What is the fastest way to FI (passive income goal) using RE

Question

Hello Fellow Bigger Pockets Friends,

I have been analyzing various models (already took action and bought investment property) to get to my freedom number i.e. monthly passive income goal to replace my expenses and maintain lifestyle. Before I took the plunge, I was all in stocks and with my new interest RE I am planning to shift more aggressively towards RE porfolio but still not sure on the long term outcome.

My goal is to be at FI stage with 4% withdrawal rate in 10-12 years. I would prefer to do passive buy and holds as I have full time job so right now I don't have time for flips/wholesale.

Here are few options I am considering:

1. Stocks: Continue investing in stocks and reach my goal in 13.5 (70-30 portfolio)

Upside: Simple and easy to do

Downside: unpredictable economy, not able to capitalize on tax benefits, missing out on higher growth

2. Buy and payoff rentals quickly: Buy 10 rentals and pay them off in 10 years (as per my calculation this would actually take 20 years instead of 10). Plus, it will not give me the same COC return as I would if I use leverage and let renters payoff mortgage balance.

Upside: Free and clear property, tax benefits, stable income

Downside: takes 20 years instead of 10, COC return is much lower,

3. Buy and hold using leverage: Buy 25 properties (2-3 each year for 10 years) and let renters payoff mortgage.

Upside: High COC return, tax benefits, stable income, mortgage interest deductions

Downside: not sure how I will continue to finance 25 buy and holds (I started with convention loan which stops at 6 properties), mortgage looming over my head for long term,

So I have a three part question:

1. Am I thinking this correctly?

2. What is the best strategy or technique from above or anywhere on BP or your experience to get me to my goal in 10 years?

3. How can I reach my goal much faster?

Thank you again

Best

Thomas S. · Answer

Buy and hold using leverage:

There is no logic, in my opinion, to pay off mortgages. As others have said before me - equity is where money goes to die.

Money is only of value when it is earning it's keep and lying dead in a property is earning no return at all.

The fastest way to freedom is leverage. Don't worry about how you will finance 25 properties at this point in time, you will find a way. The key is to work with a Mortgage broker that knows and understands your long term plans to position you correctly to get the financing when you need it.

Don't worry about ever paying off your properties, when the principal starts getting paid down by tenants pull it out and buy another one.

The equity in your properties will be inherited by your kids so keep it as low as possible.

Sameer Kh · Answer

Thank you Greg. You bring up a good point on the role of the equity and how leverage can accelerate wealth creation.

Charles Morgan · Answer

Ditto to what Thomas S. said. My kids should inherit a lot of cashflowing property with very little equity (except maybe a couple of Mobile homes). Make that a LOT of! Hopefully they will be smart enough to keep building on it.

Sameer Kh · Answer

Hey Brad, Great to meet you and glad that you are thinking along the same lines I am. Good info on the experience of you inlaws.

Darren Eady · Answer

I've focused on performing rentals and performing mortgage notes to accomplish my passive income goals.  Now, real estate investing is ALL I do.  I would be happy to speak with you about how to get started and where your focus might be when I'm back in town from visiting our nation's capital this week.  Please connect with me and I'll provide my info.  Thanks!

Nick Hedberg · Answer

Hi @Sameer Kh,

My long term goals are very similar to yours. My goal is to have enough FI in 5 years where I no need to have a day job. Once I no longer have a day job, I can begin the real wealth creation by going full time into REI and starting new businesses.

I'm currently pursuing #3 on your list. I'm purchasing high cash flow properties with mortgages to maximize my COC ROI. I live in California and am buying out of state for these properties. Once I have enough cashflow, then I'll focus more on in state properties for long term wealth building and appreciation.  Since my goal is to maximize my COC ROI, I have 30 year mortgages and won't consider paying them off until I have 10 mortgages and am capped for new Fannie/Freddie loans.

The 2 most obvious ways to do this are to increase your ROI and reduce your expenses. Maximizing your ROI is an easy answer but is tough to do. More return frequently means more risk. Knowledge & experience are key.

Reducing your expenses is generally one of the easiest ways to get to your freedom number (or reduce your freedom number) but it is not a sexy answer. Reducing your expenses means you can save more to increase your FI. It also means a lower target which will be easier to achieve. You can read about Extreme Retirement or Mr. Money Mustache, both are interesting sources to pick up some tips on cutting expenses.

I would start off building your buy & hold portfolio and continue to educate yourself.  More education = more potential.

What is the fastest way to FI (passive income goal) using RE

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