How does small positive cashflow turn into real money?

48 Replies

So I have been reading and reading about REI and wanting to get into it. Read ABC of Real Estate Investing and now on Cashflow Quadrant, to be followed by BP's UGB. From all the podcasts and all the reading I have done here, I just dont see how people are truly cashing in as small to mid size REIs.

$100/door would put me at 30 units a month just to cover my bills. Im assuming appreciation and cashout can help with some but then you just owe more money and have higher NOI on that property. You can offset that with more properties generating $100-200 cashflow but it seems cyclical. Long term (once your investments are paid off) there is large money to be made but until then...what is everyone doing?

I have a lot (2.5acres) in the DFW area of TX that I bought foreclosed for $90k. I think I can sell it in the $300-350k range. I have had multiple letters wanting to buy but Im not sure if I should cash in now and start with landlording. Honestly would rather get into commercial properties ($1M or so) with NNN and not have to deal with small stuff. Not sure if that would happen or not.

So where does the "now Im making more and Im going to quit my full time job" money come from?

@Tim W. I think you are confusing cash flow for net worth.  Cash flow is important to pay your monthly bills, as you said.  Paying off the mortgage does not create cash flow but it does increase your net worth.  

Imagine 15 or 20 years from now you are at your last payment for all 30 of those properties.  Your cash flow is the same as it has always been (leaving out lots of detail).  But you have 99% equity in all those properties.  Your net worth is looking pretty good.  And next month, your cash flow grow substantially.

Originally posted by @Larry T. :

@Tim Wood I think you are confusing cash flow for net worth.  Cash flow is important to pay your monthly bills, as you said.  Paying off the mortgage does not create cash flow but it does increase your net worth.  

Imagine 15 or 20 years from now you are at your last payment for all 30 of those properties.  Your cash flow is the same as it has always been (leaving out lots of detail).  But you have 99% equity in all those properties.  Your net worth is looking pretty good.  And next month, your cash flow grow substantially.

 Thanks Larry.. I understand the long play but I seem to hear about (on the pod casts) and read that people with say 50 units are doing this full time. 

I think what he is trying to say is that the cash flow increases because he is no longer paying a mortgage, which can be significant.  A 100k mortgage at 4.5% is somewhere around $500/mo.  with 30 units at $100/mo eliminating the $500/mo of mortgage payments makes it go from 3k/mo to 18k/mo!

Of course, myself I focus on a 5 year term to hold, so that I can continue to step up with appreciation and cash out more capital to acquire properties that do better then $100/door.  4 Plexes at $100/door make a significant impact, imagine getting 30 of those under your belt?  But when you start cashing out, you can move up to bigger and better things.  Or you can spend the cash and look for something that looks better than $100/door.

Medium logo640x400Troy Fisher, Lanika Home Inspections | [email protected] | http://www.lanikahis.com

Originally posted by @Tim W. :

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$100/door would put me at 30 units a month just to cover my bills. Im assuming appreciation and cashout can help with some but then you just owe more money and have higher NOI on that property. You can offset that with more properties generating $100-200 cashflow but it seems cyclical. 

Hi, I'm a new investor so don't quote me, but from what I'm understanding here is that your suggesting appreciation means you owe more on the property?

If your property appreciates because you did repairs to increase quality of living you can (and should anyways) raise rents every year at a small amount at a time.

If your investment strategy is to settle for $100 a door and it takes 30 doors to replace your income you might want to run some different numbers depending on what type of property your looking at.

With a single family home depending on your area you can do the math to see how you can get more than $100. But even $100 after ALL expenses and taxes etc is still positive cash flow into your pocket. Maybe only $100 but this is only one unit.  

If you have a four plex you should definitely pull in more than that a door or I wouldn't  even take the deal if your looking for a buy and hold strategy. 

Forgive me if I'm wrong but I'm a little confused. 

@Amaan Davis  I understand that an appreciating property grows in value. Say you buy at $100k and now its worth $150k, people will refinance to pull $125k out of the property and get their initial investment + $25k to reinvest. I just dont understand how people are making good money now. Later is easy once all those mortgages are gone. When people refinance the mortgage, now they owe $125k they refinanced (which increases their monthly mortgage) when they previously owed $80k on that same mortgage. If they were making $200/door on the original $100k purchase price, $20k down, their mortgage was $405. Now they have a $125k debt on that house after refi and their payment is now $633 which is now negative cashflow. Make sense?

I wonder that too.. If you are barely cash flowing and refi at a higher value I assume your mortgage will raise as well. Which could potentially equal no or negative cash flow.

I think the main people who are replacing their current job or income with cash flow from rental properties are buying cheap houses with leverage. 

Only netting $100 per door per month isn't going to get you very fast very far, especially if you are buying $100k plus SFR's. Of course it depends where and what you are buying. If you can buy $45,000 duplexes that cash flow $500 per month or buy a 4 plex for $90,000 that cash flows $800 a month you can quickly gain enough cash flow to replace your normal income.

 Obviously this is not possible in all markets and not everyone is going to want to invest in the kinds of neighborhoods that can possibly net that cash flow either. 

30+ SFH rentals, $30+/month in rental deposits, approx. $10K/month in cashflow. The majority of rentals have been purchased the last 5 years. Everyone of them will not be a homerun but at the end of the day they are all my little piggy banks. They have given me the opportunity to buy at the courthouse steps and last year I was able to buy and sell 8 properties. This year I have already past last years flip profits and we are only mid year.

@Tim W.   "So where does the "now Im making more and Im going to quit my full time job" money come from".  It comes from getting started.

@Rocky V.

 Maybe I am missing something obvious but I dont quite understand what you said? 

I have personally noticed a significant increase in my income with 2 purchases. I also plan to become an investor full time ASAP.

Triplex 86k

Rent-1850

Mortgage escrowed- 600

Maintainace-300

Municipal fees-75

Cash flow- 875/3=$308 per door

Duplex 70k

Rent-1300

Mortgage escrowed-500

Maintenace-200

Municipal fees-50

Cash flow- 550/2=$275 per door

Tax benefits are also a perk your forgoing.  

The two properties I purchased were t distressed/mismanaged or anything and listed on MLS. So their are better deals then that out their.

Originally posted by @Ross Greene :

@Rocky V.

 Maybe I am missing something obvious but I dont quite understand what you said? 

The annoying part in the middle with all the hard work? 

To the OP - you eat an elephant one bite at a time. 

- Buying a single SFR will not let you quit your job tomorrow, or even next year.

- Buying one house a year for 10 years, will probably allow you to "retire" in 15-20 years assuming some appreciation and snowballing the debt payoffs. This is a more safe and steady approach.

- Now if you want to get there faster, you need to be more aggressive. In my opinion, the perfect strategy for making solid wealth fast in real estate, is a combination of an active niche (wholesaling, flipping, working as an agent, etc) to build capital, plus BRRR acquisition of cash flowing rentals. It is not easy, and it is NOT guaranteed. You need to start from somewhere - have some capital, have lots of time and a will to hustle, have the right tools to know how to put deals together (read BP religiously!), big brass ones and "fake it til you make it" spirit, or simply the genuine desire to help people find a solution to their real estate problems.

But most importantly, you need to START. That first deal will not make you wealthy overnight. What it will do, most importantly, is open up your mind.

Pretty quickly the small positive cashflow turns into large positive cashflow, then into huge positive cashflow, then into gigantic positive cashflow.

My 2c

-D

Originally posted by @Ross Greene :

I wonder that too.. If you are barely cash flowing and refi at a higher value I assume your mortgage will raise as well. Which could potentially equal no or negative cash flow.

 Ross, I think you're missing one significant point.  The reason to refi would be to pull money out to purchase another property.  

Property A: Cashflow $175/month.  Refi at higher value, reducing cashflow to $100/month, but putting $50K in play for you.  You use that $50K to put $35K down on a property, use $15K to renovate new property.  You rent Property B.  Then you have ...

Property A: Cashflow $100/month

Property B: Cashflow $225/month

That's the way it could work.  These numbers are for illustrative purposes only.  I don't feel like spending the time to calculate figures from an actual example.  But I hope this is enough to get the point across.

EDIT: Oh, and what Dmitri said.

@Tim W. there are so many different ways to make money with real estate. Some are simple and some can become very complicated. It sounds like you need about $3000 monthly cash flow to cover your expenses to quit working. You may not need to have 30 properties at $100 per door to reach that goal. If you could sell your land for $300k you could simply buy 3 houses cash from auction.com or hubzu and take no mortgages (keeping it simple) rent each home for $1000 or more each month. To generate $3k or more for life on only 3 paid off properties. What happens then is you are hooked and will want to buy more and will refinance each and buy 30 or more because you can. 

I would add to some of the previous advice that the key is to target homes that cash flow more than $100/mo. That seems very tight to me. I have a total of 39 homes right now and am closing on #40 this friday and #41 in another 2 weeks. 

For all 41, my gross profit (Rent minus PITI) is $450/mo. If you figure 200/mo for vacancy, repairs and capex, you're at 250/mo net or even at 250/mo for the above, 200/mo net profit.

And every penny of that is tax free. So even at 200/mo, I'll be at 8k a month in my pocket. No taxes. Thats like making 120k/a year if you were to equate that with someone with a regular job (which I have one of those too).

And I actually have another buddy that is doing this and he's got an average of 600/mo gross profit. He's putting more money into his deals than I am (I'm putting very little if anything on some).  But thats how you get to that safety number where you don't care if your company lets you go or not.  You no longer have to worry about losing your house if you lose your job.... And then you'd be surprised how much more you enjoy your day job without having that fear.

One other thing I'd mention though. You don't necessarily have to wait  20 years before you see a boost in your net income.

Keep in mind that rents are going up and property taxes are staying relatively flat. So you should be getting more income per house every 2 years or so. Even at $25/mo increase in rent per house, that adds up when you have 10 or 20 houses. 

And in, say 10 years, you can always refi your remaining balance into another 20 year loan and reduce your payments that way as well.

Lets say you buy a house and your mortgage is 100k as a 20yr loan at 5% - which is pretty typical for my local banks these days. And lets say you're making 200/mo with the payments of 649/mo. In 10 years, you will owe roughly 61k. Now lets say you turnaround and refi that at 6% as a 20 year amortization again. Your new payments would be $437

Thats a boost of 210/mo right there. Multiply that by 20 homes and you're talking about a raise of 4k a month!  In 10 years......

So you can see that, yes, it may be tough to quit your job today based on 20 or 30 homes if you're only making 100/door or 200/door. But the true wealth building opportunity is in the buy and hold.

If you owned 30 homes and made 100/mo today. Then refi'd all 30 in 10 years and started the amort clock back at 20 yrs again, you'd be going from 3k a month net income to 9k a month net income.

And thats not including any rental increases that occurred during that time period either. Another 100 to 150 in additional net income from those? And now you're looking at 12k to 14k in net income from those same 30 homes.

So my advice would be not to think of real estate investing as a way to set yourself up for today. I view it as a way to set myself up for a phenominal way to built real wealth over time. And a way that will easily provide me with a lifestyle that I could have never achieved any other way.......

Heck. Even if you were to buy 3 or 4 houses, those 3 or 4 homes could truly change the type of lifestyle you can lead both now (the added rental income) and in the future (as those things really kick off cash flow).

Yet another beautiful thing about real estate. It pays you today. And it pays you even MORE tomorrow. :-)

@Randy E.   

@Dmitri L.

Thank you for your awesome Responses. Randy I guess I assumed that a Refi would be such a big jump in your mortgage it would eat your cash flow but I guess you are right.  Love your answers. 

@Mike H.

  Awesome Post! Super Motivating!! 

@Ross Greene

Thanks. I think sometimes people take the short term approach and look at investing based on what it can do for them today. But the real wealth building aspect of investing is the buy and hold part.

When you look at all the numbers of buy and hold, there's absolutely no way anyone could possibly convince that any other investment vehicle can come close to real estate.  Granted, it is going to require some effort to make it happen. But its probably the only blue collar way left today for us little guys to build some real generational type wealth.

And even if someone doesn't want to deal with a ton of houses, just buying 3 or 4 is going to be such a boost to someone's current income and an even bigger boost to their retirement, I don't see why everybody wouldn't want to do it. Its not as hard managing these things as people think.

Not saying its always easy. But its not like its a 40 hr a week job either. :-)

@Mike H. I love every single word of that post.  It's basically word-for-word my internal mantra.  

I really don't understand the people who complain that landlording must be one of the worst things in the world to do.  It's always, "I don't want to get a call in the middle of the night about a backed up toilet."  Really?  Like going to work every day from 8-5 is better than one middle of the night call per year?  And honestly, I've never received a middle of the night emergency call.  

But to each, his own.

@Randy E

Ha. Funny thing is I have never answered my phone after 9pm even if I see its from a renter. :-)

And here's my funny story on that. This was probably 5 or 6 years ago. It was a friday night. My wife was downstairs in the basement cutting someone's hair. Got a call from the fire dept in one of the villages nearby. I had just donated some money to some fireman thing so I assumed it was another ask - and I was playing halo at the time so I didn't pick up.

They called again. I let it go to vmail again.

About 15 minutes later, I get a knock at the door. This time, I stop playing and go answer. It was my town's local police.  "Are you Mr. Hasemann?"  Yep.  "Do you own house xyz in town ABC?" Yep.  "There's been a fire at the house and the fire dept there has been trying to get a hold of you. Could you give them a call?".  SURE..... 

Didn't have the heart to tell em I didn't answer because I was playing Halo. :-)

The tenant's little kid was playing with a lighter or something and set his room on fire. Everybody got out fine. But the fire dept did a number putting it out. Got a brand new upstairs, electrical, and kitchen out of the deal so it all worked out.

But thats kind of the story I think of when I hear people say they don't want calls at 2am. If you don't want em don't take em. I've had a house catch on fire and it didn't stop me from playing halo. :-)

This post is awesome. Literally printing it out for future reminder. This isn't a get rich quick scheme, but if you use these strategies there's no way you can not get rich.

EDIT: Relatively rich... for those of you who will want to jump on that statement and allude to naivetie

You guys make me feel so bad. I could replace my take home pay+ in 7 properties if they cash flowed 300 a month. Guess I better get started.

@Mike H. :

Thank you so much for the insight. This really helps clear up the confusion in my mind. I was thinking people are refinancing the next year on everything. I can definitely see the bigger picture now and how to get there. Truly great words, I appreciate them

To everyone else who replied. Thank you so much for the the help. This is the motivation I needed to sell my property. I was really looking to hold onto it to build a dream home but after reading and reading, that dream home doesnt make that much sense and will be a huge liability that will just keep me in my current job.

Thanks again guys...just did some calculating (bankrate.com actually did). Been talking with my dad who just retired and was looking to get me to invest in mutual funds or something along that lines with a 7% return or so.... so here are the numbers:

$300,000 invested over 15 years at 7% equals $827,709

$300,000 invested into 15 houses ($100k each, $20k down, 4.5% for 20 years) = $806PITI (here in DFW area of Texas). Say it rents for $1100/mo but we round down to $200 cashflow due to vancancy and what not. 

$200/house * 15houses * 12 months = $36000/yr income * 15 years = $540,000 with each house having a balance of $27k. So $100k house - $27k balance = $73k in equity * 15 houses = ~$1.1M + $540k income = $1.64M after 15 years... 

So roughly double the 7% investment... sounds like a no brainer? Hopefully pulling more per door and reinvesting into more properties to compound the earning on real estate. After the 5 more years, the income would be $15k a month as passive income. Just wished I started this earlier

Originally posted by @Tim W. :

Just wished I started this earlier

 The lament of many Real Estate Investors, including me.

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