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

    The key to our success thus far has been a great rehab contractor who is low-cost and trustworthy, a solid property management company, and an awesome realtor who can help us identify deals and get us good comps.  Good luck building your team!

    0Reply
  • Dustan Marshall
    Investor · Hamilton, OH · Member since 2013 · 139 posts · 27 votes
    10y

    great thread. I am in a very similar situation.  Following.  I have purchased a few rentals.  Basically out of cash now and don't see other are buying so many so quickly.  I would love to reach the point of early retirement sooner rather than later.  

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I guess I will play the role of devil's advocate here, not to beat you up but to give you an alternate viewpoint to consider. x32 $50k properties does not sound like passive cash flow or freedom to me, it sounds like a job, and a darn tough one at that. If that is what your market has to offer, then OK, that may be the strategy that works there. However, my mindset is I want the fewest number of properties (not the most) that will get me enough passive income to cover my expenses (plus margin) ... beyond that, mo' units = mo' problems. So, I'd probably spend a bit more to get into nicer neighborhoods, even if the initial cash flow as a percentage of purchase price looks lower as these will probably attract better tenants that will be easier to manage, less vacancy and repairs because they are higher quality tenants, they will likely appreciate better (both price and rent increases), hold their value better in a downturn, and you will ultimately need fewer of them to hit your number.

    Other suggestions: I'd try to buy a bit more distressed at a bigger discount to market value. Yes this will be more work in the short term, but less money in the short term and the extra workload goes away after rehab is complete. Also, I think your CapEx is way light ... I'd estimate it to be about 3 times that. You can't use percentages to calculate that, since those costs don't scale. I'd create a table of all the CapEx items (flooring, hvac, plumbing, electric, roof, etc.) along with the lifespan and cost for each, compute an average cost/month for each, and add them up. You'll likely come up with $200-$300/mo. The bad thing about under estimating CapEx is it could take you awhile before you realize you've underestimated it and it can turn what you thought was a home run deal into a dog after it is already too late. Not saying that what you bought were dogs, only that this is something to be very careful of.

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  • Pete Fiannaca
    Wholesaler · Henrietta, NY · Member since 2016 · 58 posts · 27 votes
    10y

    @Matt Bell I like the BRRRR way of life as well. What Tough part is, anyone going through conventional lending on their first property usually needs to wait 12 months before they qualify for a refi... That's what I'm running into up here in western NY. If that wasn't the case, I could probably be scooping up properties faster than 1/year.

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

    @Pete Fiannaca Go to every community bank, credit union you can find with a good business plan and examples of your portfolio to date.  Someone will be a portfolio lender (they don't sell their loans off to fannie mae and freddie mac) and they won't make you wait 12 months - it might be a commercial loan product but you should at least be able to get down to a 3 or 6 month seasoning.

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  • Account Closed
    Everywhere · Member since 2016 · 63 posts · 26 votes
    10y
    Eliot M. Have you considered teaming up with private money partners? There are lots of people out there with money but no knowledge or time to look for investment properties. You could partner with them and they could fund the deals and you could split the profits. Finding money partners isn't for everybody but it may help you buy more houses faster.
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  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    10y

    @Eliot M., welcome to BP.  First I think that it is pretty advanced that you have a goal and a plan to reach your goal.  I invested part time for over 20 years before I did either one.  As a result you will reach your goal quicker than I will.  Your goal seems sound.  Keep in mind you might find a deal that is a little cheaper, or save a little extra money to get to your goal sooner.  My biggest handicap is getting the money for the 20 to 25% down the bank wants for the down payment. You may also find someone to joint venture with to speed things up also.  Finally the multi unit thing can also help.  If you do not already own the home you live in you might house hack a nice 4 plex.  Good luck and hang in there.

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

    @David Faulkner Thanks for taking the time to reply with such detail.  I do agree that 32 properties will take some time to manage, but I've been doing this for 4 years and I keep track of my time pretty diligently.  I figure that in the last 4 years, I've worked about 1 hour per month on each rental, on average.  Once "freedom" is achieved at 32 houses, I consider 32 hours of work per month aint' bad at all, compared to 160 hours plus daily commutes!  

    I have considered buying in higher priced neighborhoods for your points mentioned above, but I just can't make the numbers work.  The price-to-rent ratios are just too high.  I can get $750/month in rent on a $50k house (1.5%), but if I move to a better part of town and buy a $100k house, there's no way I'm getting anywhere close to $1,500 in rent (which would be the same 1.5% (2 x $750)).  I understand the argument for higher price appreciation in a better area, I just don't agree with it.  If you read an earlier post I wrote in this thread, I did exactly that: bought in a nicer area, then moved away and rented it.  10 years later, and the rents have not increased one penny, and worse - my home's value has fallen $10k.  I just don't see how this strategy works.

    On buying distressed, I agree with you. I may be close to getting into my first flip (or might be a BRRRR), and I'm starting to see how immediate appreciation can be possible if the purchase price is less than ARV-rehab costs.

    I'm astounded at your number on CapEx... there's no way CapEx is $3.3k per year on my houses. At that rate, I would essentially be repurchasing the house at full value every 15 years ($3.3k x 15 years = $50k, or, what I paid for it originally).  There's no way this is the case.  Do you have historical financials/stories to share on this?  This is by far the highest number I've ever heard on CapEx.  I'm not using %s to calculate my CapEx; I'm doing it as you recommend: I created a table with all CapEx items at replacement cost divided by its useful life.  That's the only correct way to do it.

    @Matt Bell You're right, the last 2 lenders I spoke to have a 6 month seasoning. 

    @Account Closed Thanks for your comment and the encouragement.  I've been hit from many different directions lately from podcasts, books, etc on the importance of having a goal and a plan to meet that goal, so I decided it's high time to put one down on paper.  Good luck to you as well!

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