$500,000 Passive Income Per Year With Rental Properties?

[Brandon Low]

Hello,

This is my first post, and am still very much in the learning/education phase of my REI journey. (So please dont be too hard on me!)

I'm 26 and my goal is to make $500,000 a year in passive income by acquiring rental properties. I want to reach this goal in 20 years. I've done some rough estimations using the following criteria.

Rentals Acquired Each Year: 5

Avg. Cashflow per property per month: $350

Avg. Purchase Price: $100,000

Down Payment on each house: 20%

If I were able to stick to this plan, I would be making $441,000 a year with 110 rental properties by the year 2036. That's AWESOME except for one thing: I would be in debt around $8 million. 

Here is my question:

Even though I am making $441,000 a year, it would take 16+ years to pay off all my debt even if I devoted 100% of the income towards paying off the mortgage. The thing about rental properties that attracts me is the "worry-free" mindset that comes with it. However, due to the massive leverage that is being used, and thus huge debt, it doesn't seem like such a great option anymore. Thoughts?

[Mike H.]

Couple of thinjavascript:;gs. I think if your goal is to get 400k a year in income from real estate, you're likely going to need to look at Multifamily to get the economies of scale.

That being said, the other thing I'd add is why you need to put down 20% on each of your deals for sf? Use hard money to buy and rehab. If you find the deals, your out of pocket should only be around 5% or so.  So if you're doing 100k deals, you're out of pocket should be around 5 to 6k.  

Another thing to keep in mind is that you're probably going to have at getting 110 homes is that you're going to have to hire some help to manage that many.  Unless that will become your full time job at around 50 or so. 

But here's the thing. When I first started, I was buying 3 houses a year. I did that for the first 6 or so years. Eventually, I reached a point where the business was able to feed more purchases and the lending really opened  - partially because the market improved and banks viewed sfh loans better and partially because I think I hit critical mass with the number of properties (18 at the time) and they viewed me as having "made it". 

I'm currently averaging about $400/mo gross profit per house and am now adding houses at a rate of about 8 to 10 a year. Hit 32 at the end of last year and picked up 3 more so far this year. 

I started with a HELOC of 43k. Haven't done a single flip. But have put every penny and then some (cashed out 50k of my 401k last year) back into my reserves and towards adding more properties.

I think my net on these 32 ends up around 8 to 9k per month.  To get to 35k a month, I'd have to be at 120 houses or so at today's numbers. But thats the one last thing I'd point out. Time is your best friend as a buy and hold investor. 

These same houses that are cash flowing 400 a month gross profit should be cash flowing 500 to 600 in 5 to 10 years. 800 to 1k in 15 to 20 if you some basic historical averages for rent increases and the like. 

And at some point, these houses start paying off and then the cash flow would really jump.

So, honestly, if your timeframe is 20 years or more like 25, I think you could realistically get to 400k a year in net profit from about 60 houses. Assuming you buy 5 a year for the next 4 or 5 years and then ramp up to say 10 a year after that and you're very aggressive in preserving your capital and paying down your mortgages.

If you could get to 60 houses in 8 years that have a gross profit (rent minus PITI) of 400/mo or more, you should be able to hit 400k a year in 25 years.....

And even if you don't, you should still have an incredible amount of cash flow of equity in those 60 homes.

I know, for myself, there's no way I would have ever been able to save up enough in my 401k to be worth a million dollars or to have a really good post-retirement income. But I took a 43k heloc and now have 33 homes and 2 more that will be closing next month and more net income than I have from a pretty good job.

But what I love more is that my rental income is only going to grow over time. Its not like a retirement nest egg where people end up spending a portion of it every year and having to wonder if they're going to out-live it.

As an investor with 30+ homes, my rental income will eventually reach the point, once the homes are all paid off, that I'll be making more money off the rentals than I'll need.

So, while the big picture in using sfh's to get you to that lofty income goal (and 400k is pretty lofty) may seem a bit daunting, the fact is that sfh's are probably one of the few investment vehicles on the planet that us regular people can get into at a relatively low cost of entry (I'm picking up 140k houses for a total of 5 to 6k out of my pocket) that can truly generate the kind of life changing wealth most of us aspire to have.

The key is picking a pace you can handle and working the deals. There is definitely a tradeoff in time to get to where you want. But if you love doing it and can see how its going to help you and your family in the long run, its the most rewarding thing you'll ever do.

And, lastly, lets say you have a goal of 100 homes and only hit 20, that shortcoming is still going to leave you with one of the best retirement funds you can possibly have.

20 homes fully paid off in 20 to 25 years? If they're worth 150k today, that would make them worth 300k in that timeframe based on historical doubling of home values. Thats 6 million dollars - each of which should be cash flowing, once paid off, 1k a month? I'm pretty sure that 240k a year would be better than any income any 401k could pay out. :-)