My Freedom Plan - advice and critique welcomed

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My Freedom Plan - advice and critique welcomed

Eliot M.
Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes

I've put a plan down on paper to help me escape the rat race.  I've thought about this for over 10 years, finally took some action 2 years ago and bought my first rental.  3 rentals into it and I feel like I have a good enough handle on this whole rental investing thing that I can take what I've learned and extrapolate it out into the future to make a plan for my exit from the corporate world.  I have thought long and hard about this, built countless spreadsheets, talked to investors, realtors, lenders, family members, read countless real estate and investment and business books, and listened to hundreds and hundreds of hours of podcasts.  Now I'm ready to really lean into this hard and go for it.  But before I do, I want to post it here for the BP community to poke holes in it and test my assumptions.  I would really appreciate any and all feedback you can give me.  

In the markets I'm familiar with, I can buy houses for roughly $50k and rent for $750-$800 per month.  Using a traditional mortgage, this translates to an out-of-pocket of about $12,500 ($10k down pmt, $2500 closing costs).  Annual cash flows after all expenses, vacancies, travel, termite bond, taxes, maintenance and capex, are about $3-$3.5k (proforma picture below):

Using debt, I'm looking for AT LEAST a 20% CoCROI and really 30% will be my floor as I gain more experience.  

All that being said, I have calculated that I need 32 houses in order to hit 6 figures of passive rental income per year, after income taxes.  I have 3 now, 29 to go!  So it will be a long road and am looking for any guidance you could give.  Essentially, I am on year 2 of a 10 year journey (see pic below).

Has anyone else taken a similar path?  To me, 8 more years seems great when compared with 30 more years in a corporate job that I don't like.  But I also keep listening to these superstars on the podcast that "retire" within a couple years of starting.  Just listened today of some lady who had acquired 150 properties within 8 years, so I don't know what I'm doing wrong or incorrectly.  I have figured that if I plan to go buy 30 more SF homes, I could go get a real estate license and keep the buying side of the commissions, which will net me ~$40k and assist me in lopping off 1 year of my 8 year plan and making it a 7 year plan (reflected in the picture above).  I know things change and "the best laid plans", but I'm just fine tuning here and trying to think of ways to speed up the process "responsibly" and not wrecklessly, and all while I try to enjoy my life and my family.  

I hear a lot about direct mail, but honestly I can not stomach sending out thousands of $ of mailers every month in the hopes of getting calls back - my temperament is such that I would just rather go buy more houses... even if it means maybe I pay more.  

So anyway, there's the plan in all it's glory.  Please poke holes, offer advise, joke on me, ask questions as much as you can.  Thanks in advance!

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Matt BellPro Member
Rental Property Investor · Montgomery, AL · Member since 2015 · 93 posts · 95 votes
10y

Have you considered employing the BRRRR strategy to scale your business faster? We are employing this strategy for our rentals and have now purchased/rehabbed/rented 8 properties in 10 months - 6 of the 8 have been refinanced to get all our cash out (in one case an extra $20,000 on top of what we invested). The only reason we haven't cashed out the other 2 units is because we only did the cash closing yesterday but we will cash out by July 15 most likely. I am happy to discuss our metrics and the financing arrangements with the bank if you want to private message me. We do maintain at least 20% equity and try to get at least $200/mo cash flow after all the expenses and reserves you mentioned. So, you would need 42 properties using the assumptions of no rent increases and flat line cash flow of $200 per property (no payoffs or refinances) but if you matched our pace you would be to your goal of $100,000 in passive income in 4 years or so.

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  • Account Closed
    Lender · Milpitas, CA · Member since 2016 · 376 posts · 248 votes
    10y

    Hi @Eliot M.! Congrats on taking charge of your life and actually creating a solid plan. I think everything looks great, but would like to offer some additional advice

    1) I noticed you didn't raise the rents on any of your houses and are assuming they will cashflow $3125 a year, every year. In reality, you will probably increase rents due to inflation or rise in market prices. This means you'll need less houses than you think!

    2) You probably don't need $100,000 to retire. If you look at someone who makes $100,000 working a W-2, you'll see that they get taxed heavily on their income. On top of that, they put away a lot of money into retirement accounts (401k) and savings. Since you will be generating all of that passively and through investments, you get taxed less than a regular W-2 worker. You also won't need to participate in a retirement program. Once you make more in passive income than your expenses, you are free to retire.

    This means you need less homes/fewer years to retire if these numbers work out! I met a few people in my local REIA who have retired in the Bay Area with less houses (and less cashflow) and are spending their new-found free time on their hobbies, families, and upping their Real Estate Investing game!

    Best of luck to you, I know you'll do very well!

    0Reply
  • Matt BellPro Member
    Rental Property Investor · Montgomery, AL · Member since 2015 · 93 posts · 95 votes
    10y

    What are your assumptions on mortgage length and terms?  After 4 or 10 properties, you will likely have to switch to commercial or portfolio loans.

    1Reply
  • Lori Verni
    Investor · Holly Springs, NC · Member since 2016 · 18 posts · 14 votes
    10y

    Another way to speed this up (and/or require fewer total properties) is to either start taking out 15 year mortgages, and/or use the cash flow money to pay off the mortgages faster...once they're paid, the prior mortgage payment now becomes income as well. Also, when you own properties that have no mortgages, lenders look upon this very favorably for future purchases.

    1Reply
  • Eliot M.
    OP
    Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes
    10y

    @Account Closed It's a good question and one that I've thought alot about. I've talked to a lot of lenders and it looks like I'm set until 10 houses. Then on 11-32 I go with portfolio lenders or asset-based lenders (I've talked to those guys as well), and while the economics are less friendly (higher closing costs, higher rate, and slightly less LTV), I still am assuming I can get a 25% yearly return on those economics. But as a worse case scenario I have also modeled out what happens if I just get stuck after #10 and have to pay cash... It's worse and it takes longer but it only extends my retirement out by 3 additional years according to my calculations.

    0Reply
  • Eliot M.
    OP
    Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes
    10y

    @Account Closed I've thought a lot about the rent raising/inflation thing and I don't use it in any of models for one specific reason: the very first house I ever bought I have now owned for a decade. You know how much it has appreciated? Zero. In fact it's probably down 10%. It's on the MLS right now all fixed up very nice and just nobody wants it. Lesson learned. Don't count on appreciation/inflation/increased rents. I have a very cynical attitude towards counting on inflation in investments because for me it just has never worked out in my favor.

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    Keep in mind that when calculating cash flow you always calculate based on mortgages at 100% of property value increased each year to consider appreciation. You need to insure that not only are you considering the actual cost of the mortgage but that any equity in the property also earns a return. Cash should never be allowed to simply die in a property, When owned free and clear the cash must earn a return on top of the property itself.

    0Reply
  • Eliot M.
    OP
    Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes
    10y

    @Thomas S. I'm not sure I understand what you're saying. The ROI number above is based on after-tax net cash flow from the property divided by the cash required to buy (down payment + closing costs + repairs). I'm not including the principal pay down above, which would increase that ROI number even higher.

    0Reply
  • Chris Soignier
    Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
    10y
    Originally posted by :

     I am targeting $100k 1) because it's a nice big round figure, and 2) my wife doesn't work, so really I have to replace 2 people's incomes...

    I still am assuming I can get a 25% yearly return on those economics. 

    If your wife doesn't work, don't you only need to replace 1 income, or am I missing something?   Also, I'd be careful about assuming a steady 25% return on future purchases.   Sometimes home prices surge faster than rents, and you may not be able to sustain those returns on new acquisitions unless you want to own slum-like properties.

    1Reply
  • Eliot M.
    OP
    Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes
    10y

    @Chris Soignier Ha. Sorry, that's confusing. What I meant to say is, there is only 1 income in the household and nothing else to subsidize my leaving early. For example some people can "retire" at $50k in passive because the other spouse is making the other $50k at a W2. I'm the only one that works so I'm  saying I need this passive income to bear 100% of the household expenses because it will be the only income. 

    0Reply
  • Matt BellPro Member
    Rental Property Investor · Montgomery, AL · Member since 2015 · 93 posts · 95 votes
    10y

    Have you considered employing the BRRRR strategy to scale your business faster? We are employing this strategy for our rentals and have now purchased/rehabbed/rented 8 properties in 10 months - 6 of the 8 have been refinanced to get all our cash out (in one case an extra $20,000 on top of what we invested). The only reason we haven't cashed out the other 2 units is because we only did the cash closing yesterday but we will cash out by July 15 most likely. I am happy to discuss our metrics and the financing arrangements with the bank if you want to private message me. We do maintain at least 20% equity and try to get at least $200/mo cash flow after all the expenses and reserves you mentioned. So, you would need 42 properties using the assumptions of no rent increases and flat line cash flow of $200 per property (no payoffs or refinances) but if you matched our pace you would be to your goal of $100,000 in passive income in 4 years or so.

    2Reply
  • Matt BellPro Member
    Rental Property Investor · Montgomery, AL · Member since 2015 · 93 posts · 95 votes
    10y

    Are you managing the properties yourself?  I noticed you listed $200 for property management which equates to 2% of gross rent. You should budget 10% as a minimum if you want someone else to manage your properties - even if that won't be the case until much later - build it in to the model now.

    0Reply
  • Eliot M.
    OP
    Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes
    10y

    @Matt Bell I like the BRRRR strategy a lot but I can't see how it helps me scale faster. But I'm open if you can convince me. The way I look at it is, I can either buy a house that needs no work for $50k and rent it out, or I can buy a house for $40k that needs $10k in rehab. In the 1st example, I'm out $12,500 in down payment and closing costs. In the 2nd example, I'm out $22,500 and I've got to wait a year to refi and take the cash back out. I'm all about preserving capital as much as humanly possible so that I can continue to acquire. If I do the 2nd scenario above, I can only buy 1 house per year, but the 1st scenario enables me to buy 2 per year. But please send me any metrics if you're willing to. Send your spreadsheet or whatever you use as your strategic plan. I'm very curious to see how you're doing this in half the time that I am.

    That being said, I know you are familiar with the deal I have going right now which is completely different than what I discussed above, so suffice it to say I'm an opportunist and when something comes up that makse sense, I'll jump on it.  But please, if you have a model you can share, please do.

    As for the property management, I do it myself.  The $200 is a "finder's fee" that I use to incentivize the current tenants to show the house for new prospective tenants.  I have done this for years and it works beautifully.  They get me a signed lease, I give them $200 in commission on their way out.  The problem about professional property mgmt is, it is really only needed on the front end to find tenants, nothing more.  Actually managing the property throughout the year, they are worthless, I have found.  Not only do they offer no value to me, it actually costs me more $, because when a repair job inevitably comes up, they use their favorite contractors who may or may not be more expensive than what I can find in my own network.  They have no incentive to save me money, while I have no opportunity to negotiate for better rates.  

    0Reply
  • Matt BellPro Member
    Rental Property Investor · Montgomery, AL · Member since 2015 · 93 posts · 95 votes
    10y

    We don't wait 1 year to cash out refinance - that is the key.  We have been able purchase, rehab, rent, and refinance 8 properties in 10 months.  Doing it this way, you have to get a commercial loan and the best rates we have been given are 5.25% fixed for 5 years and amortized for 20.  It is not a balloon payment but the rate goes variable after 5 years.  If you could find a bank in Georgia that would do a similar set up - would need to be local community bank or credit union probably - you could scale up to 40 properties very quickly and then put the whole portfolio into a longer term portfolio loan before the 5 year fixed rate expired on any of your properties.

    As for property management, I definitely see your point on their incentives, or lack thereof.  We have no other option since we invest from a distance but there are ways to creates incentives for them to manage you property well.  You just need to find a property manager who is willing to negotiate their management terms - might have to go to a smaller operation where your portfolio would make you the big fish.

    @Eliot M.undefined

    0Reply
  • Jay DeCima
    Redding, CA · Member since 2016 · 224 posts · 143 votes
    10y

    Eliot

    Buying 32 houses one at a time is a lot of work to get to the 6 figure income.  Let me give you a little "twist" in your approach.  Over 40+ years investing in "groups" of houses I have done very well.  At my high point I had 200+ rental homes consisting of these groups.

    Let me share a drawing from one of my blog posts from last year.  Instead of owning 40 properties to get $100K annually, my way is to own 6 properties consisting of 40 rentals.

    The blog is on the website listed in the BP signature below.  Here is the specific blog I referred 

    to: http://www.fixerjay.com/finding-bargain-properties

    I also started a BP blog last week and will be posting weekly, at INVESTING IN MULTI-UNIT PROPERTIES

    Good Luck

    Fixer Jay DeCima

    1Reply
  • Joey NakayamaPro Member
    Investor · Chicago, IL · Member since 2013 · 129 posts · 68 votes
    10y

    You may want to build management into your projections even though you're self-managing now. Managing 32 properties yourself will likely feel much more like a job than an early retirement...

    At that scale, you'll have a lot more business to offer a management company. That leverage should help you get both better terms and better service. 

    0Reply
  • Eliot M.
    OP
    Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes
    10y

    @Matt Bell Thanks.  That's a lot of properties in 10 months.  You must've started with a lot of cash to begin with?  That's interesting that you are refinancing so quickly, but still you must start with the 20% down on each property on the front-end, so you had to come up with 20% x 8 properties in 10 months, right?  And that's not even counting the rehab costs on top of that... That sounds like a lot of moola.  If so, that's great.  I'm just having to sit and wait until I can save the next 20% to purchase another one, and so on.  1 at a time.  If I'm missing something, please let me know.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    move as the other Jay has suggested into small multi units.. if its doors you want  then don't fight trying to buy all these doors one at a time.. buy one property with 10 doors... you will get there much faster and find it much easier to finance now you do need the down stroke of course.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Matt BellPro Member
    Rental Property Investor · Montgomery, AL · Member since 2015 · 93 posts · 95 votes
    10y

    @Eliot M. We reuse the same capital over and over and initially pay cash for the properties.  For example, we recently purchased a 2 bed 1 bath home (1,700 sq ft) for $35K cash and put $30K into a rehab to make it a 3 bed 2 bath home (kept existing footprint but added some walls) which then appraised for $110K.  Our bank allows us to take out up to 80% of the after repaired value in cash so we could have pulled out $88K - we didn't but we could have.  In that scenario, we had a total investment of $65K and were able to pull all the cash out plus extra and then use that for the next deal.  We do not put 20% down or leave our own cash in a deal if we can avoid it.  Our goal is to find houses in need of rehab and build the equity through the rehab to the point that we get 100% or more of our cash back usually within 30-45 days of the cash closing.  

    In another deal we purchased a home for $50K and put $10K into the rehab.  House appraised for $82K and then we were able to cash out $65,600.  So at the end of the day, we had all our money back, plus $5,600 and a nicely cash flowing rental.

    In a third deal, we purchase a home for $12K put $20K into the rehab and it appraised right at $40K.  So, we were able to cash out our investment but had to pay some closing costs so we have a couple thousand dollars that is "locked up" in that deal.

    They haven't all been winners though - we did by a home for $22K and put $14K in the rehab.  Turns out the home was 500 sq ft smaller than all the public records and the information provided by the seller so it ended up appraising for $36K and we were only able to pull out $28.8K and with closing costs have over $8K locked up in that property.  Had it actually been the size we thought we would have been fine but just wanted to be transparent that you could run into a deal that you leave some cash in but that is by far the exception thus far and as you can see, we have made up that capital by pulling it out of other deals.

    2Reply
  • Tom V.
    IA · Member since 2015 · 304 posts · 152 votes
    10y

    @Eliot M.

    It looks like a solid plan, and you've clearly done your homework. Very similar to my own plan.

    In regard to reaching your goal faster, the bottleneck seems to be saving for the down payments. The only way to change that is to either increase your income or decrease your lifestyle (temporarily). Whether that means changing job/career for a higher paying job, your wife taking a job, getting additional training/certification that would enable you to get a pay raise, starting a side business, taking a few less vacations, those things will get you to your goal faster.

    As others have suggested, mixing in some multifamily properties could also get you more bang for your buck. If you could get a duplex for 60K that brings in yearly cash flow equal to 1.75 SFRs, then that puts you ahead of your schedule a bit.

    There's absolutely nothing wrong with your plan the way it is though. If 8 more years is an acceptable time frame for you, and sticking exclusively to SFRs is what you're comfortable with and what your local market provides, then that's what you should do. Thanks for sharing your plan.

    0Reply
  • Eliot M.
    OP
    Investor · Norcross, GA · Member since 2016 · 87 posts · 20 votes
    10y

    @Matt Bell That makes sense now. Thanks for detailing it out. Essentially you are going all cash on the first property, plus rehab, then if everything goes well, taking all that cash out and then some, then BRRRR'ing it.

    @Tom V. Thanks for your input, Tom.  If it's similar to your own plan, I wonder how far down the road you are?  Are you retired yet or still on the path, working the plan?

    0Reply
  • Matt BellPro Member
    Rental Property Investor · Montgomery, AL · Member since 2015 · 93 posts · 95 votes
    10y

    @Eliot M.  Exactly.  So, if you do it right, and you can purchase properties in your area for $30K and put $10K into the rehab and get a $50K appraisal, you would be able to use that $40K over and over.  Even if you could only buy, rehab, rent, refinance every 60 days, you would be at 32 houses in 5 years or so.  If you could get up similar to our pace, you would be at 32 properties in 2.5 years.

    Race you to the finish line!  Although I have a Partner so I am splitting mine 50/50 and need 64 houses.

    0Reply
  • Ryan E.
    Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes
    10y

    @Matt Bell thanks for detailing what you are doing! It's awesome to read. 

    How are you going about finding these deals? Mailing, driving for dollars, wholesalers? 

    0Reply
  • Tom V.
    IA · Member since 2015 · 304 posts · 152 votes
    10y

    @Eliot M. I'm still at the starting line. I decided to pursue RE investing back in Feb and been soaking up as much info as I can for the last several months. I plan to make my first buy in August. My plan is buy and hold, with a combination of SFR and small multifamily properties.

    0Reply
  • Matt BellPro Member
    Rental Property Investor · Montgomery, AL · Member since 2015 · 93 posts · 95 votes
    10y

    @Ryan E. Mostly MLS (Foreclosures and estate sales) but we did have 2 properties brought to us off market by our realtor - our rehab contractor is very reasonable on his prices and there are not a lot of competitors in that market looking to do what we are doing (rehab to rent). We are looking to scale more quickly in our second year of existence so we are starting to network with some wholesalers and considering direct mail as well.

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  • Ryan E.
    Investor · Salt Lake City, UT · Member since 2016 · 287 posts · 270 votes
    10y

    @Matt Bell that's awesome! Sounds like you guys are killing it so congrats and keep up the hard work!  I'm wanting to do essentially the same thing here in Salt Lake City and just started compiling a driving for dollars list of properties needing rehab. 

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