What is a reasonable 5-years goal for a beginner?

Question

I am trying to set a 5-years goal and define a milestone for each year. My ultimate goal is to increase the cash flow. I mean, if I start with a property, let's say a single family, costs 0.7 X and I do a minor rehab that increases the price after repair to X dollar, I am wondering if what number of similar property is a reasonable number after 5 years? Is number 10 a reasonable goal? or 20? I am struggling to find a right balance between being too ambitious and too easy to achieve.

Nathan Gesner · Answer

One of the latest podcasts was with Henry Washington. He's up to 40 doors in two years. I suspect he'll be over 100 within five years.

Is your goal just to own a bunch of rentals? Is your goal to be "rich"? Financially independent?

These are all pretty useless goals, which is what most of us (myself included) typically set. What do you really want? Do you want to be financially independent (FI) so you can leave your mundane job in five years? Do you want to retire in five years and never have to work again? Do you want to continue working but have enough money to dig five water wells in Africa per month?

How to set SMART goals for real estate investing

Your goal isn't that you want to buy X houses or XX doors. Your goal is to have $XXX income. But why? So you can roll around naked in it? Travel the world? Pay to take care of your mom? Retire early? Dig water wells in Africa? Finally get your band out of the garage and on to the road?

You need to know your real "why" for this money. Then set goals to help you achieve it.

My "why" is to ensure my family is cared for even if I am unable to work, and to give me the choice to continue in my current line of work (which I love) or to pursue something different...or to just travel...or to do nothing. I want freedom to make the choice.

To do that, I need to know what it will take. For starters, I need to know what my current lifestyle costs. If I need $6,000 a month to live on, that's a specific goal I can aim for.

What will it take to earn $6,000 a year? In my market, it may take six homes or ten apartments with no mortgages. Or I could have 30 houses or apartments cash flowing $200 each. Or 60 cash flowing $100 each.

Figure out the real "why" you are trying to achieve. Determine the exact dollar amount you need to meet it. Then you can determine how many houses or apartments it will take to get there.

Now that you have a clear picture of what it will take, start working towards it. Adjust as necessary. For example, my investment plan originally called for a certain number of single-family homes but then I bought 15 apartments in one year and that accelerated my plan, so I am adjusting accordingly.

Just some random thoughts at 5:30am on a Monday.

Nathan Gesner · Answer

There's more than one way to generate $15k monthly. Instead of 75 homes cash flowing $200 each, why not aim for 15 houses fully paid for and cash flowing $1,000 each? How much work is required to manage 75 homes compared to 15? How much time is spent paying mortgages on 75 homes compared to 15?

There are different ways to do that. Buy one house and pay it off, then buy the next, then the next...

Or you can buy the number of homes you need and use all the cash flow to pay off the smallest mortgage, then the next, then the next...

Think outside the box. Get creative. Figure out what method works best for your situation.

Jonathan Greene · Answer

Listen to @Nathan G., this is a voice of reason. Too many people are consumed by the number of doors they got and to be honest, Bigger Pockets forums don't help that because everyone is trying to one-up each other. What if I told you that your five year plan, to make the most money, could be buying one single-family house and living in it. Would anyone else tell you that? No, because it's not sexy. But could it easily earn you more in the right market. Yes. The most money I've made on deals in my life have been from living in a house with my family, buying that house really well, and watching it appreciate. Then when I want to move, I spend the end money to flip it, and take the profit to the bank. On my last home I lived in I made over 200k profit when I left. Would you rather manage 10 doors in the next five years all earning minor income month and one major repairs sets you back a year or would you rather be patient and cash out and then use that profit for multiple investments?

I'm not saying don't look to scale up at some point, but this is a reminder that there are many different levels to smart investing and all of them don't have you tapping a calculator and banking doors to feel good.

Ryan Luby · Answer

@Saman Jafari I'm a little confused on what you're looking for here. So I'll give you my more general advice about goal setting to hopefully help.

- Goals should be set long-term (20yr, 10yr, 5yr, 3yr would be the shortest for me) I don't set 1 year goals, but I do have benchmarks I look to hit based off my estimation of what needs to be done to meet my long term goals.

- Long-term goals should be ambitious, and outside your reach. This is where you dream big, but keep in mind these goals still need to BE SPECIFIC.

- Which leads to my next point. An ultimate goal to increase cash flow is meaningless in the long-run. It's too vague. You will save yourself a lot of time, and set yourself up for success by getting super specific here. Research cash flow in your market to determine market rents. Try to research average appreciation in market rents around you, research price variations based on renovations in markets around you, input realistic timelines to achieve rent increases.. The best way to achieve this is by asking yourself, and sort of asking your goal, what? when? where? and how? This leads to something like: I will increase cash flow by 10% in all unrenovated properties, through separating utilities, updating bathrooms and kitchens, and raising below market rents before the end of Dec. 2022. This is a goal you can build a process around, and measure your process on your way to achieving it.

- This leads to short term processes. Every goal should be reverse engineered to create a shorter term process that allows you to achieve your goals when followed. Even a 20yr goals has an action item you can do right now, today to keep you on pace to achieving this goal.

- Your short-term processes and habits are where you need to go from big and ambitious, to easy, attractive, measurable, and satisfying.. The big goals should be out of reach, but the daily habits to achieve those goals must not only be fairly easy, but also satisfying or else you will not be consistent.

I hope this helps, the fact that you're here and that you're goal planning is a great start! Keep working hard, I hope this helps.

Best,

Ryan

Recomended reading:

Atomic Habits - James Clear

So Good They Can't Ignore You - Cal Newport

12 Week Year - Brian Moran, Michael Lennington

Eric James · Answer

I see a lot of people setting lofty long term goals.....and then doing nothing. It's fine to have a LT goal....but what is important is executing on what you need to do next.

Daniel Haberkost · Answer

@Saman Jafari I have to chime in and agree with @Nathan G. & @Jonathan Greene because they're echoing what I have learned over the last several years.

We're constantly bombarded with eye-catching articles/podcasts about investors who acquired dozens/hundreds of doors in a short time and then suddenly we all feel we need to do the same when, in fact, that may be completely needless for our personal goals.

It's amazing the freedom that can be created with several good deals.

It also looks like your just starting and (from my experience) I would recommend focusing on getting your first deal done. Sure, you want to have a long term goal, but I'm simply emphasizing the importance of taking action. Every week at the local RE groups/on BP I meet/read about new investors who have these wild 5-10 year goal. Those people typically disappear after a month or two. Don't let that be you.

It's been 5 months since your original post, have you taken any sort of action since then?

Daniel Haberkost · Answer

Understandable, that's what a lot of people are doing. When I was just starting in this business, a lot of other newbies told me they were "going to wait for a recession" since "we were clearly at the top of the market". Fast forward several years and they've done nothing while myself and many others I know have created significant wealth/freedom with RE investing since then.

Nobody can predict the future, we might be entering a recession, or maybe we'll come right out of this. Perhaps the next recession will lead to discounted real estate OR maybe it will be largely in the world of equities with minimal decrease in RE valuations. You can't know.

So, when thinking about whether you should start or not, think through your goals and your financial position. Are you buying from a position of strength? Do you have significant disposable income every month & substantial capital reserves? If that's the case and you're looking to invest for the long term, then absolutely go out and find your first deal. On the flip side, if you have no reserves and minimal disposable income, you should likely improve your financial foundation before making any moves.

From there, it comes down to the specific deal you buy. Sure, the macroeconomic environment may appear (and likely is) weighted more towards the negative than the positive. But that doesn't mean you can't find a specific instance where the odds are heavily favoring the positive (i.e. an undervalued deal!). If you buy a distressed property, add value and refinance all/most of your money out while maintaining a fair amount of equity and it (actually) cash flows every month, do you think you'll regret that if a recession hits?

That's how I think through the age old question of "should I wait for a recession or invest now", hope it helps!

-Dan

Daniel Haberkost · Answer

@Saman Jafari I agree with @Nathan G. that you need to establish a clear "why". You have to know where you're going and align your goals appropriately.

The main thing I'd add is (once the "why" is established) to set very clear short-term goals to get started. I've talked to so many new investors at local meetups and on in BP in the last several years that have all kinds of plans for where they're going to be in 5 years or how they're going to own 1000 units and then they never do anything...... In fact, most of the time I assume that anyone who tells me they're new will never get started.

So once you know WHY you want to invest decide on your first move (whether it's house-hacking/a flip/wholesale/etc.), establish clear habits that move you towards the goal, and get your first deal done. Don't be one of the many who take an interest in RE, talk about how they're going to build this massive business and then end up doing nothing.

Saman Jafari · Answer

Thanks @Daniel Haberkost @Ryan Luby @Nathan G. for your great answers. They have made me to deeply think. I was a bit confused at the time read your messages and was not sure what I am looking for. However, during this time, the thoughts have been flickering in my head and have been thinking about how I can set goals. Generally speaking, I am good at setting specific, and measurable goals, however, in regards to RE, I am a bit confused. My goal for the next five years is to be financially independent of my pay stubs. Thus, for doing so, I need $15k cash flow. Having said that, this goals scares the hell out of me because with my understanding and considering of about $200 benefit margin with each rental, I guess I would need to have 75 properties in 5 years that I even doubt if I can get 5 in 5 years. And, i think this is why I was a bit confused of what is a reasonable goal is for a beginner as I am planning to start touch base with agents in the Bay Area to help me out to find a deal where I only pay 75% of the APR value. All I say here sounds very difficult to achieve, but as @Daniel Haberkost mentioned I don't want to end up doing nothing because its a bit scary at the beginning.

Saman Jafari · Answer

@Daniel Haberkost thanks for your reply. it makes so much sense. I have got to a point that I feel I should start it. I have applied for pre-approval and start working with David Green's team to look for a property in the SF Bay area. However, since you mentioned cash-out refinance, even though I got my pre-approval from Wells Fargo, but when I asked my underwriter about cash-out refinance, she said this option is not available with Wells Fargo. I am wondering is it something I need to take into account now for choosing the lender before closing a deal? or it is something that I need to research at the time when I want to refinance regardless from which lender I have the mortgage?

What is a reasonable 5-years goal for a beginner?

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