Passive Income: How much should you generate?

Question

We all know about passive income, and for a lot of investors, like myself, it is one of the main reasons we choose to invest in the real estate industry. When starting out, my goal was to earn as much passive income as possible, and as quick as possible. Currently, I am 20 years old, and I have come to realize that I do not need to rush this process. My goal now has shifted to creating stable forms of income, and retire as early as I can. True passive income is the name of the game for me. By this, I mean that eventually I would like to not manage my own properties because I feel like my time is better spent looking and underwriting new opportunities. Being hands free on my rentals is the ultimate goal in my case.

Investors should know how much 'passive income' they need in order to be financially free. This means taking into account all personal debt and expenses, and having income from rentals cover those expenses and business expenditures. Doing so allows for investors to have a primary target to reach to be financially free. Generating wealth takes time, and planning the right steps to achieve this 'freedom.' When I mention the word 'wealth' I do not mean rich, wealth is how long you can continue living your lifestyle without the need of a job. That is how you calculate the passive income needed, and now how do you achieve that goal?

Real estate comes in various forms, and an investor must pick what kind of real estate they are comfortable with dealing with. Along with that, and keeping your passive income goal in mind, one must also think what kind of real estate will realistically be able to set them 'free.'

For example, in my case I am a college student and I live below my means, and for me this means that my passive income number is relatively low. I have a portfolio made up of SFR and small MFR, because this was what lined up with my initial goal of becoming financially free. From now on, I expect to deal with larger MFR to generate wealth. I am picking these larger deals because it is the type of real estate that has caught my interest the most, and it is the niche that I have educated myself the most on. This makes me comfortable taking on these deals, and the learning curves that come along with it. Along with this, I feel large MFR (50+ units) will allow me to be more hands-free, since the cash flow is higher and will allow me to pay a property manager a livable salary. I would prefer to be able to pay someone a decent amount so they are incentivized to take good care of the asset.

What niche is going to allow you to achieve your passive income goals, and how is the process going for you?

Excited to hear your thoughts!

Check out my thoughts on SFR investing:

Single Family Rentals: Are they a good investment?

JD Martin · Answer

If I was 20 years old again (Ha! Don't I wish!) and I was looking to retire, I would seriously reconsider my life choices. If you are already considering lounging on the beach all day with an Apple-tini, you really need to find something that inspires you. What are you studying in college? Does it align with 50 unit multi-family housing? If not, why bother going to college?

Scott Mac · Answer

Just try to make as much as you can (as much as your able to work at it). When you get there, you'll know it. Your needs will change over the years (do you intend to afford a wife and kids, what size house, etc). If your looking for a comfort number in you keep dollars, at about $375,000 (2019 dollars) a year you can probably live a comfortable life without too many financial surprises. Good Luck!

JD Martin · Answer

I disagree that business management does not coincide with owning the kind of property you are talking about. What you are talking about is running a business, not really owning passive income producing assets. Anything the size you are describing takes some management; even if you have professional property management, someone has to "manage the managers". So I think you are in the right field. If I were you I would try to leverage that degree into a good paying W2, which will give you means as you strive to acquire that 50 unit property. Nothing banks and other investors like to see more than income that is independent of the asset.

Ivan Guillen · Answer

@JD Martin I am a business management major, so sadly, no it does not align with large MFR at all. I ask myself the same question all the time, but I was lucky enough to have my tuition covered and not take on any student debt. This is what has kept me in school, but I have always prioritized investing over my classes. Ultimately, my parents would like to see me go the traditional schooling route, so I figured it is the least I could do in exchange for the sacrifices they have made. I have been able to manage a hectic schedule, and continue to grow in the industry. While at school, I have become a licensed agent. I hope to learn more by doing some brokerage transactions, and helping investors find opportunity in the Indianapolis area. As of now, I have viewed school as a networking opportunity, and leveraged that the best I can. I agree with you that my time would be better spent looking for new opportunities in my niche, but I am pretty close to graduating so might as well finish off strong.