Case Study: How to Generate $2,000 per Month Through Rental Investing

by | BiggerPockets.com

What could having an extra $2,000 per month do for you?  

Pay down bills? Build up savings? Take more trips? Or maybe start down the path of financial independence?

Have you considered using rental real estate as a way to get there?

How to Build Passive Income With Rentals

Many who are starting out with rentals seem to get the broad concepts but don’t quite understand how to reverse engineer replacing a set dollar amount of income.  

I’ll take you through three ways to build passive income with rentals, showing you all the numbers and demystifying how to piece it all together.

In the following examples, we’ll assume your goal is to build a rental portfolio of $100K homes that cash flows $2,000 a month.  

Why? Because the math is easy, and this is a real everyday situation in 2019 for many investors. My portfolio, for instance, is made up of homes just like these.

Related: The Part-Time Investor’s Guide to Truly Passive Rental Income

Buying Rentals With Conventional Lending

In this scenario, we will purchase a $100K home using conventional financing. We’ll assume that we are bringing a down payment of 20 percent and the interest rate is 5.5 percent (although the rate may differ depending on your creditworthiness).   

Here are the numbers (feel free to use the BiggerPockets calculators or an app like DealCheck.io):

  • $100,000 purchase with 80% LTV ($80K loan)
  • $20K down (For ease, let’s not calculate in closing costs, though you must when you are running your full models.)
  • $1,000 for rent (Hitting that 1% rule!)
  • $455 for principal and interest
  • $65/mo for taxes and $50/mo for insurance (Realistically this will vary.)
  • $80/mo for property management (I ALWAYS include management even when I self-managed because you never know when you may need it!)
  • $150/mo for CapEx / maintenance / vacancy  (This number will come from working with your property manager and experience. If you have less than five to 10 homes, estimate on the higher end. For me, I use a standard 15% in my farm area because I know the true vacancy, buy my homes rehabbed, and can keep maintenance low. However, I see many investors “making the numbers work” by NOT including enough in this cash reserve area.)
  • Free and clear money = $1,000 – $455 – $65 – $50 – $80 – $150 = ~$200/mo
  • So how many homes do you need to generate $2,000/mo or $24K/yr?
    • $2,000 / $200 = ~10 homes
    • AND you will also save $1,800/yr per home in reserves, which is $18,000 total per year.
    • Note that this income is most likely tax-free as you will have depreciation to offset any income for the first few years.

To take this approach you would need approximately $200,000 to build your portfolio. Maybe this seems daunting to hold 10 homes, or to get 10 loans, or maybe even to fund the down payments. But stick with me as we explore other options.

rental-property-pros

Buying Rentals With All Cash

Another way to build your portfolio is to purchase properties in all cash. Personally, I’m not a fan as it locks up your money in an illiquid investment, not allowing you to leverage other people’s money to build wealth.

However, I do understand and respect how having a paid-off home feels, and it’s probably a good strategy the closer you are to retirement.

Here are the numbers for this scenario:

  • $100,000 purchase (no loan)
  • $1,000 for rent
  • $65/mo for taxes and $50/mo for insurance
  • $80/mo for property management
  • $150/mo for CapEx / maintenance / vacancy
  • Free and clear money = $1,000 – $65 – $50 – $80 – $150 = $655/mo
  • So how many homes do you need to generate $2,000/mo or $24K/yr in this instance?
    • $2,000 / $655 = ~3 homes
    • AND you will also save $1,800/yr per home in reserves, which is $5,400 total per year.
    • Note that this income is most likely NOT all tax-free as depreciation will not cover the entire income. Therefore, you will probably have to pay taxes as well on the income. Boooo!

To take this approach you would need approximately $300,000 to build your portfolio. This equates to less loans and less homes to manage but more capital and less tax deductions.  

Don’t worry—we have more to explore!

Now, you may be looking at these two methods of how to generate $2,000 per month in income, thinking where on earth are you going to get $200K to $300K or MORE?!

Related: How Paying All Cash for a Property Affects Your Ability to Build Wealth

Here are a few fund-raising ideas (with no specific recommendations):

  • Save up the down payment from your day gig.
  • Start a side gig. (But wait… wasn’t real estate supposed to be your side gig?!)
  • Leverage personal lines of credit.
  • Partner up with others.
  • Wait for assets to appreciate and refinance out your money.
  • Sell your properties and trade up. (I’m selling six of my original properties to capitalize on the appreciation and do it all over again!)
  • Play the lottery. (Just seeing if you are still awake!)

And those are just a few ways to do it!

But I bet if you are like me, you want another way to go about it—one that requires less of your personal capital and that could quite possibly be faster!

value-adds-rental

Buying Rentals the BRRRR Way

This is my all-time favorite strategy!

Let’s define BRRRR first. BRRRR stands for:

  • Buy
  • Rehab
  • Rent
  • Refinance
  • Repeat

In this case, we are picking up a $60K home and putting in $15K to rehab it, leaving us in at $75K for a $100K home.

If you are just starting out, I highly suggest sticking to cosmetic work (paint, carpet, fixtures) or working with a professional. (Also, check out The Book on Estimating Rehab Costs by J Scott.)

In the end, it’s the same $100K home. You are just acquiring it earlier in the process and taking advantage of building value in the home by rehabbing it. 

Once you have bought, rehabbed, and rented your property, now it’s time to get your money out and start cash flowing it.  

For ease, I’ll skip how to use hard money or private money to fund the initial deal and rehab and dive right into what final numbers should look like when you refinance.

Here are the numbers (assuming the same conventional 5.5 percent loan in our conventional purchase):

  • $100,000 refinance at 75% LTV ($75K loan)
  • $25K down payment (But here’s the kicker: the forced equity in the home becomes the down payment.)
  • $1,000 for rent
  • $425 for principal and interest
  • $65/mo for taxes and $50/mo for insurance
  • $80/mo for property management
  • $150/mo for CapEx / maintenance / vacancy
  • Free and clear money = $1,000 – $425 – $65 – $50 – $80 – $150 = ~$230/mo
  • So how many homes do you need to generate $2,000/mo or $24K/yr?
    • $2,000 / $230 = ~9 homes
    • AND you will also have $1,350/yr per home in reserves, which is $16,200 total per year.
    • Note that this income is most likely tax-free and you will also have depreciation to offset any income for the first few years. (That’s the beauty of leverage!)

In this scenario, your total monetary investment could realistically be $0.

Yes, you read that right!

If you’re surprised, that’s the same reaction I had when I ran this situation past my lender. And it’s totally legit!

Now, don’t get me wrong, you will need capital to fund your initial deal and rehab. But if you execute this strategy one property at a time, you only need to fund the initial bankroll for purchase. Then, you can use the same funds over and over again to build your empire! (Beg, borrow—but don’t steal!)

Conclusion

There are myriad other ways to generate $2,000 per month in passive income, including joint ventures, syndications, notes, crowdfunding, etc.  

But my point is this: you don’t have to have tons of money to create this income. Heck, you don’t even need very much time if you learn how to properly leverage other people’s networks.  

My hope for you is that you find the motivation (and the hustle) to jump start your path toward financial independence!

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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 questions about these strategies? Do you want to learn how to leverage other people’s networks? 

Let me know in the comments below!

 

About Author

Whitney Hutten

Whitney is a real estate investor and personal finance trainer whose vision is to launch a million families on the path towards financial independence. After purchasing her first rental in 2002, and hitting a homerun, then nearly losing it all on her second deal, Whitney took control and figured out how to invest in real estate the right way. She realized that success must leave clues. So, she studied and replicated the very personal finance and wealth creation strategies the wealthy use to create financial freedom. Today, Whitney is a partner in $240M+ of real estate assets, including 2,050+ residential units (MF, MHP, SFR, and assisted living) and 1,430+ self-storage. Additionally, she has flipped over $1.7M in residential real estate and a solid portfolio of commercial notes. (Don’t tell anyone, though—BRRR investing is still one of her favorite ways to invest—23 units and counting!) In 2018, Whitney founded ASH Capital, where she helps you develop the mindsets, skills, and strategies you need in order to take consistent and persistent action and drive massive progress towards your financial goals.

54 Comments

  1. Ken Virzi

    Nice article, I would just add a couple of things: I appreciate you put a good rate for investment property loans, but I find most non owner occupied homes also require a 25% down (not impossible to find 20% but I think 25% down is a better number to use). Property management you have at 8%, but the going rate in most places seems to be around 10%, especially if it is your first property, so I would up that number as well. Also CapEx should be closer to $200 on its own per roof (see Brandon’s break down here https://www.biggerpockets.com/blog/2015/10/13/real-estate-capex-estimate-capital-expenditures/). Maintenance and Vacancy should be 5-10% so if we wanted to be safe and conservative that would an additional $200 there.

    If you add up these increases you are negative cash flowing -$70 a month. I do think if everything is recently rehabbed and you are in a stable tenant area you can lower that 10% down to 5% saving $100 thus getting you to $30 a month cash flow positive. I think insurance can be lower however, adding another $15 say to get you to $45.

    Once you have 10 houses however, you can lower the vacancy, maintenance, and cap ex to some degree since you are working with an economies of scale principal. An idea to get that down sooner is that once you have some equity in the house, if you get a HELOC that can be used to purchase another house, or used for maintenance and capex, thus instead of setting aside $400 a month you would only use that money once you needed to spend it by paying down the HELOC.

    • Whitney Hutten

      Yes! Numbers will vary by location. However, those rates, terms, and expenses are very real. My first 18 homes were only 20% down and I started off with PM at 8%. It may take some networking and negotiating to get there, but it can be done 😉

  2. Chester Lee

    70% LTV is more is what I get loan quoted for, for investment Single family homes. My investments are out of state, but according to the banks, it would not matter if I was living next door. 70% LTV, thus 30% down, on based on appraisal, not purchase price.

    • Whitney Hutten

      Hi Chester, loan terms can vary on the area your are investing, loan terms and the ARV of the property. Shockingly, the smaller the loan, the more equity the bank wants to see it in. Check around and if this is your first few conventional, interview a few brokers who have access to other loan programs. BP has a list or you can PM me too!

  3. Dean Coronado

    Whitney, I’m surprised after helping people to get started on acquiring a rental property that you didn’t mention the 1031 Exchange instead of “selling” the property. I’d put a link in the text that explains how to do that because I’m assuming the readers:
    1. Want to spread the risk of losing equity gained on one property if it gets really high.
    2. Like having more passive income, and want to cash in on that equity to buy more rentals.
    3. Want to defer (avoid) capital gains tax from selling a property.

    • Whitney Hutten

      Thanks, Dean. 1031 is a higher level strategy and bonus depreciation almost negates the use in many cases. I was writing more towards someone new to real estate. But yes, upon a sale 1031 could be a strategy to use. Personally, I’m not using it as I have many deferred gains, am still acquiring properties… and want to use a few of my funds to do something else. In a 1031, your entire down payment and gain is locked into the exchange… unless you have refi’d it all out. For those wanting to explore a 1031, be sure to consult a 1031 exchange provider and your CPA to figure out the best path.

    • Whitney Hutten

      🙂 Always love a challenge! It depends on where you invest for certain! As of this writing, I have 26 properties using this exact BRRRR strategy… So I made my own turnkeys (essentially cut out the middle man). David Greene has a great book that just came out diving deep into the BRRRR strategy. For turnkey, you will need more capital, but markets with $100-$120K homes are definitely a reality.

        • Vaughn K.

          Not really… Look around.

          I was visiting a fairly large city a week and something ago, on the west coast even, where one can snap up $100K (or not much above) homes all day long. $140K duplex? Yup there’s one listed now, and in decent shape even. No, they’re NOT in the neighborhood where the doctors in town live, but they are where the mechanics, teachers, and many other normal working people live.

          Lemme guess, you live in an insanely overpriced coastal area and think the entire country is exactly like that? It’s not! I live in such an area too, and it really warps your worldview in lots of ways, but especially about real estate. Those areas are the anomalies, not these other places.

          Many areas where (think midwest, south, southwest, etc or even ruralish parts of other states) the average home prices are $150-250 have perfectly decent working class/lower middle class areas where this is doable.

        • Katie Rogers

          You made my point. I was saying that contrary to the author’s assertion, according to Kiplinger, 2019 US median prices are NOT $100K but substantially more, so of course my view has nothing to do with where I live. Your $150k-$250K is also NOT $100K, however according to Kiplinger you will have better luck finding a house in th$150K-$250K range. The author was not talking about “decent shape.” She said rehabbed.

          If you tell us the name of the West Coast city, it is simple matter to verify the listings. That the name was withheld suggests you are withholding the ability to verify. Never mind all the strawmen strewn throughout your comment

        • Vaughn K.

          I wish I wasn’t on my phone where it is tedious to type long responses. Do you know what “median” means? Half above, half below. The median usually reflects pretty nice properties in pretty nice neighborhoods. Things well below median are NOT ghettos, just lower middle class or even middle middle class.

          Many cities have medians in the 100s. Places like SF/NYC/Etc skew national averages.

          I was referring to Spokane, but in my state alone the Tri Cities, Yakima and countless smaller cities/towns offer similarly low pricing. Almost the entire country outside the coasts falls into this range, and even outside the “cool” cities in coastal states it’s the norm.

          You fo realize you’re telling an article writer who is ACTUALLY doing EXACTLY what they wrote about that it’s impossible right? There are hundreds, if not thousands, of people just on this site doing exactly this type of thing. Probably 95% of the US population lives within a couple hour drive of a RE market that has such properties. NO, you can’t do this in LA… But you can do it in California in countless stable population size smaller cities.

          You really need to read/research more if you think things like this, or the general principle at only slightly higher price points, is impossible.

        • Katie Rogers

          Yes I know what median means. Too far below the median and you are talking about houses that need rehab. Houses in the first quartile usually need a lot of rehab.

        • Katie Rogers

          The author’s strategy is not practical for most people. A lot of people would have to go outside their local market which introduces a whole new set of problems.

          I would not call Spokane a West Coast city. You’ll be hard pressed to find a house for $100K that does not need rehab.

          The author has not told us when she bought her properties. Maybe the $100k no-rehab plan worked 10 years ago, but not now for most people. If you do not think Kiplinger’s data is accurate, take it up with them.

        • Nathan Williams

          Hi Katie,
          I don’t think you have done enough research frankly. I would argue that going outside of your local market decreases your problems. The author’s use case in the article certainly did not apply to my market (Austin, TX) so I searched elsewhere. With running some analysis on city data, trends, etc. and spending a couple hours networking on the BP forums I found markets where the numbers made total sense. In fact, there is no way I would buy 100K houses any more as 60K is my top price. When I went out-of-state, I was forced to rely on my team and not be personally involved in the management activities. Hence, why problems decreased and were not introduced.

        • Vaughn K.

          Katie, you seem to really just be grasping at anything available to deny that such situations exist. They exist. National average is irrelevant. Cleveland and many other cities, according to your own link, have median prices barely above $100K. I’m sure it’s easy as pie to find $100K houses with recent remodels there, in decent neighborhoods.

          Nobody is saying these deals are falling off trees everywhere though! Good deals are getting harder to find. It is also very location dependent. Nobody is saying otherwise. However tens or hundreds of millions of Americans live in places where this is possible in their local market, or a distance away that is doable. For many that isn’t the case… But that simply means their local market sucks for these types of deals.

          I didn’t say Spokane is a COASTAL city, but Washington is very much a west coast state last I checked… Being a native Californian, and one who has lived on the west coast in various places my whole life, I certainly wouldn’t say otherwise.

          Spokane, or plenty of other cities in WA, have smaller houses for sale at $50-75K price points which one could get up to snuff at $100K after rehab. You can also buy recently remodeled ones for that range or not much above, losing the value add of doing the rehab yourself. I’ve been watching that market like a hawk for well over a year and have seen tons go through even on the MLS, lord only knows what off market homes there are! That duplex (that seems to have sold now) was $140K with one unit JUST remodeled, and the other in okay condition with a long term tenant. Another duplex is for sale for $160K right now. TONS of SFHs at barely over $100K, many recently remodeled, or in generally good shape. There are lots of decent homes at nearly half the median, which in Spokane is $225K or something on that very list. At $150-175K one is looking at NICE, good sized houses in great shape in simply middle of the road areas.

          The point of investing it to go out there AND FIND good deals… Not look at what the norm, or average is. To go find the best returns, not middle of the road lame returns. That’s half the game. Sometimes that isn’t in a given market, which is the breaks for people that live there. But you can’t just say such things don’t exist when countless thousands of people are doing the exact deals being discussed.

          These don’t exist where you live… Okay. So either invest in something else with different characteristics, or invest out of your area. Take your pick. I know for a fact that my moms home town in California has houses barely over $100K all day long, and plenty under too, and has never had a declining population. Go buy there, or the 1,000 other small towns just like it in CA.

          Either way, I think obsessing on the EXACT number of $100K defeats the purpose… It’s not an exact number that matters. It’s affordable homes with strong cash flow. That’s the point. If a $100K house brings in $1,000 a month, that’s not much better or worse than a $125K house that brings in $1,250 math wise. That’s the point, not an EXACT figure that you seem to be going all OCD about.

        • Katie Rogers

          Where I live is irrelevant to this discussion.

          I did not deny that such situations exist. I said that those situations are not practical for most people to implement beginning now. The house would likely require a lot of rehab. In Spokane most of the houses below $100K require rehab, sometimes extensive rehab, unless you are looking at a different MLS than I am. The way to lose a lot of money is to fail to realistically consider all the costs.

          In my own link, there were only three markets with median houses around $100K. I am not obsessing on $100K. I am using the figure the author posits three times. It does not good to change the parameters of the discussion, ie, never mind cash flow, consider only appreciation, or never mind, or never mind standard 3/2 SFH, consider smaller houses. I expect the author acquired most of her 26 properties when the median US median was far closer to the $100K she posits than it is now for somehow just beginning to implement the strategy. As everyone reports, good deals are getting harder to find.

        • Vaughn K.

          Ugh.

          Did I not JUST say that the houses under $100K required rehab in that market? Her thesis was POST rehab being into it for around $100K. Which is doable.

          I myself am NOT fixating on her precise $100K because I think it is irrelevant to the GREATER POINT, which is affordable houses with good cash flow. In some markets that may be $125K, or even higher. Provided the proportional income stays solid I don’t think it makes much difference. So I DO NOT CARE about the magical $100K number anyway. It’s the broader concept I appreciate.

          Also, what do you consider “needing rehab” exactly? Does every house need granite counter tops, fully restored hardwood floors, stainless everything that’s brand new? Because in RENTAL houses in lower middle class areas, they don’t. I’m not going to bother to look at the MLS for Spokane right this second, but I have seen plenty of solid houses come up with fresh paint, recent roofs, recent appliances, kitchen was redone a few years back, etc etc etc that are 110% good to go as rentals, even as nice rentals for the area, that are at or not much above $100K.

          Your fixation on the median is just too much… Markets with a median of $200K you will be able to find houses pretty consistently in LOWER MIDDLE CLASS areas for $100K or not much over. And there are TONS of markets at that median or lower. The MEDIAN doesn’t need to be $100K in order to find solid rentals for $100K. How hard is that to understand? these types of rentals aren’t granite counter topped out houses in the nicest neighborhood in town! They’re decent houses in decent neighborhoods with middle of the road finishes. That is what THIS type of house is.

          As for it not being relevant to most people… I dunno about that. More people live in middle of the road places than live in LA, SF, or NYC type markets. As I said almost everybody in the country probably lives within an hour or twos drive from markets that are at least CLOSE to this type of situation, if not quite this cheap. Adjust the magic number to $125K or even $150K if it makes you stop obsessing, but the idea of buying affordable houses, in affordable markets, in affordable neighborhoods, with strong cash flow is the STANDARD view with most RE investors… Not an aberration. You’re basically going against what most people on this site invest in and telling them their deals don’t exist or something… Even though multiple people who are actually doing it right now have chimed in on the conversation.

        • Katie Rogers

          You are finally finding your way to the main point. In whatever market, you will probably need 9, 10, or 3 houses (depending on the strategy) in order to clear $2000/month, however it will likely cost you significantly more than than what she accomplished if you are beginning to implement one of those strategies today.

        • Katie Rogers

          Besides, it is not a “majority rules” type discussion. Some BP users who haven’t chimed in, one of them a prominent article writer, are finding this strategy impractical going forward, and looking for other avenues, such as self-storage units, parking lots, etc.

  4. Paul Schultz

    Great article! I’m still a newbie looking to do my first deal yet this year. I’ve been looking at the $100k and less markets that are near me. While my REI education since my landing at the BP doorstep, ~ 6 months ago, is growing, I’m wondering what you are referring to by “reserves” and where those $$ are coming from. Thanks again!

    • Whitney Hutten

      Welcome, Paul! For each property you have, you will want to set aside part of that income coming in for vacancies, maintenance, and capital expenditures. It’s not a matter of IF your property will go vacant or need repairs… really a matter of when. The fewer properties you have, the higher percentage I would set aside. As you build, you might be able to tick that down. Also, think about the market you are in. Reserves allow you to take a few lumps with evictions, weather issues, new roofs, economic downturns, etc…

  5. edward maier

    Nice article. I started purchasing property a few years back and knowing what I know I wouldn’t waste my time with 10 properties to make 2k a month investing 200k. My first property was purchased for 17k and 43k in renovations for a total of 60k its a 2 family 3 bedroom over 2 bedrooms which I currently receive 1150$ each apartment monthly for a total of 2300$ taxes are around 3k a year insurance is 1200$ I only pay water which is less than 1k a year.. all in all I net over 20k a year and I now have 3 very similar properties up and running and the other 2 I purchase for 70k each only needing a basic clean up and a few touch ups. The areas aren’t so great but your 200k is making you 24k a year and mine is almost at the 70k mark with less than half the property’s. Not saying it’s a bad deal maybe I got lucky but one thing is for sure I love investing in Realestate cheers!

    • edward maier

      Thinking about it more you will most likely come out on top in 30 years with inflation and the property’s being paid off say each of your properties are worth 50k more your looking at 1.5 million if you cashed out so definitely not a bad investment if your doing it for the long haul and not the income

      • Whitney Hutten

        Great point, Ed. SFRs tend to be where most people enter into real estate investing because it is easy to wrap your head around. I think many investors realize scaling can be a real issue at some point and move up to MFR or into another uncorrellated asset like self-storage. Even with SFRs, you are essentially setting up small annuities that once paid off will pay you every month (ideally!). You can let the tenant pay it all off for you, OR you could snowball the rents and take none of the income until the homes where paid off. OR let a few of the properties appreciate, then sell them off and pay off the others. David Greene today just mentioned a way to wrap up 10-20 SFRS into a portflio loan and then use the equity to trade up to a larger MF property… There are so many ways to make this workout!

        • Katie Rogers

          You can let the tenant pay it all off for you, but doing so forfeits tens of thousands of dollars that went to interest instead of your pocket. Regardless of whether you let some properties appreciate, or let rents snowball, if you throw as much money as possible toward the principal(s) as possible, you keep the maximum amount of interest in your pocket and improve your cash flow. Another strategy is to recast the loan after you have accumulated a chunk of paid-down principal. It costs nothing to do so and it minimizes the required monthly payment. You keep paying the original PI, but if there is a setback you can always start paying only the lower required PI and hopefully prevent any default.

        • Whitney Hutten

          Katie, All true and it cuts both ways. If you pay the home off early, you then lose mortgage interest as a deduction, and since your depreciation write-off does not change, your income is now increasing and you will now have to pay taxes (unless you have a load of gains suspended from the year prior). Also, your return on equity plummets because you have more money locked up in an illiquid investment AND your rents aren’t increasing that fast (basically your Cash on Cash return plummets as well). BUT… I totally agree… it would feel very nice to have properties all paid off. For those who want to scale and build wealth, paying properties probably isn’t the best option. I think each investor needs to be fully aware of the pros and cons.

        • Vaughn K.

          In general, if you’re buying right, you will ALWAYS make more money in RE by leveraging more and buying more properties, and paying more in interest, as the interest is lower than your rate of return.

          This is where the power of RE investing really comes from. As an all cash investment most RE is actually not very good compared to alternatives.

          The amount of equity you have in properties is more of a safety hedge than anything related to making you more profit overall.

        • Katie Rogers

          It makes no sense to argue that by paying off the house you lose the mortgage interest tax deduction. It is true, but consider if you paid $100,000 in interest, you got to keep about 25% (assuming an effective tax rate of 25%), but you spent $75,000 you could have kept. Yes, you will pay a little more in taxes on the increased income, but you get to keep a lot more, and your cash flow is greatly improved. And paying off principal is basically a risk-free return (because you lock in the return when you pay down principal) at whatever interest rate on the loan. There is nothing that gives you such a high risk-free return.

          In many cases, and in many markets your rate of return is NOT higher than your loan interest. Your profit is your cash flow, not your rate of return, which is tweakable depending on how you calculate the numerator and the denominator. A lot of people leave stuff out of the denominator that really should be there, or forget to adjust the denominator over time or rely on a calculation of OPM that is too high such as when arguing that the tenants is paying off the house for you. Yes, but at a steep premium.

        • Vaughn K.

          Katie, here is a simple example 9f leverage.

          20% down. Assume zero cash flow over maintenance, taxes etc to make it a bad deal even.

          If a property merely appreciates 3%, your real return is 15% cash on cash. If you’re cash flowing saaay 3% too, you’re making 30% on the cash you have invested. Far more than interest paid or anything else. This is Real Estate 101 stuff here!

          Massive equity or paid off houses is a SAFETY move, NOT a profit maximizing move. The 2 motivations should be reasonably balanced, but you have to understand how the math works.

        • Katie Rogers

          The author is talking about generating $2000 per month, not appreciation. Even so, assuming appreciation is assuming a return. It means nothing until the return is realized. Ask all the BP users who were leveraged in 2006 and lost their shirts. And you are still losing tens of thousands of dollars to interest.

        • Vaughn K.

          Weeell, that 15% cash on cash return still beats paying cash for the place soooooo… Not to mention if you’re a true long term buy and hold person, assuming 2-3% (AKA keeping up with inflation) is a very reasonable assumption.

          Again, you’re arguing against a mathematical fact that 99% of RE investors accept because the math is so obvious.

          Paid off or tons of equity is a safety move, NOT a profit maximizing move. There’s nothing wrong with having safety, especially if one is near retirement etc. But if you’re 25 and just getting into things one should understand that they will potentially have millions less in RE holdings paying cash the whole time along vs using leverage. Maybe for some people with really weak nerves that might be the way to go… But most people have the courage to at least use modest leverage, saaay 50% even, which still leaves them making more overall in returns.

        • Katie Rogers

          Theoretical returns and theoretical profit is one thing, but until you actually realize the gain, it is just paper profit. Think of all the people who bifurcated their thinking in 2012, simultaneous holding the thought that the 2004 house prices were in a bubble, that is to say, overpriced, while listing their own house in 2012 at their local 2004 sales prices because they don’t want to “lose money” on the sale relative to 2004 prices.

  6. Vikram Singh

    Enjoyed this article. I’ve been thinking about my own investing strategy and if I want to go the highly leveraged route (easier to do now), the cash route (need to save up more) or some combination of both, depending on the circumstances and where my finances are at at the time. Perhaps some BRRRR deals in there too if possible. I’ll probabaly end up doing a mishmash of all those strategies and then thinking about snowballing the rents to pay them off once I’ve reached 4 loans, and then once 1 is paid off, repeat by getting another property with a loan and continue from there!

  7. Carol Castillo

    Thanks for the informative article! I live in a region where $350,000 buys a C level property in a run-down neighborhood if you’re lucky, yet rents only average $1000 a month. I have one rental property purchased in 1997 and now that I’m retired was looking to buy another. The more research I do, the more discouraged I get about this possibility, unless I’m willing to move to another state, which ain’t happ’nin’! Otherwise unless I can create equity with a 70% down payment (also not happening!), it looks like I should look for another investment approach. Thoughts?

    • Whitney Hutten

      Carol, I TOTALLY understand. The most affordable house in my town is $600K+. The surrounding towns you could get in for $400K maybe. Rents might be $2400-3000 if you are lucky. Out of state investing was a game changer for our family. Especially out of state BRRRR investing!

  8. Vaughn K.

    Ultimately I want to pile up tons of buy and hold properties… Doing the BRRRR thing seems so appealing, or even just outright flipping to get the cash reserves up quicker. I really wish I actually lived in the place I’m planning on investing in vs it being a fairly long (4.5 hour) drive. I’m a bit of a control freak, like to understand how things “work” myself so I know things are being done right, and cash is tight, so being able to really oversee and do a lot of rehab stuff myself since I’m handy would be great at least one my first one or two… It would allow me to jump in a lot sooner than I will be able to waiting for cash reserves to go up.

    I am actually planning on moving there too, but timeline wise I want/need to invest first before moving myself. *Sigh* life’s little annoyances! Whatever the case I’ll get it worked out!

    • Whitney Hutten

      🙂 I understand! You can maintain control from a distance… just have to rely on other people and technology (hello video walkthroughs!). For me, I didn’t want another J.O.B. Flipping only pays out once and it’s self-employment income not investor income (good read is The CashFlow Quadrant by Kiosaki). I will flip a little to replenish capital. Having rentals is like hiring in your business. The tenant is your customer AND “employee”. In the end, it really depends on how you want to spend your time. So how do you want to spend your time?

      • Vaughn K.

        The fact that it’s a job is exactly what I don’t like about it! I’ve read that one, and a few others by him, and lots more by others.

        The question is is it a good enough paying job to be worth it for me to bother with here and now. It may be, but maybe not. If you can find the right contractors and keep your time investment down it seems like it can be pretty decent.

        Unless I fall in love with the process, I imagine I would just see it as a temporary means to an end though, with long term holds being the end goal. We’ll see how it goes!

  9. Yaminah Muhammad

    I really enjoyed your article and reading all of the responds! We (hubby and I) are new to real estate investing. The BRRRR seems to be our choice to start with. We were wondering what are your thoughts with applying this method with tax delinquent properties? Presently in our city there are plenty of properties to choose from and are in urban renewal/opportunity zones. We are aware of the laws in regards to redemption rights and acquiring quiet title to seal the deal as being the owners with these properties. All responses and advice welcomed!

    • Whitney Hutten

      Glad you found this useful! And the conversation has been just fantastic. OK… to your Q’s… Opportunity zones are relatively new and the guidelines and legal are still being worked out. So do understand that, and work with a professional who specializes in this arena. Picking up a property from a tax delinquency is a great way to snag a property for pennies on the dollar. And do your due diligence (especially on the title) like you would for anything else. What I would actually focus on is…. WHERE are these properties? I’ll give credit to Joe Fairless for one of the 3 Immutable Laws or real estate… Location! Location! Location! It is only a deal if someone will buy it from you on a flip/sale or rent it. Are these properties you are looking at in good rental or flip areas with a buyer or renter ready to go?

  10. Patrick Zoro

    well when you write “ I know the true vacancy, buy my homes rehabbed, and can keep maintenance low” others need to realize that there is a lot more in that sentence. 95% of the article make it look way to easy. i bought 4 properties with 2% rent to price ratio and after 4 months i had problems with 3 tenants and 1 house had to be rehabbed. To know the true vacancies you need to kiss a lot of frogs first. buying the home rehabbed means that you are leaving returns on the table. keeping maintenance is easier said then done as you need to know what you are buying snd that only comes with experience.
    These articles are truly aimed are empowering the base but they should be more balanced in their approach.

    • Whitney Hutten

      That could be true, Patrick. I rely on my property manager’s experience to guide my numbers in market. Also, on BRRRRs, I’m placing my own tenants (rather than inheriting them… not saying you are doing this) which gives me more control on the selection of the tenant. And not every real estate path is for everyone (for example… I just don’t get wholesaling…). Keep exploring to find yours!

    • Whitney Hutten

      Glad you found value! Potentially, yes. However, if I do fix/flip loan and then refinance out, I underwrite that cost INTO the deal… allowing the equity to carry it. However, you can buy cash, or use private money (and negotiate out the closing costs) to avoid this. If you use your own cash, you may hit seasoning issues on the refinance that may tie up your money for 6 months. Like anything in real estate, there are several ways to do this.

  11. Terry Koepp

    Great article!!! There are many ways to achieve success investing in rental properties!!! Thanks for showing several ways to generate income along with different options on how to achieve good results!! Any other advice for a newbie that has recently retired and wants to generate income in the next 3-5 years???

    • Whitney Hutten

      Well said, Terry. My advice, full understand WHY are you doing this. What feeling will investing in real estate give you. Security? Freedom? Independence? Then start reverse engineering the numbers you need to achieve that feeling… the WHAT. Maybe $2,000K gives you financial security, but $10,000/mth give you financial independence. Then work through the HOW of getting there… your daily actions you need to take consistently and persistently.

  12. Anton Ivanov

    Hi Whitney,

    I’m the founder/creator of DealCheck and just wanted to stop by and say thanks for mentioning it in your article!

    Feel free to send me a message any time if you have feedback on how we can make our software even better.

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