How do I make 5k passively in real estate???

Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes

Hey,

My goal with real estate is to net $5,000 a month from rental income in the next 10 years. I'm currently a real estate agent in the Philadelphia area and I also do flips. The pay is great but its basically a 9 to 9 job. I have no problem with working hard and smart. My current problem now is that once I leave or take a vacation ... so does my income!! Which sucks. I'm only 23 but I'm thinking of when I get older and have kids and I'm missing games and birthday because I have to chase that dollar.

QUESTION:----->

How does one go out there and build a portfolio of rental properties where you NET $5,000 a month in 10 years time or less? Please be a detailed as you possible can! Thank you so much.

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Jon Klaus

Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes

12y

Assuming you can net $200 per house, per month, a 10 year buy and hold plan might look like this:

Year 1, buy 1 rental, $200 monthly cash flow

Year 2, buy 1 rental, $400 cash flow

Year 3, buy 2 rentals, $800 cash flow

Year 4, buy 2 rentals, $1200 cash flow

Year 5, buy 3 rentals, $1800 cash flow

Year 6, buy 3 rentals, $2400 cash flow

Year 7, buy 3 rentals, $3000 cash flow

Year 8, buy 4 rentals, $3800 cash flow

Year 9, buy 5 rentals, $4800 cash flow

Year 10, buy 5 rentals, $5800 cash flow

That's 29 homes. You also should have rent appreciation, and a balance sheet that gets stronger each year. That would allow you to trade up to commercial some time in the latter years or at the end of 10 years for even more passive income.

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
First thing you might want to do is look at commercial real estate as a profession over residential.

Normal hours and dealing with numbers and not a bunch of emotions. Your clients will buy over and over through the years.

You can do paperwork with a laptop and a phone while sitting on the beach versus showing a home and working crazy hours. You also can make more income at a faster clip than residential.
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Fred Makaye
Investor · Arlington, TX · Member since 2013 · 27 posts · 1 vote
12y
Buy low rent high. I was in your shoes a few years ago when I decided to just jump in and buy some properties. If youre already buying distressed and rehabbing how about buying fixing and holding. Pull out equity after you fix it up and roll it into a new property. As long as you dont buy s***holes you should get to 5k with about 20 doors in my area thats about 10 duplexes 7 tri's etc.
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Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Joel Owens Hey buddy, thanks for the feedback. I thought over what you said but wouldn't switching to commercial real estate just be transferring my 9 to 9 into another avenue? How would I be able to passively net $5,000 monthly?

@Fred Makaye Hey buddy. Glad to hear other have gone through what I am going through. I want to clear thing up, when I say I've done flips, I mean I've documented flips or I've bird dogged for someone who has let me see the entire flipping process. Cash wise I don't have the money in the bank to finance a flip. Nor the cash reserve to run with hard money lenders. Have you hit the $5k net monthly mark? How did you get there? How would you get there now?
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
How much is your average house sale??

Let's say it's 200k and you are at 3% commission = 6k

Broker gets 20% 1,200 and you get 80% 4,800 each closing.

Let's say you sell 2 houses a month which is crushing it for most residential agents.

4,800 X 24 closings = 115,200 year commission to you before expenses. Your expenses and hours worked will be substantial because you are taking homebuyers all over creation to the ends of the earth to make a sale.

Now let's look at commercial. Average transaction closed is in the millions for sales price. Most clients you interact 9 to 5 as they are professionals or own other businesses.

I can do less transactions but make more money with regular hours with commercial and it leaves me free time for myself, friends, and family. Also I have extra time for my own investments.

In residential you will hit a time versus closing ratio wall where you will have to add teams and all that other junk to increase volume. I like doing my own investments and working with clients one on one.
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Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Joel Owens Hmmm I see where you are coming from. How would one go from residential to commercial?
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
I own my own company as a principal broker.

Being that you are a residential agent mainly and do not have the training yet you would want to look into commercial real estate firms.

Residential brokerages will have an occasional piece of land they are selling for development or a small office or a mom and pop type gas station but that's not where the career is at.

In commercial people specialize. For me it's apartment buildings and triple net leasing. So you would decide if you want commercial transactions or the leasing side of things. I prefer transaction only. Then you would look at if you like land development, retail, multifamily, office, industrial etc.

Once you decide on that you go interview with one of the big commercial firms that specialize. They will put a director above you to guide and mentor and train you as part of the team. Split is usually 50/50. As you gain more knowledge and experience you can become a director yourself or branch out on your own company and keep most or all of it.
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Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Joel Owens Good Info. How did you come to decide on which aspect of commercial real estate you wanted to run with?
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Jon Klaus
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
12y
Assuming you can net $200 per house, per month, a 10 year buy and hold plan might look like this:

Year 1, buy 1 rental, $200 monthly cash flow

Year 2, buy 1 rental, $400 cash flow

Year 3, buy 2 rentals, $800 cash flow

Year 4, buy 2 rentals, $1200 cash flow

Year 5, buy 3 rentals, $1800 cash flow

Year 6, buy 3 rentals, $2400 cash flow

Year 7, buy 3 rentals, $3000 cash flow

Year 8, buy 4 rentals, $3800 cash flow

Year 9, buy 5 rentals, $4800 cash flow

Year 10, buy 5 rentals, $5800 cash flow

That's 29 homes. You also should have rent appreciation, and a balance sheet that gets stronger each year. That would allow you to trade up to commercial some time in the latter years or at the end of 10 years for even more passive income.
6 Reply
Levi F.
Real Estate Investor · soldotna, AK · Member since 2011 · 69 posts · 36 votes
12y
Jon could not have said it better. For my partner and I it was as simple as learning how to acurately evaluate properties, saving the money, then pulling the trigger. Rinse wash repeat. Your personal goals will direct you to the type of property and risks associated. For now we only focus on cashflow.
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Adam Powadiuk
Toronto, Ontario · Member since 2013 · 4 posts · 0 votes
12y
one more vote for commercial, that's where the real money is. How does a new 9-5 gig fit into your plan for passive income? Two key ways:

1. You said you don't have the cash to finance your own deals. Commercial will get you the ammo you need to take down your first property.

2. Realtors come across sweetheart deals in whatever asset class they are chasing. If you're a single family res agent you will come across opportunities to buy there. Somebody above mentioned buying 29 homes. If you specialize in retail, apartments or industrial you will come across bigger opportunities. The monthly cash flows will be bigger.

There is several hundred more good reasons to go commercial but don't wait. The more traction you get in res, the harder it will be to bite the bullet and make the switch. Nobody wants to go back to making no money for a year or two.
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Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
12y
Borrow $3,000,000 backed by RE and pay 6%, earn 8%.
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Patrick L.
Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
12y
What it all comes down to is finding enough money to invest to get to that point. If you're doing buy and hold rentals to have $5k in passive income per month you will need to find a way to invest $60k/year for the next 10 years assuming a 10 cap on the properties (which seems to be the average most people hope for). If you're willing to make sacrifices in your lifestyle these things can become more possible (no new car, living in a 4 unit property where you rent out the other 3 units, etc). The advice about changing careers that others gave is one part of it too because it seems like in order to invest the amount you need to, you'll probably need additional income.
2 Reply
Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Jon Klaus Thanks for the yearly lay out. That give me a good idea of what to aim for. Really appreciated
0 Reply
Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Levi Forrest

Hey Buddy thanks for the feedback. Yeah my goal is cashflow and my strategy is buy and hold. How did you go about getting funding for your first deal? What would you do in my shoes?
0 Reply
Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Adam Powadiuk Yeah it looks like since I have my license, commercial is the way to go. That the number one feedback I keep getting based on the response. I will really have to looking into it. Are you currently a commercial real estate agent? How did you get started? What helped you make the decision? What's your niche?
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Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Jeff S. Thanks for your feedback. However how does someone with zero properties, "Borrow $3,000,000 backed by RE"? Your idea sounds great, but please be more detailed. How does someone in my shoes "Borrow $3,000,000 backed by RE" ? I don't get it. Please help!
0 Reply
Paul Timmins
Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes
12y
@Ugochukwu Opara

In commercial its the ability of the property to cashflow thats the value loaned on. The bank wants to see someone with good credit if you don't have it get a sponsor who has good credit. The sponsor may or may not put money in the deal.

The money needed doesn't have to be yours it could be the investor. The formula is $100 a month profit per unit if you want $5,000 / 100 = 50 units. If you split the profit with investors then you need 100 units.

Look for stable properties with Cash on cash 12%+, Debt coverage ratio 1.6+ and a cap of 8%+ This will give a good return to you and the investors.

Good luck

Paul
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Levi F.
Real Estate Investor · soldotna, AK · Member since 2011 · 69 posts · 36 votes
12y
1. I saved money

2. Talked to lawyer to form holding entity

3. Found a property after evaluating hundreds

4. Talked to local bank and got commercial loan for 20yr @ 6%

In your shoes I would start saving and looking. Practice evaluating then post the property information here for feedback. Get REALLY good at evaluating cash-flow. I realized during the beginning positive cashflow is most important. If your purchased property looses money you are that much further from property two.
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Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
12y
@Ugochukwu Opara there are lots of different ways to earn a 2% spread. Isn't there a lot of opportunity in your area with low priced properties? How you go about it is a very personal thing. Some people are willing to sacrifice a lot and throw every cent into their investments while others aren't willing to lower their standards at all. Find people in your area that are doing what you admire and imitate them.

You say you are making good money. Use that as leverage to borrow and buy. If you don't own your home then buy one that you can create equity with.

Chances are you won't be able to borrow huge right off the bat but if you find something that works on a small scale then ramp it up.

30k rental you finance at 8% that rents for $600 will give you a great spread. I'd start there and play with the numbers. 50% rule says you earn $3600 year on your 30k property which is 12%. You pay 8%, earn 12, put 4 in your pocket. There, you see you only need 1.5 million in debt. 1,500,000/30,000=50 houses.
1 Reply
Darrin CareyPro Member
Lender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
12y
@Ugochukwu Opara

Get started with one property. @Jon Klaus Laid it out well, regardless of the type of property you invest in. I started with residential (2-4 units), and am gradually adding commercial to the portfolio,
0 Reply
Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Paul Timmins Hey Buddy,

Thanks for the input. I never thought to put up my deal analysis on the site for feedback. I can do that for sure. I have semi decent credit (718) but can't borrow do to not being self employed for two or more years or hold a full time job for two or more years.

Career wise I've been part time until I graduate in 2012. Then I jumped into real estate. I've been told to also work towards getting a steady 9 - 5 salary job to make borrowing easier and not eat into my real estate earnings. What are your thoughts?
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Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Levi Forrest Thanks again!

@Paul Timmins also recommended I get good at analysis and post my finding here on BP. I'll be doing that for sure. The feedback would help tremendously.

What made you go commercial loan?
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Ugochukwu Opara
OP
Real Estate Agent · Philadelphia, PA · Member since 2013 · 150 posts · 59 votes
12y
@Patrick L. He y Buddy,

Yeah looking like I need a cash reserve in order to buy and hold. This has been my problem. Currently I live pretty frugally. I recently just downsides to a small used car and got rid of my car note. Moved into families spare bedroom to drastically offset living expenses. However, I am still no where near being able to put 60K annually aside. At best I could swing 25-30K.

What would you do in my shoes?
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Paul Timmins
Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes
12y
@Ugochukwu Opara

Check out business lines of credit I heard one that will give everyone with good credit in the LLC access to 50-150K

Paul
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Levi F.
Real Estate Investor · soldotna, AK · Member since 2011 · 69 posts · 36 votes
12y
The way our law team structured our entity dictated our loan ability. You should consider entity formation sooner than later. Just my opinion. Lots of ways to Rome.
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