Commercial Real Estate

Why Apartments Are the Single Best Way to Escape the Rat Race Within 3-5 Years

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written
Modern apartment buildings exteriors or Contemporary Architecture Office In The City.

Are you wholesaling, flipping, or landlording? Have you thought about how long it will take for you to quit the rat race? Most investors never ask that question and waste years pursuing a real estate strategy that will never let them achieve their financial goals.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

I never asked the question and delayed my retirement by YEARS with the wrong strategy. It was 2005, a year after I read Rich Dad Poor Dad, and I decided that I needed to start with real estate investing to generate enough passive income to NOT have to work.

I educated myself. I hired a mentor. And I began to flip houses. Over the next several years, I ended up flipping 34 houses and made great money. But then I realized that flipping houses was:

  • Not generating passive income,
  • Was a TON of work, and
  • Was NEVER going to let me quit the rat race.

I didn’t realize these things because I never asked myself this one question.

Can I Quit the Rat Race With My Current Strategy?

In my case, I hadn’t asked this question—my goal was just to get started with real estate investing. But I now realize by NOT asking this question, I wasted several years pursuing a strategy that would NEVER help me retire.

That stops today because we’re all going to ask (and answer) that question right now.

To answer this question, you really need to be clear about your goals. And the best way to do that is by asking these next four questions:

  • What’s your rat race number?
  • How passive do you want your income to be?
  • How many rentals would I need to own to retire?
  • What’s the best strategy to achieve your goals?

Related: How to Achieve Financial Freedom By Calculating Your “Rat Race Number”

Let’s start with the first question.

Asian woman saving money and dropping coin to piggy

What’s YOUR Rat Race Number?

The rat race number is the amount of money you would need each month to cover to quit your job. Specifically, it’s the amount of passive income you need to cover your most basic living expenses. If you could have your real estate investments produce THAT much passive income each month, you could quit your job, retire, or do whatever you wanted.

That’s your rat race number, and THAT’S what you’re seeking with real estate investing. Am I right?

For the purposes of our discussion, let’s say that you’ve sharpened your pencil and decided that you needed $5,000 after taxes to cover your living expenses and quit your job.

Then ask yourself the next question.

How Passive Do I Want My Income to Be?

Flipping houses is still a “time-leveraged” activity, meaning it can produce more income than many day jobs that have you strapped to a desk for 40-plus hours. But it’s still work. If you’re not buying, fixing, or selling houses, you ain’t making money.

Same thing for wholesaling: If you're not marketing, talking to sellers, and doing deals, you're not getting paid.

And the worst with either of these strategies is that they don’t give you any kind of residual income. When you sell the renovated house, you (hopefully) make a profit, but then that house stops paying you. It’s over—the money stops flowing.

At this point you might throw up your hands and say, “OK, Michael, but if it’s not wholesaling or rehabbing, then it must be rentals, right?”

And so we get to our next question.

Aerial view of a green leafy suburb

How Many Rentals Would I Need to Own to Retire?

Rentals don’t produce the kinds of cash flips can, but they do produce passive income so you can retire some day.

But have you thought about how long it would take to retire?

Let’s do some quick math.

If you buy and manage your rentals right (and we're a bit generous with our projections), let's assume you can expect an average monthly cash flow of $200 per month from each single family rental (after all expenses, including vacancies, repairs, and mortgage payments).

We determined earlier that our rat race number is $5,000 per month. That means you would need to own a portfolio of 25 houses to generate that much income. Now let me ask you these two questions:

  • How long will it take you to buy 25 houses?
  • Do you realize how much work it will be to find, buy, and manage 25 houses?

Most investors haven’t asked either of these questions. And yet they pursue SOME kind of single family house strategy, even though it won’t help them get to where they want to go.

Then why do we do it? I think it’s for three reasons:

  • We do what is easy.
  • We do what everyone else does.
  • We aren’t intentional about what we do.

Fortunately, we’ve now asked the question and hopefully we’ve answered it. This leaves only one more question to ask.

What’s the Best Strategy to Achieve My Goals?

According to a Forbes article, unless you're an investment tycoon or technology whiz kid, the most common way billionaires made their fortunes was with commercial real estate. That's why I believe that…

Apartment building investing is the SINGLE BEST real estate strategy to get you out of the rat race in the next 3-5 years.

Related: Want to Retire Early? Sorry, But Much of Your Net Worth May Not Help

Don’t believe me? Then check out this story about Drew Kniffin from Minneapolis-St. Paul.

Drew bought a small four-plex with a friend, and then they bought a five-plex together with their property manager. That gave them the confidence to look for larger deals, and they pooled their resources, refinanced one of their previous properties, and closed on a 32-unit building in the Twin Cities.

Two weeks later, Drew quit his job.

An anomaly?

Nope, I don’t think so.

I’ve interviewed successful investors on my podcast, and nearly 100 percent of the time, they follow this pattern:

  • They decide to get started with apartment building investing.
  • They take action.
  • They do their first deal, and surprisingly, it doesn’t really matter what size that first deal is. Of all the deals they do, it’s the hardest one.
  • The second and third follow in rapid succession.
  • They quit their jobs and become full-time investors.
  • And they do this in 3-5 years.

happy businessman with cardboard box with office supplies in hands standing outside office building, quitting job concept

Conclusion

As you’re evaluating real estate strategies, ask yourself this one question:

“Will it generate the PASSIVE income I need to QUIT THE RAT RACE in a REASONABLE amount of time?”

If so, then press on. But if not, make a change.

I’ve observed that MOST real estate investors have been able to quit their jobs (and generate REAL wealth) with apartment buildings.

If you think it might also be right for you, then read everything you can about apartment building investing. Start by reading all of my articles here on BiggerPockets.

I hope this article has helped you reflect on your current path, clarify your goals, and map out a path for the future.

ad-youtube-channel

To what degree is your current real estate strategy helping you achieve your financial goals? What (if any) changes do you need to make?

Leave all your questions and comments below!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
Read more
    Charles A. Rental Property Investor from Jacksonville, FL
    Replied over 3 years ago
    @Quinn My cousin is investing in the Toronto area. He also has some SFRs here in JAX. My sense from his dual experience is that the Canadian market especially Toronto/BC/Vancouver is pretty much similar to CA and NYC in the US. These are markets where you could make a killing from appreciation but will hardly ever cash flow. On just one flip last month,he made $200k after only holding for 3 weeks. Buyers were calling his phone off the hook. That’s why I personally believe Canada is in a bubble. So proceed with caution. What my cousin right now is to flip in Toronto and invest his profits in buy and holds in JAX. Hope that helps you.
    Edward Briley None from Virginia Beach, Virginia
    Replied almost 3 years ago
    I disagree, the best investment that can be made today in real-estate are motels. You can escape the rat-race on the closing date, and ensure a high income on investment. Just make sure the motel has 30 rooms or more.
    Anthony Dooley Investor from Columbus, Georgia
    Replied almost 3 years ago
    Buying a Motel is not real estate investing. It is a hospitality business.
    Nate Reed Real Estate Investor from Austin, TX
    Replied almost 3 years ago
    Your mileage may vary. For most people, capital will be the limiting factor. The average COC returns from MF are probably about half what they are in SFR’s. Let’s say you want to replace a $100k after-tax income. At 10% (a generous COC return based on today’s market) it takes about $1M in capital to generate enough passive income to retire with the same lifestyle. There are a lot of assumptions and variables behind statements like “retire in 3-5 years” and a lot of it is either elusive (finding a value-add that will double or triple capital) or out of our control (eg. market cycles).
    Anthony Dooley Investor from Columbus, Georgia
    Replied almost 3 years ago
    I agree with everything in the article, but I have one problem. The 25 house scenario with $200 of positive cash flow is such a terrible investment. I would hope that nobody would make this mistake 25 times. If you want to make $200, you don’t need to go into debt to buy a rental property. You would be better off delivering pizza part time and make $1500 per month or panhandling on the corner.
    Adam Mazhar
    Replied 12 months ago
    @Michael Blank - Hi Michael, can an investor achieve financial freedom being a limited partner (LP) in a syndication or should an investor focus strictly on being a general partner (GP) and buy apartment complexes on their own or by raising money. Who makes more money, GP or LP? Can you claim or have protection of owning a real asset as an LP, are their any cons to being an LP vs GP? Trying to figure out which way is better if I want to be get really passive in apartment complex investing and how soon can I double my money in this while keeping the cash flow coming in from the rentals?
    Steven Ashwood
    Replied 12 months ago
    Hey Michael, I noticed your in Nova. Did you invest out of state or did you find your deals local bc it seems the property is priced way too high around here.
    Ted Gunnarsson
    Replied 12 months ago
    Great article, wonder if it will be the same in the Swedish market? Learning a lot from you guys in US and hope I can implement it here. //Ted
    Jace Perry Investor from Coeur d'Alene, ID
    Replied 12 months ago
    Fantastic article! I just purchased our first apartment complex at a 7.5 cap and will be over a 10 cap with improvements etc. What is the best step by step strategy to find new apartment deals and the tools that you recommend using? Thank you in advance!
    Michael Cole
    Replied 12 months ago
    Great article!! This the path i’m on. Four SF/duplexes to start.......selling them off and recently bought a 16 unit. Now working towards my next 25+ unit.
    Matthew Adair Rental Property Investor from Chicago, IL
    Replied 12 months ago
    Just finished reading Chad Carson's Retire Early with Real Estate (published by BP). Fantastic book. It talks about the same concept that Michael describes here- starting small and then "trading up" into bigger deals. These guys know what they're talking about.
    Darrell Hay
    Replied 12 months ago
    Good stuff. I just unloaded my last SFR, paid cash for an 11 unit with the proceeds in a depressed area (stole it in a bankruptcy) and still had cash left over to pay the capital gains and $139,000 in walking around money. That building is now churning out major cash after a paint job. Added this building to my existing 3, 6, 8 and 13 unit buildings. That was enough to completely stop working. Now I do what I want and I have exceptionally high living expenses ($12,000 month). One commenter suggested that apartments are higher risk and could involve higher risk of failure and failure in a big way. The opposite is true. One or even two vacancies is not a problem—-percentage wise it is very small compared to SFR. Also the 30% down requirement seems a hurdle for many. All of my buildings have been less expensive than my primary residence. They are out there, they just may not be in the most prime neighborhoods.
    Chad McLeod
    Replied 12 months ago
    I'm interested in getting into commercial but totally ignorant at this point (willing to learn though, of course). Question for the MF investors -- do any of you pony up the downpayments yourself, or do you always partner with others? Also, how do you work around the short-term nature of commercial loans? Do you just refinance before they come due? 5-7 years seems like the blink of an eye compared to the 30-years on SFRs. Thanks in advance for any insights!
    Mary Barson
    Replied 12 months ago
    Hi! Really great article!! I bought a home to flip 16 years ago in TN. I planned to stay 2 years, sell and use profit to move back to MI. I didn't know a soul here, as I was moving to MI from FL after a devastating breakup. Shortly after I got here, my brother moved here and bought a house. 6 months later he had 3 strokes and I ended up taking care of him for 10 years. He now has a live in caregiver, and I was able to fix the house up to sell. I paid 38k. Put 35k into it and than got very ill. I mean bedridden ill. As luck would have it, I have a rare hereditary disease that nobody treats, here except to do a complete blood transfusion. Up in MI, U of M has clinical trials. I am now on SSD and TN Medicaid. I am too sick to put this house on the market and deal with showings. My plan was to buy 1st with a co buyer, than empty house, have crew come in to clean and stage, and sell it using a realtor. But, that is against Medicaid rules and they will consider the home in TN as deserted if I relocate 1st. They will auction it off and keep any profit. The house is worth 95k now. Maybe more. I just want to put all of this behind me and go home, get healthy and get back to my life. This disease is incurable. And everyday that passes is a day less of my short life expectancy without genetic counseling and monitoring. The real estate market in MI is on fire. Houses in Royal Oak that sold for 75k 10 years ago are now asking 200k+ for a 750 sqft 2/1 with 1 car garage. Taxes are outrageous. But if I am dying, that is where I want to live my last days. I'm also lookng at other areas. Milan, Farmington Hills, Madison Heights, Waterford. I have talked to 2 attorneys, and they had no answers. I have talked to an auction company to see about auctioning it off. Local investors lowball me. My realtor won't list unless I have a place lined up to move to after closing. I am 56 years old. Single. No kids. My mother just passed away. My attorney father passed in '08. I have nobody here that can take over the sale for me. I am so sick and so over this house, have debts to pay off from the remodel, and cry myself to sleep everynight. I can't rent it out. I just wanted to fix it up, grieve the lost relationship while doing so, sell it at a profit, and go back home to MI to purchase a small home, work and finish my college education with a degree in criminal justice. Everything went wrong. And 16 years later I don't know what to do. How can I unload this house for fair market value or more so I can get home before its too late. Pay off the reno debts. I am totally lost. And my blood is destroying my RBC, and oxygen is not reaching my extremities, including my brain. I feel trapped. Do you have any suggestions? Any resources I have not considered. I need to sell this house ASAP. I feel like Shemp from the 3 Stooges. Or Curly. I had the best plan and it blew up in my face due to this stupid illness. Thankyou. Mary in Athens, TN.
    Joanna Benz from Las Vegas, NV
    Replied 11 months ago
    Hi Mary, what a sad situation. I suggest you look for someone extremely trustworthy to move in with you and handle getting the house sold. I know there are a lot of charlatans out there, but you can easily investigate them using truthfinder dot com, and then check on their personal and professional references when you are up to making phone calls. Think about the best way to compensate your new assistant, maybe free rent and utilities for now plus 10% of the net sale price once the house is sold. If you go For Sale by Owner instead of using a realtor, that could help your bottom line. So get your new tenant to handle all the staging, photos, advertising, showings etc. for you. To run the sales contract through a lawyer will cost less than a realtor's fee. I sold one large four level SFR in Colorado using only a lawyer, and he screened and qualified all applicants and did all the processing and paperwork. He only charged me $400, but this was quite awhile back, in the '80s probably. I hope you feel better and find the perfect assistant to help you get through this! Joanna Benz in Billings, MT
    Matt M. New to Real Estate from Houston, TX
    Replied 12 months ago
    how about the numbers on apartment investing and some examples? you spend 3/4 of the article talking about rat race and single family and then don't get into any details on apartments.....
    Ron Gallagher Investor from Washington, District of Columbia
    Replied 12 months ago
    I have reached my "rat race number" (which happens to also be $5000 a month in rental income) with only 4 single family properties (one is a condo) in the Washington DC metro area. So you can achieve financial freedom with just a few single family properties if you buy properties that cash flow $1000+ each per month. I would love to sell all my properties and then buy a big apartment complex and have a staff of 2 or 3 people to manage the apartment building but that's not going to happen since I wouldn't be able to coordinate a 1031 exchange of selling 4 properties at the same time as buying the apartment complex. So I will just stick with my SFDs, which were easier for a small individual investor like me to buy, and retire after running the rat race for only 9 years.
    Ariel Nixon Accountant from Wichita, KS
    Replied 12 months ago
    I understand the point you are making however for many people SF or MF are a great entryway into real estate investing, especially if they do not have the capital available for an apartment complex. When I first started there wasn't a chance I would feel confident buying a complex with zero experience; but buying my first SFR for $36K and remodeling it - that seemed like a feasible goal. Since then i've learned so much from my experiences and look forward to buying multiple apartment complexes, however I would not skip the step of all the lessons i've learned in single family.
    Jiffin Eapen varghese Rental Property Investor from New York, NY
    Replied 11 months ago
    Michael Just started listening to your Podcast. Thank you for sharing all the valuable information through your BP blogs as well as your Podcast. God Bless You.
    Greg Moore Rental Property Investor from Tampa, FL
    Replied 10 months ago
    Something tells me this article just changed my life. Updating my strategy right now!