4 Green house for 1 Red Hotel

Trade four green houses for one red hotel. It's the key to winning the game of Monopoly. It's also the principle that builds wealth in real estate. Anyone who has read Robert Kiyosaki's books, knows that he built his real estate assets on this principle. 

I was thinking about this principle while I re-read "7 Years to 7 Figure Wealth" by Brandon Turner. It's available for free on BiggerPockets. If you don't have it, start watching the great webinars because it is often a free gift. I decided to crunch some numbers while examining this principle. In the book, Brandon Turner has you buying a house that can be turned into 4 units at the start of Year 1. As the years go buy, you buy additional units, pay down your loan, build equity, etc. Eventually, you will trade in your rentals to upgrade to better properties. At the end of Year 7, you have a 75-unit apartment complex worth $3.4 million and your equity in that complex is $1.2 million. You have no cashflow at the end of Year 7 (because you just traded up), but the new complex should cashflow $15,000/month. It's a great book and really shows the "four green houses for one red hotel principle" in action.

Between Year 4 and Year 5, is when you trade up three houses (12 units total) for a 24 unit apartment complex. At the end of Year 4, you have $175,000 in equity, $173,400 in loans, and your yearly cashflow is $28,800. You then buy the apartment complex (minus expenses). At the start of Year 5 you have $300,000 in equity, $700,000 in loans, and your new expected cashflow will be $48,000/year. 

I like increasing my equity by $125,000. I like increasing my cashflow by $19,200 a year. I do not like increasing my loan amount by $526,600. I like to control my risk exposure. So, I thought "what if we didn't trade up just yet?" In the book, Brandon shows his math numbers. Each house has total rent of $2,400/month and expenses (loan, tax, insurance) of $1,600/month. How can I increase cashflow and lower my risk? Pay off the loans that are sapping my cashflow. The expenses are not broken down further, so I assigned 2/3 of the monthly expenses as going to the loan.  

In the book, 123 Main St. (the first house) ends Year 4 with a value of $124,000, a loan of $56,000, and $68,000 in equity. The total cashflow from all three houses is $28,800. If you used the total cashflow to pay down the loan on 123 Main St, you would end Year 4 owing $27,200. You would have it paid off by the end of Year 5, with some change leftover. This is known as the debt snowball, a well-known tactic to pay down debt. With no loan on 123 Main St., the cash flow on that property increases from $9,600/year to $22,400/year. 

Here is where my tactic changes a bit. My new yearly cashflow from the three houses is $41,600. I've spent two years re-investing all of my cashflow to lower my debt. From here on out, I will continue to pay $28,800 on my loans. That means I keep $12,800 at the end of Year 6. 

At the end of Year 7, 987 Fir Ave. (the second house) is paid off and I have $25,600 of saved cashflow. At the end of Year 9, 555 Cherry St. (the third house) is paid off. In Year 10, I have $0 loans, $439,700 in equity, $67,200 yearly cashflow from my properties. At the end of Year 10 I will have saved $149,600 in cashflow from my properties. 

In "7 Years to 7 Figure Wealth", the author trades in his properties for a 24 unit apartment complex at the start of Year 5. Trade 4 green houses for 1 red hotel. The author pays $150,000 coming mostly from his equity in the three sold houses. Brandon Turner hits his $1 million in equity in 7 years using his approach. 

 I'm much more conservative in my real estate approach, but I am still going to trade up. If controlling my risk in the trade-up adds time, I'm fine with that. My properties equity grew, my loans went away, and my cashflow increased. It gave me further options when I trade in my houses for the apartment complex. I thoroughly enjoy Brandon Turner's book. It teaches a lot about real estate investing, and makes me think about other approaches. There are so many ways to win with real estate when you know the principles. 

Four green houses for one red hotel.

NOTE: All dollar amounts are rounded to the nearest $100.