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Updated over 6 years ago on . Most recent reply

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235
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Courtney M.
  • Lake Elsinore, CA
300
Votes |
235
Posts

New investor in CA, looking to invest in the midwest

Courtney M.
  • Lake Elsinore, CA
Posted

Hello! I joined BP just last week.

I've been casually reading some of the Rich Dad type books for several years - my husband and I are now finally in a position to consider real estate investing and I'm excited to be part of the community as we start our journey.

I live in southern California but intend to invest in the midwest where real estate prices are slightly more, ahem, reasonable. I intend to purchase at least one multifamily property in the next 6 months and hope to scale up in a consistent way. I plan to buy and hold my properties. My goal is to create enough passive income in the next 5 years to quit my day job (about $10k/month in cash flow).

I would love to connect with other Michigan-based experts and investors, and am certainly open to other areas of the country. We have about $20k to invest right now so we're eyeing about a $100k initial buy.

Most Popular Reply

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292
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P.J. Bremner
  • Rental Property Investor
  • Claremont, CA
373
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292
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P.J. Bremner
  • Rental Property Investor
  • Claremont, CA
Replied

@Courtney M.

Everything you've mentioned sounds very reasonable, with one exception - your timeline (in my opinion).  It sounds like you and your husband have a great mindset for moving forward with your investing, which is probably one of the most important things.  I also think that going out of state right now is probably the wise choice if you're trying to build cash flow.  There are still ways to do it locally, but I think you need a ton of capital to scale them in a meaningful way (room rentals, air bnb, etc).

Back to the timeline, my personal opinion is that it's not very realistic based on the amount of capital you have at hand.  I'm not saying it's impossible, I just think for a beginner to get up to $10k in passive income will either take more time, or more money upfront (or if you're able to raise funding from others, but I don't know too many people who will trust a beginner with their cash, nor do I think it's very ethical to invest other's money if you don't know what you're doing).  When I plan out my future goals and objectives, I try to put a plan with conservative numbers to back them up.  For example, if I were in your shoes and I wanted to be at $10k/mo, this is what I would be up against:

Goal - $10k / month net passive income

Available capital to invest - $20k / year

Target minimum metrics (arbitrary numbers, you can set more aggressive or more conservative)

Cap Rate - 10%

Cash on Cash - 20%

25% down payment per investment, target house price ~$80,000 (this assumes you need $0 for holding costs, closing costs, repairs, etc. which clearly isn't the case, but to keep the numbers easy)

You buy a house in year 1 for $80k with tenants in place and earn 20% cash on cash that first year - $20k * 0.2 = $4,000.  Not bad at all!

Next year you add another house for $20k out of pocket, make another $4,000 in passive income.  You've also saved up the $4,000 from the previous year (assume you pay 0% income tax, which is possible on rentals).

Starting year 3 you have $8,000 from cash flow from house 1, $4,000 from house 2 for $12,000 which isn't quite enough for another loan, but you buy another house with the $20k saved up.  Add another $4,000 per year in income.

Starting year 4 you have $12,000 from house 1, $8,000 from house 2 and $4,000 from house 3, total of $24,000 so you can buy 2 homes this year.  You buy 2 for $20k each and add another $8,000 per year in passive income.

If you continue with this pattern, you will own 7 or 8 homes by the end of year 5! That's 8 x $4,000 = $32,000 per year in passive income. This brings it back to my original thoughts, that perhaps your numbers are a little aggressive because we made some very big assumptions here - that you will have $0 extra out of pocket expenses, $0 holding costs, and that 100% of your deals will be amazing and consistent 20% CoC.

You could always try to BRRRRR your deals and keep the cash moving faster. You would have to wait 6 months between purchases so you can pull the equity back out, but it's an amazing way to do it! That would speed you up a lot, but I still don't think it would be $100k in 5 years. Plus, finding BRRRRR deals isn't that easy in this market and often times it takes more out of pocket cash to do them (not always, but in my experience it does. I've done 3 in the past 10 months personally and I know others who have done a few each).

I'm certainly not trying to deflate your balloon, I hope i didn't come across that way! I'm just a very analytical person and have been in your shoes before. It's so difficult to really know what to expect if you've never been there before. I had a huge amount of luck play into my success, I started in 2012 and did room rentals when I could buy stuff in SoCal for $250k and get $5k per month in rents per house. There is no way I could achieve the same numbers in today's market, so I went out of state and started to BRRRRR properties. It definitely has taken a lot more money that I expected, but the results are great and I've recouped almost all of my cash back after the first set of purchases. That being said, if I was in the same financial situation as when I first started out and tried to do what I did in today's market, I probably would have lost my @$$. Several things came up that cost way more than expected - I spent $350k between 3 duplexes when I originally budgeted $300k for. Fortunately everything has appraised for right around $500k and I was able to get most of my capital back, but again if I didn't have $$$ sitting in reserve I would have been in a tough spot.

The only reason I bring any of this up is because it's so awesome to have big goals and be financially free, but it's not as easy and quick as most people think it is. Even if everything penciled out okay for a 5 year plan, you would still have to consider the intangibles - evictions, vacancies, extra rehab that you didn't expect, building up 6 - 12 months in reserves for each house, personal expenses that come up (getting married, having kids, medical issues, etc.). I have read a couple of your posts and I can tell you're very smart person and seem to have the drive that's required to succeed in whatever you want to. My personal opinion is that if you continue to add more income this year than you had in the previous year, you're on the right track. I can tell you I've hit your goal and exceeded it by a fair amount, and my goal is just to add at a minimum of $1,000 in passive income each year. I will probably do more, but I wouldn't be upset if I came in at $1,000 because I know how much work and money goes into making $1,000 each month. Always remember, if you get a stable investment setup that pays $1,000 per month, it will continue to do so forever (assuming you save up properly for CapEx, vacancies, repairs, etc.) without anything extra from you. Keep on pushin forward, I'm excited to see where you and your husband will be in a couple years!

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