Feasibility of generating significant passive income with LTR
Member since 2023 · 11 posts · 7 votes
Hello,
Having delved into the informative realm of the Bigger Pockets podcast and other materials, I've learned that, optimally, a long-term rental investment might generate a monthly profit of $100-$200 per property. To attain a passive income of around $5,000 per month, one would need to possess a portfolio of at least 25-30 properties. However, acquiring such a substantial number of properties necessitates a considerable amount of upfront cash for down payments. As a newcomer, I find this goal unattainable without substantial initial funds. If lacking cash, the time required to achieve this objective remains uncertain. What's the best way to understand this?
Thank you!
Ankit Gupta
@Ankit Gupta Welcome to BiggerPockets!
I see two flawed assumptions in your analysis:
First, you should be looking at deals where the monthly cash flow is closer to $400/mo. These DO exist, you'll just have to dig a bit to find them!
That drops the number of properties you'd need in your example by half.
Second, and this is the BIG ONE, your plan is to acquire by going to a bank and putting 20% down. We don't do that!
What if you could buy without involving a bank, and pay less than 10% upfront (sometimes FAR less!)
I recommend you investigate seller financing and "subject-to," both of which are discussed here on BP. Search the Forum and Blogs for details.
Happy Hunting!
@Ankit Gupta Welcome to BiggerPockets!
I see two flawed assumptions in your analysis:
First, you should be looking at deals where the monthly cash flow is closer to $400/mo. These DO exist, you'll just have to dig a bit to find them!
That drops the number of properties you'd need in your example by half.
Second, and this is the BIG ONE, your plan is to acquire by going to a bank and putting 20% down. We don't do that!
What if you could buy without involving a bank, and pay less than 10% upfront (sometimes FAR less!)
I recommend you investigate seller financing and "subject-to," both of which are discussed here on BP. Search the Forum and Blogs for details.
Happy Hunting!
I can understand how going from 0-30 properties can seem unattainable. I'd break it down into smaller goals. How does the goal of getting one property sound? The idea of a few rental properties allowing someone to retire off the "passive" income is pervasive in our community, but as you're seeing it's just not reality. A recent episode of the BP podcast used the analogy that your investment business is a stone wall. It can be daunting to look at the finished product and think about building it, but the reality is it was built one small stone at a time over a period of time.
I'd recommend attacking this problem on two fronts. The most obvious one is to procure properties that cash flow more. These can be higher class properties, M or STRs, or commercial properties like storage units or strip malls. You can start with properties that don't cash flow much then 1031 them into properties that do down the road.
The other things you need to do is get more income for investing. I'm a big proponent of increasing your W-2 income. Working a little harder for 6 months to a year for a 10K annual raise is a great ROI. You can also find hard money lenders, DSCR loans, or partner with someone who has cash but not the know how. This can potentially be more risky though, so if you do peruse more non-traditional funding options make sure you're underwriting as best you can.
Hello @Mitch Messer - It's possible to $400/mo cashflow in this high interest market? Which markets would you recommend for these? I was primarily looking at Columbus and Atlanta
Hello @Mitch Messer - It's possible to $400/mo cashflow in this high interest market? Which markets would you recommend for these? I was primarily looking at Columbus and Atlanta
Yep, it sure is!
Look for areas where you can still purchase a 3-bedroom home (pre-rehab) for under $100K AND where rents for a 3-BR are running at $1200+ and climbing.
I also recommend you avoid states that make it super-hard to evict, such as New York and California.
Right now my favorite target market is Tulsa, Oklahoma, but I'm also quickly falling in love with Augusta, Georgia!
Another problem with your calculations is you don’t include raising rents. Let’s assume you do only get $100/mo cash flow. But next year you raise rents $00/mo (5% on $2k rent), now you need half a many. Next year, same thing, unfortunately you still need 1/3rd as many, but you get the point. If you can buy one per year. (I’d suggest buying a new primary every year for lower rates and down payments.). Within 5 years you have 5 Properties bringing in $100/$200/$300/$400/$500 per month cash flow. That’s 5 Properties and $1,500/mo. 5 years later with 10 Properties you’re at $5,400/month cash flow on 10 properties. Next year it’s $6,400, and so on.
But I suggest going the other way. Buy them with 15 year mortgages to get the lower rates and less interest cost and get them paid off asap if you want cash flow. You can EASILY make $250k/yr with 12 or less paid off properties. Just try to avoid cheap areas with low/no appreciation in value or rents. You run out of your 10 golden ticket loans, you can’t raise rents as fast, and truly, even with all the cash flow. Appreciation will probably bring your more wealth than the cash flow. But The cash flow gives freedom.
I did exactly what I’m suggesting above except my wife was a nurse and we lived on just her income while doing this. So we were able to buy a new primary and a new rental every year for 5 years. That’s all it took to become very financially free.
Hello,
Having delved into the informative realm of the Bigger Pockets podcast and other materials, I've learned that, optimally, a long-term rental investment might generate a monthly profit of $100-$200 per property. To attain a passive income of around $5,000 per month, one would need to possess a portfolio of at least 25-30 properties. However, acquiring such a substantial number of properties necessitates a considerable amount of upfront cash for down payments. As a newcomer, I find this goal unattainable without substantial initial funds. If lacking cash, the time required to achieve this objective remains uncertain. What's the best way to understand this?
Thank you!
Ankit Gupta
Hi Ankit, there are many ways to attack this, but the key is to build cash flow long-term (I like the stone wall analogy). I was able to do this and totally replaced my medical device income to the point I was able to retire and have complete financial freedom.
Similar to what @Bill B. did, I bought my first rental in Tulsa while also working full-time. I put 20% down so I was cash flowing every month. I then bought house #2 a few months later using both cash flow from property #1 AND the excess from my medical device job (BTW, we lived well below our means so had extra cash each month to invest - all I did was invest all of it in real estate instead of what I normally did in stock market). Houses #3+ (I eventually built up to 20) happened in orderly fashion.. Once I got to 10, I started paying cash for the houses both by converting my 401k to a Self-directed IRA and then using those funds to buy houses out right and then also using all of the excess cash flow from the first ten houses plus my medical device job excess income.. Having those houses with no debt allowed me to pay off the first ten loans in a disciplined and timely fashion. Once I had no debt... that was financial freedom and gave me choice to continue to work - or not!
Get started and then build it.. It doesn't all have to be done at once.
Hello @Mitch Messer - It's possible to $400/mo cashflow in this high interest market? Which markets would you recommend for these? I was primarily looking at Columbus and Atlanta
Yep, it sure is!
Look for areas where you can still purchase a 3-bedroom home (pre-rehab) for under $100K AND where rents for a 3-BR are running at $1200+ and climbing.
I also recommend you avoid states that make it super-hard to evict, such as New York and California.
Right now my favorite target market is Tulsa, Oklahoma, but I'm also quickly falling in love with Augusta, Georgia!
Hey Mitch - Yes on Augusta! I live in North Augusta and the scenario you're describing happens frequently in Augusta! I literally moved to the area a few years ago because of the real estate! :)
@Bill B. - Great point on rents increasing! I look like a genius for properties I bought several years ago :)
Hey Ankit - it is definitely doable to obtain a few hundred a door on the outside of the Atlanta metro. However, these deals typically are in multiple offer situations (which is fine).
I have seen folks have success implementing the rent by the room strategy in Atlanta where they can cash flow $1k+ / door.
Please feel free to reach out if you have any questions - contact info is in bio and phoneline is always open!
I think your analysis is pretty accurate. But that's why there are other methods to try to find better or different deals. They're just tough. BRRRR for example.
It well serve you well that you have reasonable expectations. Many come on here being fed the overnight millionaire stories by "gurus." Real estate is about snowballing your wealth- 1 property year 1, 2 year 2, 4 year 3, 8 year 4.... so on so forth. The down payments will fund themselves in some instances if you get crafty with BRRRR, HELOC, etc. Continue to generate active income and work to put that to passive income.
Thanks all for the advice. This is super helpful!
@Ankit Gupta In my market the cost of entry isn’t necessarily the problem but really most deals even the ones meeting the 2% rule are only cash flowing $200-250 per door after expenses and reserves are taken out.
This isn’t stopping people from investing but most people aren’t finding the great deals, they’re only buying things just to be buying them.
Being able to find $400 cash flows may not work in every market.
I’ve currently got 7 properties with 25 units. On the last, most recent property I’ve brought in my first partner who is bringing the up front money and I will be bringing my 50% after I refinance something else in a few months or get the money elsewhere.
It's taken me close to 4 years to get to the 25 doors and I hope to have a total of 50 in another 3. It is a long game. I still work my W-2 to help obtain traditional mortgages. In my opinion it's easier to get multi families because 75% of the leased value of the rents counts towards your income needed to qualify for a traditional mortgage or you can go for a DSCR mortgage and bypass your income altogether neither of which you can do with SFR.
Hey Ankit- I think your assessment is fair overall. This idea of building a real estate empire and retiring at 20 is not feasible and has (in some spaces) been the narrative for some time. RE, realistically, is not some get rich quick scheme- slow and steady wins the race. However, the BRRRR method is a great strategy for speeding things up a bit and assuring that you can continue to scale as you find properties that pique your interest.
I've been reading a book from BP's own David Greene about the BRRRR method that's been really helpful in understanding the nuances of the process. Utilizing the BRRRR method, for many investors, will generate returns more quickly than simply buying turnkey properties.
I agree with the slow and steady approach, given current market realities. That has worked for me and surprisingly the numbers have worked far better than my spreadsheets showed 4 years ago. If I was in your position just starting out, I would be fine with $200/month profit per door. That will grow considerably in the upcoming years and yes, in low cost markets (midwest), there is still considerable room for appreciation. I live in it and can see that the wages are allowing very young homeowner's considerable purchasing power. Houses are still priced below what those markets can afford. I don't wish for them to increase, but these are my observations based on known incomes and house prices.
@Erin Azar with the $100 - $400 /month profit deals are you doing 15 yr or 30 yr mortgages? When you say your numbers have worked far better, does that mean you were able to increase your rents easily or you saw appreciation for your properties? Curious as to which markets you are looking at
Hello @Mitch Messer - It's possible to $400/mo cashflow in this high interest market? Which markets would you recommend for these? I was primarily looking at Columbus and Atlanta
Yep, it sure is!
Look for areas where you can still purchase a 3-bedroom home (pre-rehab) for under $100K AND where rents for a 3-BR are running at $1200+ and climbing.
I also recommend you avoid states that make it super-hard to evict, such as New York and California.
Right now my favorite target market is Tulsa, Oklahoma, but I'm also quickly falling in love with Augusta, Georgia!
Mitch - are you seeing appreciation in Tulsa and Augusta markets?
Shhhhh... don't tell 'em about Augusta ;-)
I've got to say I'm also having mixed feelings about how much more properties are costing compared to a year ago. I mean, whoo hoo for equity on the ones I bought, but I also am helping investors (and myself) continue to purchase in the area and it was lovely when it took less cash. :)
Shhhhh... don't tell 'em about Augusta ;-)
I've got to say I'm also having mixed feelings about how much more properties are costing compared to a year ago. I mean, whoo hoo for equity on the ones I bought, but I also am helping investors (and myself) continue to purchase in the area and it was lovely when it took less cash. :)
Hi Erin - do you recommend connecting with any realtors for multi - family units in Augusta?
@Mitch Messer do you recommend connecting with any realtors in the Tulsa area?
@Mitch Messer do you recommend connecting with any realtors in the Tulsa area?
I absolutely do and I'm very happy to share names, just not in a public forum.
Check my BP profile to see how best to reach me!
Shhhhh... don't tell 'em about Augusta ;-)
I've got to say I'm also having mixed feelings about how much more properties are costing compared to a year ago. I mean, whoo hoo for equity on the ones I bought, but I also am helping investors (and myself) continue to purchase in the area and it was lovely when it took less cash. :)
Hi Erin - do you recommend connecting with any realtors for multi - family units in Augusta?
Hey Ankit,
Are you interested in small multifamily? If so, I'd be happy to help or can recommend some other investor-friendly agents. :)
@Erin Azar with the $100 - $400 /month profit deals are you doing 15 yr or 30 yr mortgages? When you say your numbers have worked far better, does that mean you were able to increase your rents easily or you saw appreciation for your properties? Curious as to which markets you are looking at
Most are 15-20 year mortgages. Appreciation has been exceptional - most of my homes have doubled in price in the last 2.5 years, but that is a mix of significant fixing up and increasing values in the market. I invest in smaller towns in Indiana - they are either on the path to progress or they have a significant captive audience of folks that want to stay living there.