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?
Bao,
From one immigrant VNese to another. I came to this promised land when I was almost 16. Always have the love for real estate. Love the infomercial from Tom Vu back in the late 80's to early 90's.
There are a couple of ways to get to $100k/year in cashflow as I have found out. If you own $2MM worth of real estate and it appreciates at 5% annually, you can tap $100k of equity tax-free. That's equivalent to a salary of $150k-$160/year before taxes. In my market, about 60% of my cashflow is being off-set by depreciation so I still have to pay taxes on 40% of the income. By the way, $2MM worth of real estate in my market is not very much.
As much as some people like to chant appreciation is icing on the cake. To me, it's the cake. Up until 2014, I have gained about $2MM in equity from appreciation, flipping, cash-flow and principal pay down. About 70% of that gains came from appreciation. I was able to tap over $700k in equity from appreciation in the last 18 months and rolled it into apartment buildings, which I bought for anywhere between $300k-$400k below fair market value each. So $700k down payment is giving another $700k in equity. That's 100% ROI. Who says you can't eat appreciation? Try it sometime. You might get addicted. This is the year where I will likely gain $1MM in equity from appreciation. Is that really icing on the cake?
I have been a student of the housing market since the late 1990's, but didn't pull the trigger until the recent mortgage meltdown. I soon realized it was an opportunity once in a lifetime and went "all in". Wife and I had $100k in savings in 2008 and a HELOC of $266k. We have turned this into a very substantial real estate portfolio. Thanks to my wife for giving me the support to quit my W-2 job in late 2009 when the sky was falling. The cash flow is getting close to replacing my six figure salary. However, the equity gains are huge. How long does it take an average Joe to save a couple millions? How long does it take to get a couple millions in cashflow?
It's possible, but you have to have an open mind and are willing to tweak your acquisition model along the way. Do what you do best and leave the rest for others. I started out buying REOs in summer 2008. I got short-changed by an REO listing agent on a deal so I decided to go over his head by learning how to buy foreclosure properties at the courthouse steps. As the trustee sale market dried up, I called up all the pending short sales and asked the listing agents to contact me if the deal fell through. I let them double-ended the deal while I was getting these for anywhere between 65%-75% FMV. The market has moved up so much that these short sales were lagging behind in prices. Once single units dried up, I moved into the multi-family (5+ unit) market. I used the same strategy by letting the listing agents double end the deals. We were able to pick up some great deals. What I have learned is that "give others what they want, and you will get everything you've ever wanted." Agents make a living by earning commissions. Let them double end the deals, and they will bring you more deals. When you go to sell, give the listing to whoever that brought you that deal. Everyone is making money, and everyone is happy.
With respect to chasing yields by buying in lower end markets, let me leave you with this quote from Master Oogway "One often meets his destiny on the road he takes to avoid it."
Best of luck with your endeavors.
Minh
Originally posted by @Cindi Boyer:
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!
Financial Independence Point. Where I have enough income from passive sources to not worry about working a job. I will probably still have the job of managing the properties at the 10% of rent I built into my equations which is in addition to standard cash flow profits.
thank you,!
Originally posted by @Cindi Boyer:
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.
I am not sure by what you mean "going after each other's deals" The forclosures on the MLS often go "highest and best" meaning there are multiple offers on the same property, however I have no idea who to other people are.
Wow this took awhile to get through. I am small time compared to most here but here is my story from growth and income. @Bao Nguyen I started investing in real estate as a means to make money, not because I moved out of my house, 20+ years ago. Me and another guy scraped up $1,200 and bought a property from a guy for the outstanding tax liens on it. My partner and I rented it out for many years. There was a fair number of cheap houses around but we were too broke to afford a down payment. We acquired a property with 3 houses. The biggest fancy one was like a small mansion that looked like it would collapse. We fixed up the 2 small houses on each side and rented them. Occasionally we would sale a property to a renter and get an infusion of cash to help buy another property. Once in awhile we would put a thousand or 2 in from our savings to help buy another property. My partner was running a real estate office under a local broker and would make commission from the purchase and sale. He branched out into a small contracting business, and did most of the repair and fix up of properties and made a little money doing that as well. We never took any money out of the business, it was intended to build and grow and eventually provide either income or a retirement supplement. We both had full time jobs, and it was hobby we both worked at. A fair bit of work was done by us on the properties. My partner had been a contractor who went bust when the economy crashed. After about 12 years he went back into contracting and moved to a more active area. I took over running the business mostly by myself. After another 7 years of that I bought my partner out by selling a few properties and refinancing other properties. So properties that had 50% equity were refinanced back to 80% equity with longer loans. There was a little cash left over after the sales and refinances. For the last 3 years I poured all of the extra money and about $40K of my own money into acquiring more houses and added 7 last year. We used mostly 15 year loans but one or two were 20 year loans. We would get a property paid down and refinance it for the money to put down on another property. We normally showed a loss of a few thousand dollars a year, sometimes when we sold a property we would have a profit. I now have about 18 houses and about 12 apartments.
So for your comparison I have a full time job. Luckily for now I am the boss. I spend about 15 to 20 hours a week during the summer and maybe 10 to 15 hours in the winter working with rental stuff. I do a lot of work myself. My wife spends about 15 to 20 hours a week taking payments, paying bills, making deposits, and doing the accounting. My gross income from rentals was about $120K last year, this year will be a fair bit more. All extra money is used to fix up properties or buy new properties. This year I only added one property. Due to a local economy bust I am concentrating on fixing up big ticket items. Properties were bought distressed and fixed up to rent. I hope to pay down mortgages aggressively the next 2 years and when I see the local economy begin to recover use the accumulated equity to buy more properties at a deep discount. I then plan to retire. I have saved aggressively the last 8 years from my salary and put it in a small portfolio of stocks. I would say that I would retire in 5 more years if I could figure out health insurance. The idea of waiting until 65 to retire to get medicare is depressing. Right now I am paying down about $3,200 of principle on loans per month. That will increase each month as interest payments decrease. I plan to cash flow at least $2,000 per month in 5 years, then add in my state retirement pension, and firefighter pension. That will be more than my net money after taxes now. My income from rentals will grow each year as more units are paid off. In 10 years I should be netting $4,000 per month off rentals, and in 15 years I should be netting over $6000 per month in rentals. If I had accelerated my investing 10 years sooner I would be retiring about now. The properties I plan to buy in 3 to 5 years will be for the benefit of my children and grandchildren. I plan to gross around $140K this year and maybe $170K the following year. I have gradually moved from lower end C- properties to C+ or B properties. In my area the nicer the house the less it makes me. I lose at least $100 per month on my two nicest houses. They are the easiest to rent, but price rent ratios stink. The bigger you get the easier it is to grow more. Good luck.
Originally posted by @Jerry W.:
Wow this took awhile to get through. I am small time compared to most here but here is my story from growth and income. @Bao Nguyen I started investing in real estate as a ....
Thanks for the detailed and thoughtful response Jerry! Your numbers are realistic and it's what I'm starting to experience as well. Thanks again for the honest answers. Of all the books I've read, and what I've learned from mentors and seasoned investors, they all pretty much tell the story you are going through as the tried and true way to make it in real estate. It's work, it's a job, and it takes a long time, but it does pay well in the end. Glad to hear you're over the hump and things are starting to come to fruition.
Your numbers are depressing to me. Even after you brought it up to $170k, that's less than $500/month in rent per door. Wow, rents are so low in your area. Maintenance and capex would absorb so much of your profit. If you were to invest in hard money lending or crowdfunding, do you believe you would get a higher yield? It seems you work so hard for so little yield. Of course, I could be wrong. You'd have to excuse me since I'm from the Silicon Valley where everything is inflated.
My partner and I bought 3 small buildings this year totaling 21 units and in contract to purchase the 4th one, which will close in 3 weeks. Total acquisition cost on 3 buildings is $3.525MM. Spent $55k in rehab costs so far. We brought rents up from $266k to $357k. Appraised value came back at $4.65MM. Fair market rent is closer to $445k so we still have a way to go. That was the maximum the City allowed us to raise the rents due to rent control. The value would be north of $5MM once the rents are closer to fair market. Some people drudge about turnovers, but it's great in our rent control market. Renting to students would almost guarantee a turnover every 2-4 years, which would allow us to bring the rent to fair market.
When I started out several years ago, I had $100k in savings and a $266k HELOC. I told myself if I could acquire $1MM worth of real estate each year, I would control $10MM worth of real estate in 10 years. Unfortunately, I didn't have $2.5MM. However, if I could acquire properties for 70-75 cents on the dollar, I should be able to control the asset without much skin in the game.
Now, if I can control $10MM worth of real estate and get 5% yield from the $2.5MM equity, that's $125k/year of cash-flow. Principal paydown is another $125k/year. If the properties appreciate at an average annual rate of 3%, that's $300k in equity. This means my networth is passively increased at $425k/year from appreciation and principal paydown. How long does it take for an engineering couple making $250k-$400k/year to save $425k/year? That's why I love Bay Area real estate. It just has an extra zero at the end with the same amount of work.....I think. :>)
I just saw this quote a couple days ago, and I shared it with my partner. "If you're not excited about it, it's not the right path." Although I'm running wild with the new biz that my wife and little sister are excited about, I know where my heart belongs.
Cheers.
@Account Closed, I always like reading your posts. The road I have taken is not a fast one. Perhaps I can add some things to explain why.
First keep in mind Me and my partner started with $1,200. I had less than $200 in my pocket when I moved here but I had some assets and a small amount of student loans and hospital and Dr. bills for the births of my 2 children. The first 4 or 5 years were only 3 or 4 properties with slow growth. As we got a few more properties we had more income coming in. Instead of me and my partner doing all of the work we paid his employees to work on the properties. I was VERY inexperienced, but was able to get banks to loan us money on the good deals when we could find them. It was considered a good deal by us if it would make it's payment plus taxes and insurance and have a few dollars left. We were using 15 year loans though so our payments were high. We would often have to feed tiny amounts of cash to keep in the black. My partner did the managing part, I got financing and found acquisitions and helped with labor. The tipping point for me was when we had an offer to buy our apartment building with 5 small rentals in it. It was just a big house broken up into 1 bedroom apartments. I had just taken over the management. I sat down and figured out income of our building versus the price we were offered. My partner said sale as we would make a profit. I compared the income ratio to what our houses were making and realized it made more money than any house for the same price. I told my partner we should buy at that price, not sale. There were 2 identical buildings next to ours so we made an offer on them and bought them by refinancing 2 other houses we had. We paid just above what the buyer who wanted our property had offered. Here is how bad I was at investing. I only saw one apartment in each building, and did not factor in that electricity was not separately metered. I didn't even realize that there were only 4 units in one building and 3 in the other. Anyway, after that I realized there needed to be more math involved than can we make the mortgage, taxes and insurance payments. I slowly began adding properties as equity would allow, but started trying for more cash flow. I began doing a lot of repair work myself as well as doing the renting. I made a lot of mistakes and learned a lot. Eventually I began to resent doing all the acquisition, financing, fix up, renting, collection and book keeping, but splitting the income and equity growth as my partner had moved out of town and started a construction company. The property had finally tipped over to more equity than mortgage. I decided to buy rentals on my own, outside of the company. I discovered Bigger Pockets while researching for more information on being a real estate investor. I eventually bought out my partner. We sold some properties and I refinanced all that were left. He got a check for $300,000, plus some money from some house sales. I got full ownership, a lot more monthly payments, and some money in my pocket. I dropped my cash flow down in order to buy out my partner's share. Then I took my money and every bit of equity I could squeeze out and started adding properties. None of them cash flowed that well, but they were better than we used to get. I made them account for maintenance and cap ex, etc. If they could break even doing that I bought them when I could. I put 3 and 1/2 roofs on this year and I was on the roof doing the work with what laborers I could find. I am not after cash flow, it is almost impossible to get with 15 year loans. I am not after appreciation, though I get some of that, but it is is very small here and I expect a downturn soon. I am banking on loan pay down. I put less than $20K into the business total in the first 15 years. I got about $20K out out of it. I added about $40K over the last 3 years. In 10 years or so I should have paid off $800K in bank loans. All of my properties in that company will be paid off. I have 3 rentals I bought privately out of the company, I am also a half owner of a commercial property that is separate from these, and I have the money I have made in my career, like retirement accounts and state retirement benefits. I have a few non income producing properties as well for my horses and my office building. I only showed the real estate rental side. The rents here are pretty low. This month I have rented a large 3 bedroom house with attached garage for $750 and am glad to get it. The house is 97 years old. I have rented out one house with one bedroom for $450, and still need to rent out another one bedroom house for $500 if I can get it. I rented out a 4 bedroom house for $700 and it was empty for well over a month. I have apartments that rent for $400 per month. I pay a manager to rent the all the apartments. Real estate is get rich slow here.
I would not mind investing in crowd funding or hard money lending, but I have only put $40K into the company of my own money. How much income would that net me? If I even had $100K to invest bank the early 1990s the size of the company and its income would hopefully be dramatically different, but I only had $600. In hindsight I should have put more money into real estate, but I was only taking home $1,200 per month and paying off student loans and Dr. bills. Without real estate though, my retirement would be a bit gloomy. I did trade cash flow now for larger equity later by taking out more loans. Hopefully I will live long enough for it to pay off.
You will get a laugh out of this, I have tried to move up into fourplexes but the prices are too high to justify buying them, the prices are ,,,,,,, wait for it ...... $175K to $250K. I bet you would have a heart attack to find those in your area at that price, but here they do not cash flow. We need to have coffee together sometime and talk real estate. Call me if you are in the area, :).
I did a quick read on your town. Wow, only a population of 3,000? The weather is brutal. I would stick out like a sore thumb if I were to visit there. LOL!
@J. Martin, maybe we should plan a trip out to Thermopolis to visit Jerry. Have any real estate law questions? Maybe we could get them answered for free over coffee, lunch and dinner. LOL!
Jerry, I've been debating for several years now about going back to school and get my law degree. It's not something I need, but it's something I would love to have to hang on my office. What is your take on it? Having a family with a young daughter makes it a little tough though. I love school so it's not an issue going back. When my wife could stay home full-time, that would make the decision much easier.
In San Jose, you're looking at $1.2MM-$1.5MM for a fourplex. At $900k, it's hella ghetto. There's a town 2.5 hours drive away that has fourplexes at your price range. They're getting between $550-$650/unit. I know some Bay Areans, who are chasing yields, bought into this market and some equivalent markets. It goes back to what Master Oogway has to say. "One often meets his destiny on the road he takes to avoid it."
To me, there's so much advantage investing close to home. It's our home. We know our turf better than anyone else. Unfortunately, we are the ones that put obstacles in front of us. We put limitations in our own minds. In fact, we are our own enemies.
What I have learned is that life would pay us no more than what we had bargained for it. The beautiful thing is that life would have willingly paid for what we had asked of it. At the risk of sounding arrogant, my partner and I no longer go into a deal where we don't get 100% ROI immediately. We may settle for 75% ROI, but that's it. If we invest $400k into a deal, we want the deal to have $400k in equity. So far, we have been lucky, which makes this our best year.
People keep repeating deals are hard to come by, or there are no deals out there. They are right. However, if they change their belief that deals are abundant, they're also right. See how we are our worst enemies?
My new biz partner said deals are falling on my lap now so it's easy for me to say. Another BP member said I can recognize where the opportunity is. It's second nature to me. The reason I love my signature is because water has the ability to adapt to any conditions. It can become gas, liquid or solid under different environments. Be water my friend.
Maybe, just maybe, I'm an optimist and I'm looking through a colored glass. It would be great to meet you one of these days and exchange notes.
@Account Closed Hey Minh, how much does each unit in a 4-plex at $1.5million rent for in your area? From what it sounds like, your biggest gain is from appreciation, not from cash flow. What's your exit strategy? How long do you hold your properties before you sell them off and capture the appreciation/equity gain?
Originally posted by @Bao Nguyen:@Account Closed Hey Minh, how much does each unit in a 4-plex at $1.5million rent for in your area? From what it sounds like, your biggest gain is from appreciation, not from cash flow. What's your exit strategy? How long do you hold your properties before you sell them off and capture the appreciation/equity gain?
Bao,
The $1.5MM 4plex will likely bring you $10k/month gross rent after stabilized. However, it's not my game. I'm doing 5+ units where most investors are shying away. The path less travelled is often filled with opportunities, which appear as work. :>)
You're right. We make most of our money on forced appreciation. Cash-flow is icing on the cake. When we keep looking only at the cash on cash return (CCR), we're missing the big picture. Here's an example why cash-flow is just an icing for us. My partner and I bought a 6-unit building in May for $1.175MM. We brought rents up from $7,250 to $9,500/month. Appraisal came back at $1.55MM. We took out a loan for $1MM. We have about $200k tied up after factored in closing costs etc... Based on the lender's underwriting, we're looking at about $12k-$13k of net cash-flow/year or 6-6.5% CCR. Nothing to ride home about.
This is where it gets interesting. Fair market rent (FMR) is close to $14k/month. If we raise rent 8% annually as allowed by the City, that's an extra $8,700/year of cash-flow. That's another 4.3% yield on top of the 6-6.5% yield. In a couple of years, our yield will be in the mid teens and counting. As they say in hockey "A good player goes where the puck is while a great player goes where the puck will be."
Now, what would be the value of the building when we brought rents up close to fair market? If we take it to market now, I'm confident someone will pay us somewhere between $1.65-$1.8MM. Not too shabby for 6 months worth of work. Why sell now when we still have plenty of upside in rent? We could be cash-flowing $5k/month after we bring the rent to fair market? So far, we spent $3k on cosmetic work on this building. :>)
We consider ourselves opportunistic buyer and seller. We will buy for the right price, and we will sell for the right price. For the above mentioned building, I know my partner will not let it go for less than $2MM at the moment. We are open to selling after 1 year and 1 day to qualify for long-term capital gains.
Here is the beauty, if we don't get our wishing price based on our pro-forma rents, we don't have to sell. In fact, give us one good reason to sell? We can do another cash-out refi and walk away with tax-free/deferred money. $5k/month of cash-flow can service another $1MM+ worth of debt.
We have done 3 deals like this YTD and will close on our 4th deal on December 11th. We sold one deal that we bought last year at 1 year and 2 days mark so we qualify for long-term capital gains. Again, we are opportunistic buyer and seller. We will buy for the right price and will sell for the right price.
Hope it makes sense why we're doing what we're doing.
@Account Closed Thanks for educating about local markets and sharing your wisdom always. I learned a lot from merely reading your posts.
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Dan Gheesling:
@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.
Correct. What does that tell you? Answer: Buy in DBH...don't buy rentals in Plymouth. Not a tough one.
@Account Closed can you give us an update on your portfolio in the last 12 months
Originally posted by @Eddie T.:
@Account Closed can you give us an update on your portfolio in the last 12 months
Hi Eddie,
My partner and I bought an 8-unit building this past summer. We're in the process of stabilizing it. We'll shop it around in the next couple of months to see if someone is willing to pay $2.7-$2.8M for it. I believe we can easily get it sold at $2.5M. We paid $1.86M and spent about $60k in rehab.
I sold a duplex late last year and used part of the sale proceeds to acquire the 7-unit building on 12/11/15 with my partner. We brought rent from $7,826/mo up $9,600/mo thanks to a couple of natural turnovers. We completed a cash-out refinance and pulled out about 45% of our initial investment on this building.
I sold another duplex this month to raise liquidity. Plan to sell another condo this coming spring to raise more liquidity. The rents in our market appears to have topped out for this cycle. The rise in interest rates will put pressure on prices in the second half of next year if it hasn't already. Unless our local economy experiences another IPO liquidity in 2017, We're approaching the end of this housing run-up. Only the low-end market is still making a push, but that's about it.
One of our agents/brokers took us out for lunch last month and told us to sit tight for at least 12 months unless we are seller. Another broker said it will take sometime for sellers to come to the realization that the market has changed and adjust their expectation.
I'm using this opportunity to take it easy as RE has finally caught up to me and I've been feeling burnt out.
Hey @Account Closed, even a fun job can take it's toll. Hang in there and stop and smell the roses for awhile. I am feeling a bit burned out myself and have not done much work this last week trying to recharge a bit before a jury trial later this week. Of course if I made the kind of profit per deal you are doing I would probably quit my day job and go full time real estate. Anyway good to hear an update on you.
Originally posted by @Jerry W.:Hey @Account Closed, even a fun job can take it's toll. Hang in there and stop and smell the roses for awhile. I am feeling a bit burned out myself and have not done much work this last week trying to recharge a bit before a jury trial later this week. Of course if I made the kind of profit per deal you are doing I would probably quit my day job and go full time real estate. Anyway good to hear an update on you.
Hi Jerry,
I've been feeling better in the last couple of days hence I'm back on BP. The gains are definitely decent thanks to appreciation in the last few years. $244k gains on the duplex sale in 2015, about $300k gains on the sale of the second duplex in 2016. I have to keep a close eye on what I'm selling this year as a couple of sales may push the gains into $500k+ territory, and the tax liability can be massive. I got hit with AMT in 2015. More than likely I'll get hit with with AMT for 2016. This is the reason why I can only liquidate one asset/year to reduce the tax liability.
I still get giggles thinking about those debates about cash flow vs. appreciation, which is better. It's all money, and I don't discriminate. ;)
You should move to the Bay Area where it pays to do RE full-time. Good luck with your jury trial later this week. ;)