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Updated over 9 years ago, 09/01/2015
Financial Plan to $100K yr income
This is uncharted territory for me. Am I on the right track?
Goal: Generate $100k a year net income from rental real estate.
Background: Currently own a few SFH's and a condo from early 90's
I have long term W2 income, current ratios are good, and good credit.
Plan: 50 units @$200 minimum net per door to account for vacancies.
$50K per unit at maybe 60% occupancy so maybe 85 units total. The cap rates are determined based on actual occupancy and gross rents so this would be paying for the 51 or so units right?
Thinking maybe about $2.5 million?? if 5% down $125K with seller carrying a second for the other 15% and getting a Freddie Mac Small Balance Loan program.. not sure if a seller second would be allowed.
What might this look like..
Prefer A properties but understand this might not be realistic without starting with a huge amount of capital. B properties would also be ok (not sure if this can be done).
I have worked way too hard to be willing to allow for too much risk of the gains we have made over time and money we have saved. I would like to factor in a realistic amount of money that would be needed in reserves to prevent a problem with a property resulting in foreclosure because I didn’t have either enough money set aside or don’t have access to the funds needed to do the repairs. How much would be recommended? I would like problems to be bumps, not the end game.
I have a paid off property worth $270K and I prefer not to sell it, but to leverage it in some way. I understand a blanket loan requires 5 properties and a minimum loan size of $500K. A concern I have with a blanket loan is the higher interest rates and lack of flexibility, in addition to the prepayment penalties. Another concern is the short term loan length of 5-10 years with rates at a historic lows. I knew someone who lost their home in the 80’s when rates where in double digits. I don’t know if this will happen again but I know it has happened in the past.
I would like something I can hold long term that will be solid.
I also have about 3 more years to draw on a unused equity line of $45K and then 10 years to pay it off.
It would probably be best if it is a property(s) with upside potential i.e.. under market rents due to outdated kitchens/baths or older landlord who has allowed a property to be in some disrepair (not to bad though). Or maybe it is in a good area but due to mismanagement has vacancies that can be solved.
Maybe get a property(s) with seller financing or 10-15% as a second to a commercial loan or a cross collateralized loan. Even if I could put more down I am not sure that it would be a good idea because it might be better to have the money in a reserves account.
I have great 30 year fixed rates on my other properties and want to keep them separate.
I would rater develop a solid game plan and get my ducks in a row than jump into something that I will regret. With a plan I will know what I need to shoot for and start determining the steps I need to take.
I understand there are more details and variables but wanted to take a shot at this and see what people think.. Crazy or possible?
@Rocky V. Congratulations on reaching your goal.. I am aspiring to get there. And may you reach your new goal soon.
With your background it can be a definite advantage in this industry. By being able to check out the properties, assess the costs, and do the work, it can make the process much smoother.
What price point have you been utilizing for your buy and hold rentals and are the returns still available with the gains the market has made?
Originally posted by @Anna Shaver:
@Michael Seeker In the project you are referring to how many units was it? What percentage of occupancy do you think the commercial lenders would like to see that would still have some growth potential?
If I started with a smaller complex would that be helpful? I don't want to go too small if possible but am open to suggestions.
I don't know the exact unit count, I believe it was about 250 though. As for what commercial lenders like to see related to vacancy...I think their primary concerns are that the rents can service the loan long term and that the buyer/owner is competent and capable of at a minimum maintaining those rents. I talk to a lot of local commercial lenders and they all have different appetites for risk. The more lenders you can connect with the more likely you'll be able to find one who wants to work with you and help you achieve your goals.
I never understand these $100K goals. Right out of the gate, I wonder why not $92,500 or $104,500. And "net"... you mean after taxes? I look at what $100K W-2 salary is and what the "net after tax" is ... and $100K in "net after tax" real estate holdings has substantially higher net before tax when you account for depreciation allowance.
Why not 'I want $92,500 in free cash flow... and have a current year tax liability of $0.' I guess I'm not answering your question. $100K per year, it's like saying 'I want 100 houses...' which is kind of meaningless.
I like @Joel Owens answer (gave him 2.. each post.) Map it out via a PFS.
@Chris Martin Not net after taxes, net after real estate expenses excluding depreciation for the property(s). I am definitely going to do that. And no, I don't want 100 houses. When creating a plan it needs to be defined. I will need to run different scenarios to see how the number could work. If one said I want to be able to not have to work so much, I wouldn't really have a starting place.
A PFS shows where I am today and what I can personally qualify for. It doesn't show where I want to go.. to do that I need to start with the goal and work it backwards. Or at least that is how I am trying to approach this in this instance.
Well a PFS if properly filled out will show your income and expenses so 100k income and for instance 30k taxes would be a net 70k and if you dont use that cash it goes to the balance sheet as assets (unlevered). I think this is what Chris and Joel was talking about so you can be more accurate with the goals and specifics on the 100k.
Generally a PFS is to see how the debt coverage of the property you're applying for will affect your current financial scenario.
If you have a very high level of global cash flow which is cash flow monthly / monthly cash out flow = percentage of global debt coverage as a "whole."
A global debt coverage of 1.0 is means you have 1 dollar coming in for every dollar going out.
Ideally a commercial lender wants to know that you have at least 1.25x global DCR.
If you're working on a more risky project like a vacant apartment building with low occupancy and deferred maintenance the lender may require your current cash flow or DCR to debt service the entire loan assuming $0 rents before they may consider lending to you.
As a part of the risk analysis the underwriter will even do a global DCR with out your working/earned/ordinary income to see if your "passive income," alone can cover your expenses each month as a means of stress testing your approval.
Investing all over DFW from Garland to Grapevine to Cleburne and all areas in between.
I look at all properties below $300K with the majority of rentals being in the $120-160K range. I also invest in Mobile Homes on land and find that they are really good for cash flow. Just keep in mind you make your money when you buy no matter if you are holding or flipping.
Dear Anna,
Achieving a passive income of $100,000 is a very ambitious goal. I have not met many members in bigger pocket who have achieved this goal who started from scratch and who have built this type of portfolio on their own. I know of maybe 5 BP members who have achieved this.
According to the 2011 IRS records, an average American household makes $51k a year. To be able to make double this amount passively is the number I believe where one is truly rich/wealthy and in the early stages of financial freedom.
I prefer to reach my passive goals with the minimum number of assets as possible. I personally find it that 10 SFRs that can generate $100k in passive income is much easier to manage than 50 SFRs that generate the same passive income. The type of asset I prefer to build my retirement portfolio is "A" class SFRs.
In my farm area, which is the northern suburbs of Atlanta, one needs to acquire around $1.3 million dollars of Assets with no debt service to reach the $100,000 passive income. Your assets will continue to appreciate while your retirement SFR portfolio will provide you a secure financial future for a life time.
If you have a $1.3 million equity portfolio where you have withdraw $60,000 a year for next 21 years, you will have nothing after 21 years. You can clearly see that real estate is a superior path to retirement.
Hope this information helps.
-James
@James Park
Hi James, so it sounds like you are suggesting 10 SFH instead of a 50 or so (could be smaller) unit apartment complex. Based on the $1.3 million paid off I am guessing you are suggesting an average price per property of $130K each. Just wanted to confirm is the income taking into consideration the property taxes and insurance still due on the properties after they are paid off?
I started investing in rental real estate in California in approximately around 1992. I own 2 other rental which I purchased in 2001 and then a second in 2006. Because I am in the San Francisco Bay Area I have had the benefit of the appreciation gains. While it is not as aggressive as San Jose or San Francisco it has been good to us.
What types of rent would these properties generate?
What type of neighborhood would this be in? would it be an A or B neighborhood and what is the property taxes like in your area?
In our area we have something called "mello roos" in some developments in less expensive areas which makes the property taxes higher because it goes to support the schools and the developers don't always pay it passing it on to the homeowners.
In Georgia there is an additional 3% tax on the sale of real estate for non residents which would apply I believe if I didn't create a business structure there as well. In CA I would need to pay $800 per year per LLC even if it wasn't created within CA.
Your feedback would be appreciated.
@Anna Shaver We have similar ideas. I have been modestly successful with single and small multi-family places and have been thinking about trying to buy an apartment complex in need of better maintenance and management.
Like you, it has taken me a lot of work to get where I am and I don't want to take on too much risk. After looking around at financing options (@Albert Bui has been really helpful) I have decided that I really need to get some bigger pockets before I can tackle apartments with any kind of reasonable risk. I am going to not get rushed and stick to my current game plan until I can do 30% down on a moderate size apartment investment. Maybe after that I could be in the ballpark of doing something like @Michael Seeker is talking about.
Hi Anna,
What are your current rents per month off of each property currently versus the value of the property??
- Joel Owens
- Podcast Guest on Show #47
Anna I re-read over your initial post again. I understand what you are trying to do but it is highly unlikely in the current multifamily investment cycle to pull off such a feat.
You want ultra high returns but low to no risk of your capital.
The multifamily sector has been recovering for years and there is stiff competition from all cash buyers on value add properties. Being new to anything other than SFR I do not recommend you go for value add with new asset class right out of the gate. Those type properties are usually reserved for investors well experienced in that asset class and are versed in the risks that those properties have.
I am not trying to be a downer but I am a realist over an optimist. The optimist might get lucky every one in a hundred or a thousand properties but buy nothing the rest of the time. I can't run a business that way.
When I look at clients I see what is possible in the marketplace, what they want to do, and if they have the capability to do it based on their resources without having to get another partner.
James specializes in SFR and we have met for lunch before. We have differing views on things because we work in different spaces. He is comfortable in SFR because that is what he knows and I am comfortable in commercial. You might not be ready just yet for the leap into commercial. I would talk to various people and get opinions.
- Joel Owens
- Podcast Guest on Show #47
I have admiration for people who have had the courage to go the less traveled path (not just work for the paycheck) and hope that I will be able to have some of the same experiences you have had in your projects.
I am grateful for all of the people who have taken the time to respond in regards to brainstorming on how this goal could be achieved and for the benefit of all of the knowledge of the different investors on this site.
I have read many books on real estate in the past and was very disappointed that most authors were more interested in making money off books than teaching about real estate investing. They gave general ideas that were not complete and didn’t enable people to utilize the strategies. I have read some books that were good and informative but that seems to be not typical.
I have learned more in a short amount of time reading this site and listening to the bigger pockets podcasts than I got out of the books.
I attended a few REI groups quite a few years ago and rather than a learning experience it seemed to be more product pitches. Most people there were more interested in talking about setting up business structures than knowing what part of real estate they were interested in investing in and what strategies they wanted to use. I wanted to know where all the real investor went so I could learn from successful people.
I was gullible at one point and paid for a guru weekend which didn’t offer any actionable strategies only to find it was an extended pitch to spend more money with them. Worst part was I didn’t believe in what they were teaching.
I went to one REI group where they were pitching buying 10 packs of homes in a weekend during the height of the market and I decided I didn’t want to have anything to do with a group that felt they could offer it in good conscience.
It is nice to be part of a community that encourages careful and intelligent investing choices.
I too would like to have bigger pockets :)
@Joel Owens Your feedback is greatly appreciated. Yes, I have too much money tied up in properties that don't bring in the same rents as other markets. LOL with anything I need to evaluate what I have and what could get me where I want to go..
@James Park I would be open to hearing more details about what can be done in your area.
Originally posted by @Albert Bui:
Well a PFS if properly filled out will show your income and expenses so 100k income and for instance 30k taxes would be a net 70k and if you dont use that cash it goes to the balance sheet as assets (unlevered). I think this is what Chris and Joel was talking about so you can be more accurate with the goals and specifics on the 100k.
Generally a PFS is to see how the debt coverage of the property you're applying for will affect your current financial scenario.
If you have a very high level of global cash flow which is cash flow monthly / monthly cash out flow = percentage of global debt coverage as a "whole."
A global debt coverage of 1.0 is means you have 1 dollar coming in for every dollar going out.
Ideally a commercial lender wants to know that you have at least 1.25x global DCR.
If you're working on a more risky project like a vacant apartment building with low occupancy and deferred maintenance the lender may require your current cash flow or DCR to debt service the entire loan assuming $0 rents before they may consider lending to you.
As a part of the risk analysis the underwriter will even do a global DCR with out your working/earned/ordinary income to see if your "passive income," alone can cover your expenses each month as a means of stress testing your approval.
I am familiar with DTI ratios and not going over the 50% ideally. When you are talking about global debt coverage, do you mean the net passive income before taxes and is the W2 income before or after taxes?
With the stress test for the passive income covering the project, this would also count the income from the new property if I were to get a stable property that is in the 75% occupancy range, correct?
When I mean global debt coverage it assumes total cash flow before taxes divided over total cash flow going out as a "global," picture view.
So if you had:
Income -
10000 salary (both)
3500 rental income "net"
Expenses -
Expenses (living) of 2500
Mortgages (total) of 3000
Other Obligations (Car/Credit cards/etc) - $0
It would be 13,500 total cash in flows / 5500 cash outflows = 2.45X global debt coverage
The above is a simple way to look at it and there might be adjustments to this but I didnt want to get complicated. The above also assumes the lender is a commercial/portfolio lender since residential lenders generally do not use debt coverage or global debt coverage.
The only difference with global debt coverage and normal debt coverage ratio is that normal DCR only takes the subject property into account not the global expenses and cash flows of the individual.
Your question about the "stress test," is more geared towards commercial lenders on the residential end for conventional 1-4 financing we do not stress test things we just take gross income X 75% - PITIA (prin/int/tax/ins/assessments) simple as that. If you have the property claimed on the tax returns the underwriter will most likely use the income "calculation," that shows up on the tax return or the above 75% of gross formula if there is limited history on the tax returns.
Regarding stress tests, they can be done with a multitude of factors to ensure the loan will be conservative enough varying from: lower occupancy, market rents decline, a higher debt service/mtg payment, adding in additional costs like prop mgmt, repairs, cap X reserves, etc. The point of the stress test is to ensure you can "handle," the debt service even in more "lean," times and is generally done in commercial lending environments or more business oriented lenders (portfolio).
@Albert Bui Thank you for the clarification. Looks like I have some numbers to run.
Typically the upside in a building comes from renovating/upgrading, doing a great job of managing occupancy, and keeping expenses in check.
Properties with large vacancy issues are probably not going to be cashflowing. They are unlikely to be able to by purchased on any type of a decent cap rate. These types of deals usually go on a price per unit with your projections determining what they will be operate at once you are finished fixing the issues.
@Steve Olafson I think if I were to take the next step into multi-family I might need to put my complex into a shrinkydink oven. If I looked at a 12 -14 unit building at about $50K a door with a 20 year loan @ 5% interest assuming the building were close to full occupancy with about 20% - 30% down I think the numbers might work. This would also be based on 10% of the cost of the building in liquid reserves for the lender to feel comfortable.
It sounds like typically if it is 10 units or under the lack of multi-family experience requirement might be considered if the numbers were sound. Alternatively, with one lender their documentation said that you could also provide a letter from the property management company you will be utilizing. This may be more likely to be considered when the property is smaller. I don't know if this is a common practice or not.
From what I am seeing it looks like the commercial loan value needs to be a minimum of $500K which would be a tiny for this type of loan. I am not sure how many lenders offer this small of a loan size. I am only in the initial stages of looking at my options and what this would look like.
This is also based on theoretical numbers and not using a specific market, so it is debatable if it would be something I could find. I understand that but figured this is a starting point.
This is just one possible property configuration as a step to reach my goals. Another option might be going the 4 plex route first.
I am open to feedback.
I'm kind of late to this thread. You have decided your long-term goal. In this market you will need to take some short-term steps to get it.
1. You will need to likely buy non-performing/under-performing Class C properties and fix the issue. This will substantially increase the cash flow and value.
2. You can then 1031 exchange this into a Class B and repeat the same process.
3. From there you 1031 exchange into a Class A property.
I own lots of asset classes. My criteria has the biggest emphasis at buying at a discount versus what asset class/property type. If I buy Class A or Class C it doesn't matter much, I just want a big discount.
This will give you experience for the banks, let you know what you want, etc.
To answer your other question there are many commercial lenders that will loan under 500,000. Credit Unions and Regional Banks is the place to start.
Originally posted by @Michael Seeker:
So are you looking to purchase an ~80 unit complex/building that is ~60% occupied? You're definitely not going to find any Class A buildings like that. You'll be lucky to find a Class C building like that and in my area they're typically priced like they've got 90% occupancy because "the potential is there". Even drug havens in bad parts of town that I would never consider investing in typically have 75%+ occupancy.
Like I said before - it's good that you've got a goal laid out but from your post it doesn't seem that you have any sort of plan to get there. Are you buying 50 SFRs over the span of 10 years or an 80 unit building next week?
All of the questions you're asking have different answers depending on whether you're buying SFRs, small multis or large multis. Once you have an idea of what you want to invest in then the questions will be easier to answer and it will be easier for you to formulate a plan.
The suggestion @Joel Owens made in the podcast is geared towards complexes with a larger number of units which requires a lot more capital, time and effort to get from 60% to 85-90% occupancy. I know a local company that does this and they're dumping money into these 200+ unit complexes for 2-3 years before seeing any type of positive cashflow.
Honestly, that;s hard to believe. There are C or even B class assets out there who have low physical vacancy AND economic vacancy, i.e. tenants who do not pay on time.
