Am I Crazy? (A Path to Financial Freedom)

15 Replies

The other day I sat down, and in about 30-45 minutes I had whipped up this plan. I was simply conjuring a hypothetical as I tried to close the gap between year 1 and year 10, but it's gotten me really excited about the prospect of actually turning the idea into a reality! I'm posting here to hopefully hear your thoughts, feedback, hesitations, or simply to generate discussion.

The $120,000/year number is somewhat arbitrary... At this point in my life it's hard for me to tell what kind of annual income I'd be comfortable living off of while still pursuing my own interests and business ideas. If you simply took the time even just to look this over I appreciate it!

Also, PD = Police Department. I apologize for areas of poor handwriting, I did not originally plan on sharing this.

@Austin Rose Of course it is possible. What you really need to account for is how much money you will save/accumulate in your day job to make it possible. Otherwise you will need to find other sources of funding. 

But, if I were you, I would start with a duplex or fourplex while you are single and working. Will teach you a ton and should be able to purchase it with low to no money down because it's owner occupied.

Originally posted by @Zach Quick :

@Austin Rose Of course it is possible. What you really need to account for is how much money you will save/accumulate in your day job to make it possible. Otherwise you will need to find other sources of funding. 

But, if I were you, I would start with a duplex or fourplex while you are single and working. Will teach you a ton and should be able to purchase it with low to no money down because it's owner occupied.

 Thank you Zach! Your second paragraph exactly describes my current plan. And you're right, securing a stable and reliable source of funding as the portfolio grows will be a challenge. I appreciate the input!

@Austin Rose

You got a plan. That's a lot farther than 90% of people out there, or even 90% of the people on Bigger Pockets. The next big advantage you have is your age of which you are starting. 

Now, the critique. The goal of $300 per unit is a high goal. I don't know the rents in your area. My area is Las Vegas, and I can get $200 per door or unit. Brandon here on Bigger Pockets likes Washington state, and he pencils in $100 per door. Also, the larger multi units you purchase, the higher the amount per door you can achieve.  Next, you might need to have a buy, hold, and sell strategy. Real estate cycles goes up and own, and occur normally between 7 and 15 year cycles. Holding onto property even in a down market, will get you cash flow, and whether the storm, but isn't it better to unload when markets are high, take the gain, put in bonds, and wait for downturn, and buy again?

Just my two cents.

Terry

@Austin Rose

Your 2027 goal will run into the below cycle. That's why I believe in buy, hold, and sell strategy. If you can time cycle, then sell high or near high, wait, and buy again on low cycle. then you can have twice as many units, if markets lose 50% on recession. 

Terry

Originally posted by @Austin Rose :

The other day I sat down, and in about 30-45 minutes I had whipped up this plan. I was simply conjuring a hypothetical as I tried to close the gap between year 1 and year 10, but it's gotten me really excited about the prospect of actually turning the idea into a reality! I'm posting here to hopefully hear your thoughts, feedback, hesitations, or simply to generate discussion.

The $120,000/year number is somewhat arbitrary... At this point in my life it's hard for me to tell what kind of annual income I'd be comfortable living off of while still pursuing my own interests and business ideas. If you simply took the time even just to look this over I appreciate it!

Also, PD = Police Department. I apologize for areas of poor handwriting, I did not originally plan on sharing this.

Having a plan like this is great, but in reality you are going to find out that you need 2x to 3x more doors than you expect, unless you have them all paid off in cash.  Let me tell you why :)

While I don't know how much you make a year, it's difficult to save proportionally to increases in home values. Many people who take this approach save and save but the market just outpaces them. You also need to take inflation into account and the most expensive items you will acquire, which are a wife and kids. Additionally you need to take your young age into account so the money needs to last a very long time regardless of the economical state of the country. Ultimately, having too much money is never a problem, but too little is.

With that said, your plan can easily be far more aggressive. Even starting out, you should be able to acquire at least 10 doors every year. Look for owner financed deals, use your job to leverage loans (don't quit to do this full time until your income is replaced), and househack a fourplex. As you gather more doors, it gets exponentially easier to acquire more. I wouldn't fixate on $300 per door, just make sure all costs are accounted for (including capex, management, repairs, etc) and that you have at least $100 extra per month. Pay down principals when you can, but keep sufficient money in reserves. 

Also, if you have some free time read Grant Cardones book the 10x rule. I don't agree with a lot of his points where real estate is concerned but the overall lesson of the book is important to understand. 

-Christopher

Originally posted by @Terry Lao :

@Austin Rose

You got a plan. That's a lot farther than 90% of people out there, or even 90% of the people on Bigger Pockets. The next big advantage you have is your age of which you are starting. 

Now, the critique. The goal of $300 per unit is a high goal. I don't know the rents in your area. My area is Las Vegas, and I can get $200 per door or unit. Brandon here on Bigger Pockets likes Washington state, and he pencils in $100 per door. Also, the larger multi units you purchase, the higher the amount per door you can achieve.  Next, you might need to have a buy, hold, and sell strategy. Real estate cycles goes up and own, and occur normally between 7 and 15 year cycles. Holding onto property even in a down market, will get you cash flow, and whether the storm, but isn't it better to unload when markets are high, take the gain, put in bonds, and wait for downturn, and buy again?

Just my two cents.

Terry

 Terry,

Interesting pieces of insight! I honestly hadn't really considered that I would ever sell any of my investments once I'd acquired them. But you're right, if the numbers are tempting enough it's a good option to consider! I'll also be running more hypothetical's using slightly more conservative numbers like $200/unit to better understand the changes in outcomes. Thanks for the posts and graphic!

Having a plan like this is great, but in reality you are going to find out that you need 2x to 3x more doors than you expect, unless you have them all paid off in cash.  Let me tell you why :)

While I don't know how much you make a year, it's difficult to save proportionally to increases in home values. Many people who take this approach save and save but the market just outpaces them. You also need to take inflation into account and the most expensive items you will acquire, which are a wife and kids. Additionally you need to take your young age into account so the money needs to last a very long time regardless of the economical state of the country. Ultimately, having too much money is never a problem, but too little is.

With that said, your plan can easily be far more aggressive. Even starting out, you should be able to acquire at least 10 doors every year. Look for owner financed deals, use your job to leverage loans (don't quit to do this full time until your income is replaced), and househack a fourplex. As you gather more doors, it gets exponentially easier to acquire more. I wouldn't fixate on $300 per door, just make sure all costs are accounted for (including capex, management, repairs, etc) and that you have at least $100 extra per month. Pay down principals when you can, but keep sufficient money in reserves. 

Also, if you have some free time read Grant Cardones book the 10x rule. I don't agree with a lot of his points where real estate is concerned but the overall lesson of the book is important to understand. 

-Christopher

 Christopher,

I actually did read the 10x Rule a couple of years ago... quite a daunting way of approaching business but it seems to be working for Cardone! I do plan on house-hacking for at least my first couple of properties, in my area multifamily properties are much more uncommon than SFR. I currently have found myself mostly looking at duplexes on the MLS that have been sitting for over 100 days, and I'm left scratching my head as to why some aren't selling when the numbers seem to make some sense... I am an advocate for a more aggressive approach, I'm wondering if you could elaborate on the proposition of pursuing owner financed deals? I'm unfamiliar with the advantages or nature of that approach. I'm currently working with an agent, if that factors in.

Thank you for your time!

- Austin R.

@Austin Rose So, you're ahead of the game, you have a plan.  Now...getting to the hiccups...

1.) Plans like this have to be redone every couple of years.  Things change, life changes, real estate changes, etc.  Plans are great to make and I love me a good spreadsheet.  That said, they're static.  It's hard to plan for future interest rates, ways to get capital, etc.  

2.) Building on #1 you have to think about pesky things like marriage, kids, if you'll have to move for work, etc.  $120K per year today isn't the same as $120K in a decade, let alone a decade from now with two kids!  Worry about the next 3-5 years and focus on the next 3...well...really...focus on getting your first deal...

3.) Building on #1 and #2, lifestyle creep happens.  It will happen to you.  You can try and fight it but it will happen.  It will impact the amount you save each year.  I don't see too many people with 20+ units driving an AMC Pacer.  Or maybe it's just my SoCal experience...

4.) I have no idea why you're mixing duplexes, SFRs, etc.  I'm sure there's some logic behind it and I conceptually get the "large 1031 deal" but don't get the "why" on the other mixes.  Once you're over 10 units you'll have "run out" of conventional financing options.

5.) Personal opinion, the biggest thing you can do to accelerate or keep your plan on track is the advance in your "day job". More W2 means DTI issues are dealt with easier, you can save faster, you can stomach a large cap-ex hiccup easier, etc.

6.) For whatever it's worth, I don't try and time the market.  It costs roughly 10% to sell and you're sitting on capital (at some point) waiting/hoping/planning for the market to drop and that idle money isn't earning a return.  And some of us really hate paying taxes...even capital gains taxes... :-)

@Austin Rose

Lots of people giving advice to you from various backgrounds, experiences, and different levels of income and expertise. 

If you are starting out, having a plan is good, be flexible and make adjustments when warranted. 

Overall, my best advice to you is...............FICO.  The higher the FICO number the better. Try to be at least 740, that's bare minimum for best loan rates. There are 3 FICOS, Experian, Transunion, and Equifax. All three have separate scoring methods. Lenders will pull all three, toss high and low, use middle score.

Get a dog, call him FICO, to remind you of the importance of FICO or FIDO.

Terry

@Austin Rose

It's good that you have set goals for yourself, but why not go bigger?

Also good luck in getting on with a police department. I have worked in law enforcement for years at multiple agencies. This career can be very tough on your personal life and it is often thankless. I applied at over a dozen agencies before getting my first position as a part-time Deputy Sheriff. After that I worked as a state corrections officer making $11/hour on the midnight shift. Back then I had no clue just how far I would go. I kept pushing even when things looked hopeless and now work for a large 3 letter federal agency and get to travel the world.

My first landlord when I moved from Tucson to Omaha was a retired Omaha police officer who also was a real estate investor and owned a portfolio of homes in the city.

@Austin Rose ,

I think it's great you have a plan, but you're oversimplifying the process. $300/mo is great, but what about when a HVAC or roof needs replacement, or one becomes vacant for a few months. It also depends on your strategy if $300 is reasonable or not, definitely possible for fixer uppers, but then you have to include your rehab budget.. As others have said, your priorities in life will change.. If you do it in a LLC, most banks don't like to lend to you until you have 3 years rental history, and then if you buy the homes yourself, I believe you can buy up to 8 with a bank. Just realize, it's a complex path, but it is able to be done!

Start with 1 duplex, get your feet wet, and see if it's a good fit for you.. . then get the next one, always keep looking, that's how you grow!    If you're going traditional financing, you better be saving like no other... bank will want 20-25% down payments  + 6 months reserves of total debt, so 6 months payments for all your houses,  that can quickly be a giant number!   Definitely possible, but again just realize how the banks operate and what they need to get the loan approved.  

Originally posted by @Austin Rose :

 Christopher,

I actually did read the 10x Rule a couple of years ago... quite a daunting way of approaching business but it seems to be working for Cardone! I do plan on house-hacking for at least my first couple of properties, in my area multifamily properties are much more uncommon than SFR. I currently have found myself mostly looking at duplexes on the MLS that have been sitting for over 100 days, and I'm left scratching my head as to why some aren't selling when the numbers seem to make some sense... I am an advocate for a more aggressive approach, I'm wondering if you could elaborate on the proposition of pursuing owner financed deals? I'm unfamiliar with the advantages or nature of that approach. I'm currently working with an agent, if that factors in.

Thank you for your time!

- Austin R.

If you haven't already, you need to go look at the properties. If a property is on the MLS and isn't selling, there is a reason why and you need to identify and evaluate it. The property may be overpriced, trashed, smell really horribly, have foundation issues, be a hoarder house, etc. Understanding these problems and the costs associated with them will put you ahead of the crowd and let you find profit where others can't.

As far as owner financing goes, or any creative technique for that matter, it depends on what the seller's reason for selling is. If the seller just needs cash, then an all cash offer at a lower price point will carry the most weight. If a seller needs income, not cash, seller financing is a great solution. If the seller has little to no equity and just wants out without putting cash in, then subject to may be your best bet. The best deals are where everyone wins. The bad news with creative financing is that most realtors aren't more than door openers and don't understand creative techniques. Your best bet is to study up on them, learn them well, and make sure you can educate your realtor before any offer is presented. Also stress that they will get their full commission, commission reductions (or perceived reductions) are usually why most offers get filed in the trash can. 

At some point, you're going to need to learn how to use other peoples money and just not your own. Unless you're a billionaire, you're going to need financing, loans, creative techniques, and possibly even partners to take various deals down. 

-Christopher

If you haven't already, you need to go look at the properties. If a property is on the MLS and isn't selling, there is a reason why and you need to identify and evaluate it. The property may be overpriced, trashed, smell really horribly, have foundation issues, be a hoarder house, etc. Understanding these problems and the costs associated with them will put you ahead of the crowd and let you find profit where others can't. 

As far as owner financing goes, or any creative technique for that matter, it depends on what the seller's reason for selling is. If the seller just needs cash, then an all cash offer at a lower price point will carry the most weight. If a seller needs income, not cash, seller financing is a great solution. If the seller has little to no equity and just wants out without putting cash in, then subject to may be your best bet. The best deals are where everyone wins. The bad news with creative financing is that most realtors aren't more than door openers and don't understand creative techniques. Your best bet is to study up on them, learn them well, and make sure you can educate your realtor before any offer is presented. Also stress that they will get their full commission, commission reductions (or perceived reductions) are usually why most offers get filed in the trash can. 

At some point, you're going to need to learn how to use other peoples money and just not your own. Unless you're a billionaire, you're going to need financing, loans, creative techniques, and possibly even partners to take various deals down. 

-Christopher

I really appreciate the follow-up Christopher, thank you. A lot of work ahead for me... better get going! 

Austin, 

Look into acquiring "control of" properties doing "terms" vs. the strategy of "buy -n- hold" utilizing conventional financing, because there's no reason you shouldn't also consider doing STRs (Short Term Rentals) like say AirBnB to placing "tenant buyers" on lease option agreements into properties, vs. the self- limiting approach of having tenants pay- off a mortgage, that "barely keeps place, with inflation." Nothing wrong with EXPANDING one's knowledge and understanding BEYOND the "traditional' mind trap paradigm, and ultimately making a LOT more money, over the long haul. Great comments here, BTW. I plan to BOTH buy and hold $800.- $1200. apartments (purchased with terms deal generated investment capital) AND doing six to seven figures yearly in owner financing, subject to, lease option, etc. "terms" agreements. (i.e. With minimal "out of pocket" requirements, to CONTROL the RE... prior to purchasing, at the BOTTOM of the market cycles. So buying low, then reselling higher... and NOT ending- up PERSONALLY "over leveraged," whilst making the BANKS most of the MONEY... as at the end of the day their rigged "system" is designed and constantly "readjusted" to do precisely the OPPOSITE of making the 99% "wealthier," so WHY limit oneself to ONLY PLAYING their games?!)   ATB ;-)  Scott

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