When Brady Hanna turned 30, he decided it was time to start building passive income. Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free Six years later he had 12 doors, which were grossing him around $7,700/month. Granted, that’s not all profit. His net profit in a given year? Around $40,000. Here’s exactly what he did to build that portfolio. In the Beginning “I had stumbled across BiggerPockets and started absorbing as much information as possible. I asked questions on the forums and started listening to the podcasts every chance I could,” Brady explained to me. How seriously did he take his real estate investing education? “I installed a Bluetooth speaker in my shower and bathroom, so I could listen to the podcast when I was taking a shower and getting around in the morning. Over the years, I have listened to every podcast multiple times and get fired up every time I hear a new episode.” That’s dedication. “For my first property, I wanted to follow all of the things I had learned and was looking for properties that hit the 2% rule.” Now, it’s worth mentioning that not everyone agrees with following the 2% rule. I have my own bones to pick with it, but that’s another story. Or article. Whatever. Brady located a move-in-ready duplex for sale in Grandview, Mo., which is south of Kansas City. Estimating gross rents at $1,100/month, he paid $55,000 for it. To finance it, Brady secured a loan from a local community bank, using money saved from his 9-5 job for the down payment. "I put down a 20% down payment and was off and running." Early Lessons in Property Management “I thought I was smarter than the system and figured I would self-manage to save the property manager’s fees.” Any time you catch a case of the smug and think you’re beating the system, that’s a good time to pause for some good ol’ fashioned self-reflection. Not that I would ever discourage anyone from managing their own rentals—if they’re prepared to put in the time and learn the skills necessary to do it. Brady advertised the units for rent, then promptly left town for two days for a trade show through his day job. Over those two busy workdays, he received no fewer than 60 phone calls from prospective renters. “After the first week of driving out to the property multiple times for showings, I saw a property management company off the side of the highway and quickly pulled over, walked in, and hired them on the spot.” Does it strike you that he skipped an important step there? It should. “I didn’t vet this property management company. I just assumed that since they were close to my rental property, they would do a good job.” If you’ve ever wondered about the first sign that a property management company needs replacing, pay attention here. “Communication was a struggle. It was like pulling teeth just getting information out of them and trying to stay in the loop about what was going on with the property.” That’s the sound of foreshadowing, for all you non-English majors. Related: Sorry, But Passive Income is a Myth for Most Investors. Here’s Why. Property #2, Property #3 After a few months of collecting rents, Brady decided that being a landlord was everything he thought it would be. “I took out a $50,000 home equity line of credit (HELOC) against my personal residence, using my local bank. I used $36,000 to buy a single family property through a short sale in South Kansas City. The property needed $7,000 in repairs.” If you've ever bought a property with cash, you know how much easier it is to negotiate a good deal. Better yet, Brady avoided paying hefty hard money loan fees to buy and renovate the property. He knocked out the repairs quickly and rented the house for $850/month. From there, it was simple to secure a long-term mortgage, which he used to pay back his HELOC. “House #3 I bought off an online auction website for $23,000 cash (again, using my HELOC). I put $27,000 into the property over a matter of three months. “I thought, man, this rental business thing is easy!” All Chickens Come Home to Roost If there was ever a cue for something to go wrong, that must be it. “Around this time, I started running into a lot of problems with my property management company.” Not exactly a plot twist, is it? His out-to-lunch property manager was starting to cost him serious money. A tenant at his original property, the duplex, skipped town in the middle of the night. That left him with two vacant units (out of four), as his most recent property was still under renovation. He called the owner of the property management company and fired them. Armed with firsthand experience that he needed to do a better job screening property managers, he went back to the drawing board. “I asked for recommendations on BiggerPockets for a reputable property manager. I interviewed a couple candidates and hired our new property manager a few weeks later and haven’t turned back.” The new company filled his vacant unit in the duplex, then rented his newly-finished single family for $875. From there, it was a simple matter of getting a mortgage on the property and paying off his HELOC once again. Building a Portfolio and an Evolving Strategy Brady used the same strategy to finance the next seven properties in his portfolio: buy and renovate with cash from his HELOC and savings, rent it out, get a mortgage. Or not get a mortgage, if he can help it. “I’ve taken the income from the rentals and just put it all back into the business, paying down principal on the houses. I now have a total of 12 units, and only have debt on three properties, using this technique.” When I asked Brady what he’s changed as he’s accrued experience, he didn’t hesitate. “Originally, I invested in B- and C class neighborhoods. They are not in ‘war zones’ and have relatively low crime; they’re working class neighborhoods. “But as my portfolio has grown, I’ve been focusing on B+ neighborhoods, as they are less transient and there is less turnover.” Why? Because turnovers are ROI-killers, which is why tenant retention is so important for landlords. Related: 3 Real Estate Investing Strategies That Aren’t So Passive (& 4 That Are) Landlord Cash Cushions I asked Brady what advice and takeaways he would offer for other rental investors. “I highly recommend having a reserve fund in place, as you never know when a bad month or couple months is going to hit your portfolio.” All too true. It turns out Brady hasn’t just paid off most of his mortgage debt, but he’s also set aside strong cash reserves. A recent example? He had not one, not two, but three furnaces fail in November. At an average replacement cost of $2,000 apiece, that would have been a desperate blow to someone without a liquid cash cushion. Here’s another example: “One of our rental properties had a small undetectable leak behind the sink for an extended period of time, causing mold to build up behind the wall. We ended up letting the tenants out of the lease, hiring a mold remediation company who also found asbestos behind the wall, hiring an asbestos abatement company, and then rebuilding the kitchen wall.” That set of repairs, which started with a tiny leak, cost Brady $10,800 and four months of lost rents. Final Advice: Network! Brady explained that as the Kansas City real estate market has heated up, he’s had to increasingly rely on his network to find deals, rather than the MLS. “Go on Facebook, and search for investor groups in your area. In Kansas City alone, there are over five local real estate investor groups that I have joined where people are posting deals all the time at a discount. “Network with fellow investors at meetup groups, REI clubs, and talk to people you know about real estate, because you never know where your next deal is going to come from!” You know what they say—your net worth is directly correlated to your network. Grow your network in the real estate industry, and your opportunities will grow right alongside it. What Comes Next In the meantime, Brady is in no rush to retire from his day job. “I plan on ‘retiring’ from my full-time job when I am 50 years old. I enjoy what I do at my job but want to retire when I am still young enough to enjoy being active in my retirement.” Any financial targets before then, Brady? “I am looking to build a passive income of at least $10,000/month so that I can use my abilities to help others. I plan to take a year off ‘working,’ spending time with my family, church, fishing, golfing, and working out. Once I am going stir-crazy, I plan on helping others invest in real estate and focusing on larger scale real estate investments while spending time helping out in my church.” I don’t know about you, but I think Brady’s onto something here, with this whole invest-in-rentals-and-retire-young strategy. What’s your strategy for building passive income? How are you planning to reach financial independence? Any tips or tidbits to share? Weigh in below!