5 year plan

[Ryan Heilig]

I am looking to make my first investment and would like to be generating 150-180k net within 5 years by adding properties each year. I own a primary residence and I will live in CA and looking at out of state investments.  I have excellent credit and about 200K cash and another 100k in equity I'd be willing to tap into. Looking at 2-3bdrm STR for first couple properties, possibly in the smokies and then some LTR or STR in various markets to diversify.

Is my net goal realistic in that time frame with what I have to work with? I would add another 50-75K yr in cash to invest on top of parlaying income/equity in owned properties.

[Randall Alan]

Your question about 'realistic net goal' is more or less a math exercise.  I'm more of a long term rental guy but will try and break it down both ways  So this would be the answer for long term rentals:
A typical financed cheaper 2 bedroom / 1 bath rental (ie. $100,000) will take $25-30,000 to finance, and each of those will probably net you $300-400 on a good day. Obviously this is not a California equation... lol... so would be out of state investing to optimize your funds.  But if we do the math targeting $150,000 net it would look like this:  $150,000 (target net) /3,600 (yearly net per rental) = 41 rentals.  If you net $400 each, it would equal 31 rentals needed for $150,000. 

Keep in mind these numbers are accounting for Principle, Interest, Taxes, Insurance, and a Maintenance reserve on the properties (so $300-400 per unit after all those expenses) - but does not account for any income tax allowance.  In addition, property management will take 10% of your gross rents if you are an out of state investor.   Once you include property management you actually need to make $167,000 to net the same $150,000... so tack on 4-6 more units to account for that.. Usually financed property expenses and depreciation will eat up most income for properties, but it is likely you will have some taxable income from them.

As for the cost to get there (on the low end) - 41 * $25,000 = $1,025,000; or 31 * 25,000 = $775,000 in down payments if you neglected income you were making along the way on the properties.  

All of this is just some ballpark back of the napkin figuring.  You can find great deals where you will make more sometimes... but in today's rate environment I would say that most smaller housing deals would struggle to make more than $400/month.  Bigger houses will net you more per month, but will cost more to acquire.  

When you move to short term rentals and factor in a 3/2 house it is really a more complicated calculation to estimate, because seasonality, and occupancy level becomes an unknown additional factor and location will be a major driving factor as to cost, income and occupancy. AirBnb suggest average occupancy is 56% in their literature and charges about 15% total on your rental); then there are potentially local taxes as well. I'm not an expert on that part... But let's say you have an occupancy level of 56% on a 3-2 property that now costs $200,000 and you can rent it for $125/night. This would be an income after Airbnb fee of $1,785/month Let's ballpark all the expenses total $1,300 per month. So you are netting $485/month / unit. That would be $5,820 per year per rental. This would take 25.7 units to achieve the $150,000. Your units would take $50,000 to purchase at $200,000 - so $1,288,659. This whole paragraph is really subjective though... The price of the property, what you can charge, your total expenses, all are variables. So take it with a grain of salt and run some real world calculations based on Airbnb properties that match your criteria on location and the other variables listed. My comparison between 2/1 and 3/2's is obviously not symmetrical... but I buy mostly 2/1's for long term so know those numbers better. I'm betting a STR 'guy' will chime in and offer some more solid numbers.

Hope some of it helps!

Randy

@Ryan Heilig