How to Create $50,000 in Passive Income With 14 Doors
[ Disclaimer: These opportunities ARE present for everyone if they find the appropriate markets. The numbers described below are for real markets and describe the average worth of properties, cash flow, and profits of a market I invest in. For the purpose of this article, property selection will be touched on but not elaborated upon. ]
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I’m going to outline just a few ways to replace your income with fewer doors than it might take the typical real estate investor, assuming you want to use a mixture of financing methods and wealth management. Not everyone will take this route or even agree with the route I took, and that’s OK.
Property Accumulation Phase
Obviously there needs to be some sort of way to get properties. There are many no or low money down ways to do this. In fact, at one point, I was generating $26Ka month with just $3K of my money in the market!
Here are a few different portfolio-building strategies:
- If the property needs significant repair, consider a HomeStyle Renovation Loan, which wraps your repairs and possibly down payment into the mortgage itself. There are limitations to this type of loan, however, so one must ensure they meet the requirements.
- Home equity lines of credit (HELOCs) can be a great way to do this, as well, if your house has appreciated in value or if you’ve paid down a good portion of your mortgage. But it’s easy to over-leverage oneself. so taking calculated and controlled risks is important. I personally used this strategy to finance down payments and even buy entire houses free and clear (mostly REOs or foreclosures needing significant repair).
- Partnerships are also possible. You’ll need a fairly detailed contract if you plan to use other people’s money (OPM) in this way. There are plenty of places online to find information about this process.
- Hard money loans are normally used by fix and flippers who need assistance completing a project before selling it, repaying the loan back, and profiting.
- BRRRR (buy, rehab, rent, refinance, repeat) is an investing method where one buys a place to rehab and does a cash-out refinance in order to make money on the property with little or none of the original investment remaining in the home.
- While there are many others, in the later stages of property accumulation, quite a few people take advantage of reinvesting their passive rental income by using this cash to buy more real estate.
There are so many other ways to get properties with no or low money down. In my case, I primarily used a HELOC, a bit of the BRRRR method, and eventually the reinvestment strategy.
In my market, it wasn’t uncommon to find $100K townhouses in a nice area. In 2015, it also wasn’t all that uncommon to find distressed townhouses locally that were selling for $50 to $60K.
With just $10 to $20K in rehab costs, one could easily have an automatic 20 percent equity in the home after rehab. However in most cases, if analyzed properly, one could come out with 20 percent in equity in the refinance, plus their original investment back with an extra $10K-plus. How about that?
Think about it. At most, someone invests $15K of their own cash to buy a property, assuming they don’t acquire it creatively. Then they get money to rehab through one of the aforementioned strategies, walking away with $10 to $20K more than their original investment (minus fees, of course) after refinancing the property.
Not bad at all—especially if they keep doing it!
Getting to $50K
It doesn’t need to take 10 years to develop cash flow of this sort. In fact, I bought my first property in 2015 and my last one mid-2018. Doing everything so quickly may be problematic for you, though. I certainly ran into a few obstacles.
For example, if someone uses the BRRRR method for their first three properties in a single year, they are prone to bump up against their debt-to-income (DTI) ratio with regard to traditional loans. This is assuming they’re new to the process and don’t have rental income on two years of their tax returns yet.
Be prepared to monitor your DTI and forge relationships with investor-friendly lenders (often portfolio lenders), who understand the cash flow behind the debt.
If you’re new, you must budget for what you don't know. Issues often arise during rehabs, and they can end up more costly than you thoughtâparticularly if you didn't have a thorough inspection or good contractor.
I once had a surprise $10K bill on a property, which ultimately cut into my ability to profit from it. (I made $10K instead of $20K in my refinance.)
While this differs wildly in many markets, one can’t expect to buy places worth $100K in L.A. There are, however, plenty of markets that do allow for these numbers at (just about) any give time.
Let’s say an individual maxes out at five loans. Keep in mind, they’ve been profiting $10K-plus with each property, making rental income, and getting their original investment back.
At this point, they may have the ability to buy and rehab a distressed home in cash alone at certain price points. Some are of the mindset that buying a house and remodeling it with your own cash creates a terrible return, but if your frame of mind is that this money belongs to “the business,” which is reinvesting its dividends, perhaps you’ll find wealth accumulation a tad bit easier.
So this individual has five properties, cash flowing $300 per month each after all known and potential expenses are budgeted for. This amounts to $1,500 a month in cash flow and only 25 percent of their initial investment in the game.
Assuming that initial investment is $15K, this investor’s portfolio makes that cash up in less than a single year.
Arriving at the Finish Line
Five deals in a single year is doable under certain circumstances. Once your business gets rolling, it’s easier to get more. But if you’re reading this and have yet to acquire a single property and are doing business in a more expensive market, you’re probably wondering how on earth you’re going to replicate this type of success.
I’ve been able to get these numbers in three different markets. In my most expensive market (Denver), I simply held onto these properties for a shorter amount of time, taking advantage of the appreciation the property experienced in such a short amount of time. To be fair, the added pressure of growing HOA dues prompted our early exit to some extent, too.
Point being, while this opportunity isn’t available to everyone, it is for quite a few people.
Investing and rehabbing can be a rather hands off activity if you’ve formed a good team to handle rehabbing and renting. This was a great help for me while I worked full time and built my portfolio.
At first, I came close to my DTI, but that’s when I started speaking to portfolio lenders (in my case a local bank). The first year of rental income brought that DTI number down significantly, and I was able to both pay off my HELOC with additional rental income and accumulate more properties.
And that’s why I only needed 14 doors, averaging $300 a month per door, to arrive at $50K a year cash flow! What’s even better is, at this point, I have none of my original investment in the game. I accomplished this through buying and selling other properties and reinvesting the profits.
There is no one way to wealth (or this stage of it), but I certainly don’t regret the path I took. The secret is budgeting for what you might not know, finding those opportunities (even if it’s not in your local market), and taking advantage of them.
There’s a lot of learning and preparation (i.e., reading and listening to podcasts) that goes into it. To be honest, it takes a lot of courage, too! It’s not the easiest business to jump into, but if you know your stuff and have good mentors, you may just find yourself in a similar position in a matter of a few years.
Need a way to up your real estate investment game? Author and investor David Greene shares how he expanded his real estate business from two houses per year to two houses per month with the BRRRR strategy. Pick up your copy from the BiggerPockets bookstore today!
Do you have any follow-up questions for me?
Let’s talk in the comment section!