How to Create $50,000 in Passive Income With 14 Doors

by | BiggerPockets.com

[ 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.  ]

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:

  1. 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.
  2. 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).
  3. 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.
  4. 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.
  5. 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.
  6. 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.

Getting Started

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

Overcoming Obstacles

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 thought—particularly 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.

Aerial view of a green leafy suburb

Building Portfolios

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.

Conclusion

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.

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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!

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Do you have any follow-up questions for me? 

Let’s talk in the comment section!

About Author

Sarah P.

A longtime writer and consumer of all things related to the FIRE (financial independence retire early) movement, Sarah went from working 50+ hours a week to less than 20 thanks to her real estate investment portfolio and side passion projects. Investing since 2015, she reached financial independence in 2016 and was able to retire in 2017. Articles about her journey and information about her current projects have been published in LinkedIn, BiggerPockets, Kiplinger, and many other financial news sources. Prior to the FIRE movement, Sarah worked as a Program and Acquisitions Manager on various projects and started a successful, world-renowned non-profit organization. Today, she uses these skills as a real estate consultant to help others reach their FIRE-related goals on a regular basis.

16 Comments

  1. Erik Whiting

    Thanks for putting together a vision for us. Please don’t consider this rude as I ask with honest intention, but could you please clarify if that $300 net profit per month after vacancy and all expenses, and if yes, how much capital on average is in each property?
    .
    Why am I asking? Because, to kindly and gently say this, your numbers sound highly optimistic, and I’m a die-hard cash flow investor and have been since 2005.
    .
    I’ve seen a lot of investors claim those kinds of numbers, but when you follow up with, “What are you paying for management, maintenance, capital expense reserves” you usually get the following answer:

    1) “I self manage.” (not passive income)
    2) “I fix my own toilets” (again, not passive)
    3) Huh? (shows a clear lack of understanding/planning for stuff like HVACs, roof, and flooring wears out and will need replacing)
    .
    Yes, yes, I know you said, “all known and potential expenses”, but humor an older dude (43 years) and let’s just be sure we’re talking about the same recipe for this apple pie.
    .
    Also, is $300 average your net taxable profit, or NOI (pre-debt service for the newbies)? Folks always seem to forget the debt-service when throwing around large cash flow projections/stats.
    .
    To be clear: I’m not saying it CAN’T be done. We’d have to have a look at your Schedule E as well as a P/L and personal financial statements submitted to your bankers to know for sure, and most folks aren’t willing to post that level of detail online (I’m not!). But generally speaking I’ve talked to a LOT of investors (as in, literally over 300 people), and even folks with 10-20 years of experience who are buying with at least 20% down in good markets aren’t seeing $300 / month net of all expenses and debt service. So even if your results are achievable–and again, I’m not saying I don’t believe you–I would characterize them highly unusual. Like, you’re in the top 1-2% of all investors. If that’s you…woo hoo, congrats! But if not, a warning to newbies that they probably aren’t going to be making $50K in 1-2 year’s time in a passive venture would be thoughtful and kind.
    .
    So, I hope to hear more from you and maybe get some more insight. I’m always willing to learn.

    • daniel m.

      Excellent points Erik. $300/month sounds like a nice round number. I find myself doing that all the time. I have 2 duplexes in the Midwest that have never really cash flowed but on paper they look cheap. Costs that have to be factored in are: property taxes, water bills, repair costs [furnaces, plaster repairs, window replacement, garage door replacement, floor refinishing/replacement, ceiling replacement, wiring replacement, plumbing replacement, 2 bathrooms redone, 2 kitchens redone, painting, changing locks, installing security cameras, landscaping, snow removal, grass cutting, roof repairs, gutter repairs, new kitchen cabinets, new vanities, new shower surrounds, tree cutting, basement work – there are so many costs associated with a 110 year old property but I am close to cash flowing – anyhow would be interesting to see all the costs related to the author’s 14 doors].

      • daniel m.

        When I say $300/month is a nice round number, what I mean is that I project that kind of cash flow from my 2 duplexes but it just doesn’t work out that way in the real world for me. Furnaces fail, windows need to be replaced, property taxes need to be paid, water bills are higher than normal, etc. There’s a huge difference between projecting cash flow and the reality for me.

    • Darra Rensing

      Great- i’m in the research phase of beginning to invest and I live in a high cost market, it seems unlikely that I could be cash flowing even $200 to start- if i choose to buy locally and not attempt out of state investments yet…
      Thanks for making the numbers more realistic. Again, with time and maybe some savvy deals, this cash flow could be a reality??
      Everything I read/ listen to makes it all sounds so easy!! You buy a house from a whole saler, then you rehab it with like 10k, rent it and refinance…!

    • Sarah P.

      Hi there! I follow the general BP expenses: mortgage, HOA fees, city/county fees if they have a tight handle on rentals, PM fees, yard/utilities, taxes, insurance, cap ex, maintenance, etc. I do self manage a few of my own properties, however those culminate to maybe a few hours a month if I have tenant changeover. It’s not impossible to find that cash flow and that’s just my average. Some are higher and some are lower. All in all, though, I wager my average door is higher than that and the reason I say that is because I budget conservatively and assume any extra is a bonus at the end of the year. $300 is what I budget coming in, which includes “unknowns” that may pop up. The only year (of the nearly five now) I feel I didn’t do better than that was when I had three HVACs needing replaced last year. I hit that number on the head for 2018, but turned one of them from a long term rental into a flip of sorts and made some money off of it.

      All this to say, I got rentals quickly. There’s no doubt about that. Refinancing helped me get them so quickly and finding cheaper markets allowed this as well.

    • Joe C.

      Nice job Sarah. I have a different angle. I buy raw land and construct my own rentals. I usually build 1300 sq ft, which costs me around 150k which includes land. I put in 40k and finance 110k. Principal, insurance and taxes runs around 750 per month. I rent for 1600 per month. I’ve built 4 in the last couple of years and am getting ready to start 2 more. Always more than 1 way to make the numbers work.

  2. Andy Villagomez

    I agree with others on this post that the numbers seem highly optomistic. Would you be able to publish a Profit and Loss Statement by chance? I think that will help us see how you got from your rental revenue down to your cash flow profit. Then, we can see how that compares to what our investments/businesses are doing and see if we can mimic your methodology.

  3. Rebecca Jackson

    At the end of the day, it’s about how much you keep, not how much you earn. We invest part time as part of our retirement strategy and tax strategy. Cash flow is an added bonus- but I agree those numbers are a probably outlier, especially in 2019.

  4. Henry Kaldenbaugh

    The take home message here is to keep repeating and get to a mass effect with your rental properties. I like the idea of more units per property and have a five year goal of fifty doors. We keep sifting through the for sales looking for something with daylight in the deal. BTW this is not retirement, this is a new career.

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