Prepare for a long post. According to my calculations and "rules", It seems that it'd be possible to double your portfolio and rental income ever 15 months or so (in a perfect world) leading to financial freedom very quickly.
Thoughts?
Factors and Rules
- 1.Cost to entry must be low
- 2.Profits per unit are directly linked to the amount of time required to double portfolio.
- 3.Market must justify a low purchase price with 2.5-3.5% ARV in rents each month
- 4.Market must have a demand for rental property
- 5.Per unit cost MUST be lower than 40k (preferrably under 30k ea) in order to maximize your per-unit purchasing power. I aim for small, 1-2 bed units that rent for around 500 a month in either college towns or blue collar, C-class neighborhoods
Characteristics and Benefits:
- 1.Low minimum entry cost
- 2.Virtually no cap on potential gains
- 3.Do not sell old portfolio, but buy additional, similar units
- 4.Appreciation of property value is not guaranteed or expected
- 5.Repairs will slow the timeline, but are necessary
- 6.With minor upgrades, rents could be increased to expedite timetable at a minor cost
- 7.When possible, upgrade to larger, taller buildings with units on multiple floors. This limits the number of roof repairs, replacements, and leaks per unit.
Process:
This is all assuming you have ANY amount of money to start your investment with. For this example, I am using a base investment of 37,500 each from my partner and I for a total of 75,000 to invest with.
Note, if I did not have a partner I would start anyway and it would simply add a year or two onto my timetable.
Note 2, if you do not have almost any money, save up a minor Down Payment (further called DP), and do some House Hacking (google and read about this on the BiggerPockets blog) until you can do a cash-out refinance or save enough money for a first, remote rental property.
Now, let’s proceed with my current situation with $75k. I have discovered several markets in Ohio and many other states that have low property values with multifamily homes selling for roughly $100-120k for 4 units. In my example, I actually found an 8-plex building for $210k, a 4-plex for $89k, and another 4-plex for $80k.
After doing more market research, I found that small units like these rent for about 450-550 per month. Because each of my units costs about $20-25k, my per-unit mortgage payment is about 100 dollars including taxes and insurance. Because of the spread in the rents, let’s assume an average of 500 per month per unit.
My expenses will look like this monthly: Tenants pay all utilities
- 1.Mortgage payment (per unit): 100
- 2.Property management fee Per unit): 40
- 3.Capital expenditure: 50
- 4.Vacancy: 25
Net Operating Income (NOI)((profit)): $285/unit/month
In some units, the price of the mortgage is cheaper and so my monthly NOI increases to around 300-325. Every extra dollar of rent is pure profit.
Now, DO NOT TOUCH THIS MONEY. Allow it to accumulate in a regular checking account until your monthly revenues have added up to your initial DP (in this case, $75k).
In this model, I have 16 units, each profiting about 300 dollar per unit per month (4800 a month). 8 of the units rent for 25 dollars more per month than the others, with similar expenses. As such, my total monthly income from these properties is now $5,000, or $60,000 per year.
Remember, DO NOT BE TEMPTED TO TOUCH THIS MONEY AT ANY TIME. Unless an emergency repair is needed in a unit (you save your cap ex for that) or if you can significantly raise your rents with minor renovations, do not touch this money.
Continue living on your regular W-2 income and do not touch this money until you reach a level of passive income that will satisfy you for a long time. Spending this will dramatically increase the amount of time required to retire.
Now, how long will it take at $5,000 per month to reach the level of my initial DP of $75k? If you answered 15 months, you are correct. 5k x 15 = 75k.
During your year of waiting for accumulation, continue studying your market and seeking other opportunities to purchase properties like your initial portfolio. Once you reach your SAME level of DP (75k in this case), purchase 16 more units at the same or similar price. Once this purchase is complete, assuming that all of your expenses and new rents remain similar, your income will have doubled to $10,000 per month or $120,000 per year. I am using a partner, so we are each entitled to $60,000 of this each year.
Still, do not touch this money. Its been a little over 1 year so far. Your TOTAL investment in this project so far is $150,000 ($75k of our own income plus $75k that the tenants paid to us)((we only needed to save our INITIAL DP. ALL future DP’s will be saved FOR YOU by the tenants rents)).
How long will it take you at $10k per month to DOUBLE your total investment of $150k? If you guessed another 15 months, you’d be correct. 10k x 15 = 150k. After this waiting period of 15 months, you will have 150k in savings that you spent NO effort saving or earning.
At this point, you should have about 32 units in your possession. Now, with your $150k DP, you will be able to scale your business upwards and purchase either a single 32-unit apartment building, or continue finding smaller multifamily homes. The MOST important thing that matters is that your monthly NOI is $300/door (unit).
In conclusion:
Continue doing this process every 15 months as your previous DP amount is doubled. Ad Infinitum. There does not seem to be a cap on this process, so long as your per door profit is at least 300 per month. Do not expect to have your properties appreciate greatly over time. This is usually the trade-off in real estate investing (appreciation vs cashflow). This CAN be done with a slower cashflow building, but it will take about 94 months for your initial DP to be doubled. Why is that? Well, we were able to buy 16 units with our first 75k. If you purchase a property that has lower cash-flow but is likely to appreciate in value, your per-unit cost is normally double and your monthly profits are lower. So, instead of buying 16 high CF (cashflow) properties, we would have been able to buy only 8 that profit about $100/unit/month. Our total monthly income would drop from $5000 per month down to only 800 per month. How many months does it take to reach $75k at 800/month? 93.75 months or 94 months.
800 x 93.75 = 75k. That’s an almost 8 whole years. I don’t feel like working for the next 40 years to achieve what could be done in 4.
I intend to stop at least temporarily once I hit 240k/year in personal profit. According to my calculation, in a perfect world, that will take 4 years. Likely, it will take 5-6 years as issues are sure to arise.
I will name this method the “DP Doubling” method of real estate investing.
Also, if you have a good accountant who specializes in real estate tax, this money is TAX FREE.
