Making 6 figures in real estate
Ottawa, Ontario · Member since 2013 · 9 posts · 1 vote
Making 6 figures in real estate
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Wholesaler · Washington, DC · Member since 2014 · 2 posts · 4 votes
12yStephen,
The second link is a diagram to illustrate the domino strategy described in the first link. In the example, the author has a goal of owning 9 free and clear properties that each produce about $11,000 in income. He starts by buying 9 cashflowing properties with 20-25% down on each property. Each of them has a monthly payment of about $515 per month. He uses the cashflow to aggressively pay down the first house. By paying $4015 per month on House 1, he is able to pay off the mortgage in 27 months. During this time, he is just paying the regular payment on the other properties.
Once House 1 is paid off, the mortgage balance on House 2 is down to $100,000. He again uses the cash flow (probably the same $4015 per month) to pay down House 2. This takes 23 months.
Once House 2 is paid off, the mortgage balance on House 3 is down to $97,086. He uses cash flow to pay down House 3 in 20 months. By repeating this approach of using cash flow to pay off the mortgage balance, it takes a total of 149 months to have 9 free-and-clear properties that bring in about $100,000 in income.
Hope this helps,
Keanne
38 Replies
- Wholesaler · Washington, DC · Member since 2014 · 2 posts · 4 votes12y
Stephen,
The second link is a diagram to illustrate the domino strategy described in the first link. In the example, the author has a goal of owning 9 free and clear properties that each produce about $11,000 in income. He starts by buying 9 cashflowing properties with 20-25% down on each property. Each of them has a monthly payment of about $515 per month. He uses the cashflow to aggressively pay down the first house. By paying $4015 per month on House 1, he is able to pay off the mortgage in 27 months. During this time, he is just paying the regular payment on the other properties.
Once House 1 is paid off, the mortgage balance on House 2 is down to $100,000. He again uses the cash flow (probably the same $4015 per month) to pay down House 2. This takes 23 months.
Once House 2 is paid off, the mortgage balance on House 3 is down to $97,086. He uses cash flow to pay down House 3 in 20 months. By repeating this approach of using cash flow to pay off the mortgage balance, it takes a total of 149 months to have 9 free-and-clear properties that bring in about $100,000 in income.
Hope this helps,
Keanne
- Rental Property Investor · Bristol, CT · Member since 2014 · 45 posts · 10 votes12y
Originally posted by @Keanne Henry:
Stephen,
The second link is a diagram to illustrate the domino strategy described in the first link. In the example, the author has a goal of owning 9 free and clear properties that each produce about $11,000 in income. He starts by buying 9 cashflowing properties with 20-25% down on each property. Each of them has a monthly payment of about $515 per month. He uses the cashflow to aggressively pay down the first house. By paying $4015 per month on House 1, he is able to pay off the mortgage in 27 months. During this time, he is just paying the regular payment on the other properties.
Once House 1 is paid off, the mortgage balance on House 2 is down to $100,000. He again uses the cash flow (probably the same $4015 per month) to pay down House 2. This takes 23 months.
Once House 2 is paid off, the mortgage balance on House 3 is down to $97,086. He uses cash flow to pay down House 3 in 20 months. By repeating this approach of using cash flow to pay off the mortgage balance, it takes a total of 149 months to have 9 free-and-clear properties that bring in about $100,000 in income.
Hope this helps,
Keanne
Not sure if I like this method... takes 149 months over 12 years to start seeing your income. If your looking for a retirement plan, well that's a different story.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes12y
Many investors have little capital to start. So they are looking for maximum yield and forced appreciation. Their jobs in many cases do not allow for much savings. Example if you make 75k a year a lot of that is used for living expenses. Even if you save 1,000 a month that is 12,000 in a year.
So it takes much longer to get going this way with slow build up.
This versus someone who has a business they own or a job with very high income can regenerate capital much faster to take advantage of market cycles where someone with limited capital might buy one property and be tapped out for awhile.
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes12y
I'm not a big fan of the article for a few reasons. The first being that you need ~$180K in cash to be able to pull this off. He's suggesting buying 9 ~100K properties which will require 20% down each.
He's then suggesting taking 0 cashflow on that for 12+ years. Over that time, you'll be paying taxes on ~$40K of income that goes directly to the bank to pay down your debt while only capturing about 30-35K of depreciation.
If you've got $180K laying around there are surely worse ways to put it to work...but this definitely isn't the best way
- Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes12y
paying down and not using interest for your tax deductions is dumb in my opinion. But many people on here would disagree. So u own a fully paid off pile of bricks in a shape of a house... what's so great about it? If u want to take money out.. u have to pay 4k to refi. Just dumb
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
LOL, this "system" was bounced around in the 80s!
In financing this is a distribution of debt reduction and use of funds issue.
You're paying off debt with expensive current dollars while reducing the after tax interest expense of cheaper money. In other words your real economic cost is greater with accelerating the payoff. The benefit is receiving future dollars with less value due to inflation. Keep in mind that raising rents does not effect the funds necessary to retire debt, increased rents are above amounts for debt service.
No one mentioned buying 9 properties with 25% down buys 2 properties free an clear and a third with 25% down. Property 1 could buy property 4 and property 2 can payoff property 3 or buy property 5. I'd say this could be quicker to the same end off hand.
In some cases this does have benefits depending on your age and retirement goals, wiping out any debt. Suffer now and enjoy later. :)
- Minooka, IL · Member since 2013 · 353 posts · 85 votes12y
@George P. I used to think the same way as you do. Why pay off a house? Then I realized I wanted 5000 in true net income per month. I needed 10 houses paid off to do that, or in my market 25 leveraged houses. I realized why work 250 percent more when I could just have 10 houses and be done with the same amount of net money. What do you think?
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes12y
Originally posted by @Sean Kuhn:
@George P. I used to think the same way as you do. Why pay off a house? Then I realized I wanted 5000 in true net income per month. I needed 10 houses paid off to do that, or in my market 25 leveraged houses. I realized why work 250 percent more when I could just have 10 houses and be done with the same amount of net money. What do you think?I think the amount of additional work for 25 "units" versus 10 is nowhere near 250%. I actually find managing 15 units much easier than it was for me to manage 4 or 6. Part of this is due to putting systems in place and improving tenant screening, but I never would have been forced to do that if I didn't grow. Ultimately, if/when I add another 15 units, it will not be twice the effort. If you really want to minimize your "work", sell all 10 houses and leverage or pay cash for a 10+ unit building. If you're good at landlording and managing property then 2.5x the units should not equal 2.5x the effort.
- Minooka, IL · Member since 2013 · 353 posts · 85 votes12y
I do see what you mean, I think its to each his own. I'd rather just keep things simple, if you know what I mean.
- Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes12y
Here's the author's response to all your comments:
http://investingarchitect.com/to-domino-or-not-to-domino-that-is-the-question/
Erion's Blueprint Investing plan is the same thing that Jeff Brown, The Bawld Guy, encourages as the best route for those seeking stable cash flow in retirement. Jeff's assertion, which Erion implies in his articles but doesn't out-right state, is that where most people who use REI for retirement go wrong is they chase cash flow instead of focusing on capital growth.
For instance, someone who is in their prime earning years should not be spending the cash flow their investments produce. Rather, they should be taking it and either purchasing more properties (preferably newer homes in excellent areas so that your portfolio is not too aged when you reach retirement, which lessens capex, and so that you will have a stable tenant base), and then at a certain point, you begin aggressively paying them down so that you enter retirement with the income you need, free of major property management worries (because you have less properties).
I've always been a huge fan of leverage, but the appeal to both Jeff and Erion's plan is obviously the speed with which you can accomplish the goal, especially if you are getting close to retirement and realize you're not anywhere close to being where you want to be financially. I think the plan has merit, but obviously, it is a case by case situation based on each person's goals, timeline, and availability of funds.
- Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes12yLeverage is the most powerful reason to invest in real estate. In my opinion any method that preaches zero debt is an inefficient use of capital. If you have the cash then you can easily buy more properties with debt to obtain the same cash flow.
- Real Estate Broker · Houston, TX · Member since 2009 · 25 posts · 22 votes12y
This is an excellent discussion. I started addressing some of the arguments that various users have made about my article but then it got too long to post as a comment so it became a standalone post. :-)
To Domino or Not to Domino - That is the Question
- Real Estate Broker · Houston, TX · Member since 2009 · 25 posts · 22 votes12y
This is an excellent discussion. I started addressing some of the arguments that various users have made about my article but then it got too long to post as a comment so it became a standalone post. :-)
To Domino or Not to Domino - That is the Question
- Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes12y
@Michael Seeker I think you have your numbers wrong, based on what I keep reading, at least. 10 unleveraged SFRs can easily produce $5k per month, but everyone seems to say that $100/door is a good return on MFH. And in the area I invest in, the owners brag if they have a 5% Cap rate on the triplexes and quadplexes, at least.
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes12y
Originally posted by @Walt Payne:
@Michael Siekerka I think you have your numbers wrong, based on what I keep reading, at least. 10 unleveraged SFRs can easily produce $5k per month, but everyone seems to say that $100/door is a good return on MFH. And in the area I invest in, the owners brag if they have a 5% Cap rate on the triplexes and quadplexes, at least.I'm curious as to what numbers you're referring to and what you're reading that you disagree with (you did not provide reference for either). I did not mention CAP rates or $/door or $/month in my post.
If your area is better for SFR than MFR, then by all means, invest in SFRs. Here in KY the returns on MFRs are absolutely better than SFRs in comparable neighborhoods.
I'm also a bit confused as to what you are trying to compare. Typically investors shoot for $100/door with 100% financing and will get more than that with 75-85% financing. An unleveraged property will always produce higher cashflow than if it's leveraged. I've never heard of anybody is shooting for $100/door on a MFR that they are paying cash for, so I can only assume you're referring to leveraged MFR properties. Why try to compare leveraged MFRs at $100/door vs unleveraged SFRs at $5000/month. That makes no sense.
In 2013, CAP rates for stabilized Class C property in Miami (the most expensive property in your state and quite near the most expensive in the country) were in the 6-6.5% range. I don't know what area you invest in, but I'm assuming it's not Manhattan which is the only city even close to 5% CAP rates. It also does not add up that SFRs would rent for between $500 and $1000 per month and comparable triplexes and quads sell at a 5% CAP rate. There is no way you're making an apples to apples comparison here.
If you want to invest in SFRs, more power to you. But if you're going to call somebody out for being wrong you should at least have a good understanding of the topic or do a little research to support your argument.
CAP Rate Reference: 2013 CBRE CAP Rate Study
- Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes12y
@Michael Seeker i will admit to being wrong if the $100 value refers to 100% leveraged properties.
The cap rates on larger properties may be better, but not on smaller (3-4 unit) properties. The reason is that they are almost exclusively repurposed singles or duplexes
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes12y
Is Sebastian, FL the area you're referring to?
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes12y
Here's an example of a quad within 20 mins of Sebastian that is listed at a 12% CAP rate (that's at list price...could get into the 15% range with lower sales price).
If you're talking about rentals that are within a block of the beach, I'd expect pretty low CAP rates, but otherwise 5% seems pretty crazy to me for a "normal" MFR! All the more reason to invest in a different city if the numbers don't work where you are :)
- Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes12y
@Michael Seeker palm bay is a hot market right now. I looked at a bunch there and gave up when due diligence showed a lot of "forgotten" expenses. This one may be an exception, but the ones I have seen so far have been landlords trying to dump non-performers off on some sucker at an inflated price
The area is great for SFRs. It is quite possible to get properties that meet the 2% rule and 70% rule by a pretty wide margin. If that changes I would be likely to go with MFH since I would have to learn a different market anyway. Oh, and the SFRs here are mostly newer, probably because a lot of the really older stuff got wiped in the hurricanes a few years back.
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes12y
Thanks for the link to the CBRE's article. 4% cap rate for multi-family in San Jose sounds about right given that the article is 1 year old. The market is even tighter now. I'm in contract to buy a 6 units at 4.3% cap. Should be a 6 cap after stabilized. Thank god I got financing at 3.0% for a 5/1 ARM with 10 year ballon amortizes over 30 years. I'm still doing a chicken dance for getting this deal. :)
- Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes12y
Originally posted by @Account Closed:
@Michael Seeker ,
Thanks for the link to the CBRE's article. 4% cap rate for multi-family in San Jose sounds about right given that the article is 1 year old. The market is even tighter now. I'm in contract to buy a 6 units at 4.3% cap. Should be a 6 cap after stabilized. Thank god I got financing at 3.0% for a 5/1 ARM with 10 year ballon amortizes over 30 years. I'm still doing a chicken dance for getting this deal. :)
What kind of minimum appreciation will make you happy with this one, Minh?
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes12y
2.5% - 3% annual appreciation. That's all I'm asking for. I'm in contract for $1.2M. Based on my calculation, it should worth about $1.45M after stabilized, which will take about 6 to 12 months. Unfortunately, there's a 2% pre-payment penalty if I refinance in the first 2 years. Otherwise, I would have done a cash-out refi after the building has been stabilized. Gotta keep the money turning. ;)
- Real Estate Broker · Houston, TX · Member since 2009 · 25 posts · 22 votes12y
I'd like to pose a question, if I may.
If in a particular market the average cap rate is 7 or 8%, why would a Seller price their property at a 13 or 15% cap?
- Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes12y
@Erion Shehaj - great question!
CAP rates essentially show the desirability of a property (both from owners' and tenants' perspectives). The reason CAP rates for Class A buildings in Manhattan and Miami are around 4% is because they are viewed as a very high-demand and safe investment. On the opposite end of that spectrum, if you look at the Class C properties in Detroit (much less desirable) the rates are north of 10%.
These numbers are also averages, so you'll see a lot of deviation across the board depending on specific neighborhoods, blocks, or even properties. Pick any city that you've lived in for 5+ years and you know the parts of the city you'd stay away from or where you'd buy your dream house.
In Louisville, I can drive 5 miles and go from a 4-5% CAP rate area to a 18-20% CAP rate area. Some of the major differences are desirability, location, deferred maintenance, tenant selection and expected appreciation. I would not touch most of the 15%+ CAP rate properties in my area with a 10 foot pole. That's not because I don't like high returns...I (along with most investors and tenants) don't like undesirable properties. As a seller, if you have an undesirable property, you have to offer a higher return to somebody in order for them to take on the higher risk and additional work.
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