing them out of lifes issues..
I have a lot of experience at this.. My first HML company I had all private investors about 250 of them... And you really get to know those folks they are the ultimate passive investor most owned rentals then grew to hate them and migrated to loaning money.
But once they came into the company as a lender they would live on the interest income and only took their capital out ( usually ) for 2 reasons.. To buy their kid a home or to bail them out of Jail and pay for the lawyer... I am serious.. happens more than we know.
I have a lot of Airline pilot buddies who retired.. and they usually have about 2 mil in cash at the end of the career of course many have more and some have less but 2 mil in cash correctly invested and your personal residence free and clear can usually make a nice retirement.
I know for me everytime I get real close to my cash goals we have another freaking recession and I get knocked on my butt yet again. LOL
Did you mean you have properties in 11 states?
Originally posted by @Joe Villeneuve:
My cost to Buy/Rehab = $47k
ARV after rehab $64k
75% ARV (in 2mths) $48kRent = $1100
R/I $ 245
PM (10%) $ 110
MTNC (5%) $ 55
D.S. on REFI $ 254
NET CF = $ 436/monthI 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) $ 120kRent = $ 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
Can you define all your acronyms to a newbie?
Thank you!!
Yes, The majority of my properties were foreclosures. Although I did purchase 6 properties from a retiring real estate investor through a private sale.
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Originally posted by @Cindi Boyer:
Originally posted by @Joe Villeneuve:My cost to Buy/Rehab = $47k
ARV after rehab $64k
75% ARV (in 2mths) $48kRent = $1100
R/I $ 245
PM (10%) $ 110
MTNC (5%) $ 55
D.S. on REFI $ 254
NET CF = $ 436/monthI 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) $ 120kRent = $ 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
A2REICCan you define all your acronyms to a newbie?
Thank you!!
ARV = After Repair Value
R/I = Rent & Insurance
DS = Debt Service
PM = Property Manager
Net CF = Net Cash Flow
Originally posted by @Joe Villeneuve:
Originally posted by @Cindi Boyer:Originally posted by @Joe Villeneuve:
My cost to Buy/Rehab = $47k
ARV after rehab $64k
75% ARV (in 2mths) $48kRent = $1100
R/I $ 245
PM (10%) $ 110
MTNC (5%) $ 55
D.S. on REFI $ 254
NET CF = $ 436/monthI 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) $ 120kRent = $ 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
A2REICCan you define all your acronyms to a newbie?
Thank you!!
ARV = After Repair Value
R/I = Rent & Insurance
DS = Debt Service
PM = Property Manager
Net CF = Net Cash Flow
Thanks, Joe. I wasn't sure about DS or R/I
Originally posted by @Bill Sargeson:
Yes, The majority of my properties were foreclosures. Although I did purchase 6 properties from a retiring real estate investor through a private sale
Thanks, Bill. What is the best way to find them?
I found my private sale on Craigslist. He was selling two properties, when we got to talking about them he gave me his name, so I looked him up on the county GIS website and saw that he had 10 more properties. The next time we spoke I said if you have any more properties that you would like to sell let me know...and he did...for a total of 6 properties.
The foreclosures I mostly found on the MLS....
Like many people on here....I also tell everyone(and I mean everyone)I meet that I buy real estate, so I also get a lot of leads that way....
Originally posted by @Bill Sargeson:
I found my private sale on Craigslist. He was selling two properties, when we got to talking about them he gave me his name, so I looked him up on the county GIS website and saw that he had 10 more properties. The next time we spoke I said if you have any more properties that you would like to sell let me know...and he did...for a total of 6 properties.
The foreclosures I mostly found on the MLS....
Like many people on here....I also tell everyone(and I mean everyone)I meet that I buy real estate, so I also get a lot of leads that way....
Thanks, Bill. Have you ever seen a situation here where people go after each other's deals? Seems like that could potentially occur, yet so far everyone seems so honest and respectful. Think this is the nicest online group I have ever seen.
Everyone has their own beliefs and thus this is a very subjective question. The simple answer is:
Your passive income needs to match or exceed your expenses. The less your monthly expenses, the less monthly passive income you need.
People use a variety of rules for calculating needed retirement income but they are often argued. Not looking to get into a long winded debate on this but this is the one I go by:
If you multiply your annual expenses by a number between 25-30, whatever number you arrive at is your needed number (higher for those more conservative, lower for those who are less).
Ex:
My annual expenses are around 25k a year due to paid off residence and no car payment (and would be drastically lower in a foreign country with a lower cost of living).
25k x 25 = 625k (less conservative)
25k x 30 = 750k (more conservative)
If I'm confident in the calculations, once I have 625k parked in an income generating vehicle, be it a REIT, stock market allocation that pays dividends, or a 100 door unit, work becomes optional.
All of this goes back to what people refer to as the Safe Withdrawal Rate (SWR). This also varies depending on who you talk to, but most people who aren't alarmist are fine with 4%. All this means is that as long as you don't pull out more than 4% a year, you probably won't ever dip into your nest egg.
4% of 625k = 25k
4% of 750k = 30k
So, if the stock market (or your chosen combination of income generating assets) makes a return of 4% or better, you should be fine to pull that amount out to live on without ever having to cut into that chunk.
As most people I've seen post here are very resourceful and intelligent, the likelihood of a BP user just checking out entirely is something I would rate with very low odds. The excitement of a new deal will probably always lurk in the shadows, so 25x your annual expenses might even be high for you. This doesn't take into account selling assets, being hired occasionally for your expertise in your field, selling all that awesome art you created, inheritance, or finding all those gold coins in the crawl space of your trusty SFR.
I believe the quickest way to this number is reducing expenses (although boosting your income is definitely a close second, and something we're all in this thing for right?).
That's just my two cents. See you on the beach!
Originally posted by @Nick W.:
Everyone has their own beliefs and thus this is a very subjective question. The simple answer is:
Your passive income needs to match or exceed your expenses. The less your monthly expenses, the less monthly passive income you need.
People use a variety of rules for calculating needed retirement income but they are often argued. Not looking to get into a long winded debate on this but this is the one I go by:
If you multiply your annual expenses by a number between 25-30, whatever number you arrive at is your needed number (higher for those more conservative, lower for those who are less).
Ex:
My annual expenses are around 25k a year due to paid off residence and no car payment (and would be drastically lower in a foreign country with a lower cost of living).
25k x 25 = 625k (less conservative)
25k x 30 = 750k (more conservative)
If I'm confident in the calculations, once I have 625k parked in an income generating vehicle, be it a REIT, stock market allocation that pays dividends, or a 100 door unit, work becomes optional.
All of this goes back to what people refer to as the Safe Withdrawal Rate (SWR). This also varies depending on who you talk to, but most people who aren't alarmist are fine with 4%. All this means is that as long as you don't pull out more than 4% a year, you probably won't ever dip into your nest egg.
4% of 625k = 25k
4% of 750k = 30k
So, if the stock market (or your chosen combination of income generating assets) makes a return of 4% or better, you should be fine to pull that amount out to live on without ever having to cut into that chunk.
As most people I've seen post here are very resourceful and intelligent, the likelihood of a BP user just checking out entirely is something I would rate with very low odds. The excitement of a new deal will probably always lurk in the shadows, so 25x your annual expenses might even be high for you. This doesn't take into account selling assets, being hired occasionally for your expertise in your field, selling all that awesome art you created, inheritance, or finding all those gold coins in the crawl space of your trusty SFR.
I believe the quickest way to this number is reducing expenses (although boosting your income is definitely a close second, and something we're all in this thing for right?).
That's just my two cents. See you on the beach!
Love your input, Nick, thanks.
Originally posted by @Cindi Boyer:
Originally posted by @Sharad M.: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.
Hi Sharad,
Can you lay out how you started?
Cindi
Hi Cindi,
I simply started by living on the lower income between my wife and I and saved and invested the higher income and to this day, we still do the same thing. We started by investing into rental properties and just kept using the savings to keep adding to our portfolio.
Sharad
Originally posted by @Sharad M.:
Hi Cindi,
I simply started by living on the lower income between my wife and I and saved and invested the higher income and to this day, we still do the same thing. We started by investing into rental properties and just kept using the savings to keep adding to our portfolio.
Sharad
There are other posters on the Bigger Pockets forums who did the same thing -- with two incomes, you can evaluate if it's possible to give up one income to trade off to do real estate full time. Believe me, if you don't have two incomes, and you're just doing it on just one income (like I did) it can take more time and/or require more effort.
Originally posted by @Dawn Anastasi:
Originally posted by @Sharad M.:Hi Cindi,
I simply started by living on the lower income between my wife and I and saved and invested the higher income and to this day, we still do the same thing. We started by investing into rental properties and just kept using the savings to keep adding to our portfolio.
Sharad
There are other posters on the Bigger Pockets forums who did the same thing -- with two incomes, you can evaluate if it's possible to give up one income to trade off to do real estate full time. Believe me, if you don't have two incomes, and you're just doing it on just one income (like I did) it can take more time and/or require more effort.
Dawn,
I am sure that doing it on one income will take longer, but not everyone will get to the end result in the same amount of time. Some people will take longer than others. If I were on one income, I would do the same thing, live on half my income and save and invest the other half. It would have taken me longer than it did with my wife and I together, but the end result will be the same. Both scenarios will require discipline and making sacrifices in the present for a better future.