Possibility of Financial Independence via Real Estate

Starting Out
10yFollow

Possibility of Financial Independence via Real Estate

Scott Taylor
Investor · Oakland, CA · Member since 2016 · 57 posts · 16 votes

I'm new to investing in real estate (and investing in general).

I've got a small amount of cash piled up, and right now looking to make moves into buying my first property for long term, buy and hold cash flow with leveraged property. This will have to be out of state as I'm in California which is out of my budget.

I've been poking around the forums, but haven't been able to find some spreadsheet / projection of how one can achieve financial independence via real-estate. I'm using financial independence to mean "making back my salary so that I don't have to work".

It looks like the conservative estimates right now are around 7-10% per year cash-on-cash return for a leveraged SFH. How am I going to achieve financial independence any time soon with those rates? I'm not looking for get-rich quick scheme - I know it will take time, but at this rate it looks like it will take over 15 years.

For simplicity's sake, let's say I have $100k to invest. I buy 5 leveraged properties, each for $100k with 20% down and 30 year fixed mortgages. After all is said and done, I make 8% per year, cash on cash return, even with leverage.

With the "rule of 72" it's going to take me about 9 years to double my money.

72 / 8.0 = 9.0.

So now in 9 years I have $200k (a 200% return). Assuming the same rates, it will take me another 9 after that to go from $200k to $400.

Most of the books out there seem to suggest that with leverage you could make about 12% per year, which cuts down the number of years substantially. But of most of the deals I've analyzed, (assuming I'm budgeting for safe 10% maintenance and "regular" rates of tenant vacancy - 5% or 1/20 months), there's no way to achieve those sorts of returns, even with a 80% LTV leveraged position.

So am I missing something? Are rates of return actually much higher? Am I looking in the wrong markets?

1Reply
68 views

Most Popular Reply

Chris Washington
Cincinnati, OH · Member since 2016 · 62 posts · 52 votes
10y

@Scott Taylor

I think you may be hitting on something here...while buying SFH is a nice start for a lot of people due to the affordability and simplicity of the asset, you would need a small army of SFH to get you where you want to go financially through straight buy and hold.

My recommendations are as follows:

1. Look at commercial multifamily property (i.e. apartments, mobile home parks, etc). It would take quite a while do get to 100 doors through SFH, but you could close 100 doors in 1 day through an apartment deal!

2. Evaluate different strategies. You may be able to rapidly build cash through a different strategy (i.e. fix-n-flip) for the first couple of years and then go aggressive after cash flow once you've got a bigger piggy bank to work with.

3. Start somewhere! Remember, with the cash flow from investments (as well as the tax benefits), every year you should be able to save/invest more money than the previous year. This should allow you to accelerate the velocity of your money and grow your passive income exponentially.

Hope this helps...best of luck!

2Reply
See this reply in the discussion

17 Replies

Jump to latestLatest
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    10y
    You know that nifty New York Times calculator where you plug in your saving rates and a few other parameters. Well with real estate it's the difference between 30-40% return and 8-10 percent than in the stock market. That's how I distill it down.
    0Reply
  • Scott Taylor
    OP
    Investor · Oakland, CA · Member since 2016 · 57 posts · 16 votes
    10y

    Haven't seen that calculator.  Googling returned me this:

    http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

    But I doubt that's what you are referring to.  

    In what market are you getting 30% returns?!  Sounds a little too good to be true.

    0Reply
  • Laniece Miller
    Bolingbrook, IL · Member since 2015 · 46 posts · 11 votes
    10y

    I'm actively looking for my first property at the moment so I'm no expert.  From my reading you're not taking into account mortgage paydown.  With a 15 year mortgages, after that time you're now making the amount you were paying to the bank plus what your previous cash flow was.  Also you now own the properties free and clear, so all 5 houses at their hopefully appreciated value.

    Also you have the possibility after a few years to use the equity in your properties to buy more or bigger properties which will make you more.  Brandon Turner wrote a plan 7 years to 7 figure wealth that may help answer your question.  Drop the title into Google (sorry copying links on the phone isn't the easiest)

    1Reply
  • Zach Mitchell
    Investor · Orlando, FL · Member since 2012 · 183 posts · 155 votes
    10y
    Scott Taylor You're not getting rich off five $100,000 houses. Look up 'freedom number'. Determine what your definition of financial independence is and then you'll know how many houses like the one in your example it will take to get there. The idea with real estate is that hopefully you bought it right and can refinance in a couple months or years, depending on the market conditions, to get your initial $100,000 back out. Then you buy five more. Then you refinance those a few years later and buy five more. Hopefully within <10 years you now have 15 properties from that initial $100k cash. You will soon see that it takes a lot of $100,000 houses cash flowing $100/month each to find your version of financial independence. There are also hundreds of other avenues to make money in real estate. Keep reading, it will click soon.
    0Reply
  • Brian Dayal
    Real Estate Agent · Cohoes, NY · Member since 2016 · 26 posts · 5 votes
    10y

    I'm with you Scott. I am a brand new real estate agent, 3 months, and looking to invest in it. I have spoken to people in my local investor association and I was told to start out with SFR which should yield no less than $30K otherwise it's not worth the time. I was also told to look in the higher end area instead of the $100K area. I wish you all the best.

    0Reply
  • Scott Taylor
    OP
    Investor · Oakland, CA · Member since 2016 · 57 posts · 16 votes
    10y

    Hi @Lanice Miller - Thanks for that link. I actually hadn't seen that book. I took a good hard look at it last night.

    It seems like the assumption in that book is that you can 1) buy a 4-plex for $100k (with a 20% discount at 80k) and b) you can generate $800/mo in cash flow. That means each unit = $600 a month. Note that yields $9,600 on 20k down - that's nearly a 50% cash-on-cash return!

    Read the forums - most people are getting somewhere between 5-15%

    So of course it won't take that long, even discounting appreciation - because there's a really high cash-on-cash return + compounding going on.

    Notice that without appreciation / equity, that plays out like this:

    year 0-2 - 20k => 40k

    2-4 - 40k => 80k,

    4-6: 80-160k,

    6-8: 160->320k

    So that's only buying 1 property! If I could get ~50% cash-on-cash return and after 5 years make ~ 100k with 20k down, then I could replace my salary - no need for appreciation.

    But the bigger question - in what market can I:

    1) buy a 4-plex for $100k

    2) find one that rents each unit for $600?

    I think it's hard to find a 4-plex anywhere for 100k asking that can rent each apartment out for $600.

    Prove me wrong!

    1Reply
  • Scott Taylor
    OP
    Investor · Oakland, CA · Member since 2016 · 57 posts · 16 votes
    10y

    @Brian Dayal In what markets are you looking?  30k in rent per year on what asking prices?

    0Reply
  • Scott Taylor
    OP
    Investor · Oakland, CA · Member since 2016 · 57 posts · 16 votes
    10y

    @Zach Mitchell Yeah, I've already done that calculation.  If I make $100k a year, and I net about ~$1000 each year, I'll need at the most 100 doors.  That's quite a few.  And clearly the math starts getting hard because you have to trade up / refi whatever to get there.

    From what I gather, I take it that you think the SFH isn't the way to go about it?

    0Reply
  • Zach Mitchell
    Investor · Orlando, FL · Member since 2012 · 183 posts · 155 votes
    10y

    @Scott Taylor Persoanlly, I have a goal of owning a portfolio of apartment communities. I would much rather buy 10, 20, 50, or hundreds of units at one time. It's an entirely different real estate strategy though and the apartment market is currently believed to be overpriced by most people so it's a difficult time to make my first purchase. Also, in apartments you're usually leveraged for the life of the asset and only looking for cash flow vs appreciation. However, when you've witnessed someome make $7 million from one single cash out re-finance of an apartment community, it tends to pique your interest. Granted they had decades more experience than me. 

    1Reply
  • Chris Washington
    Cincinnati, OH · Member since 2016 · 62 posts · 52 votes
    10y

    @Scott Taylor

    I think you may be hitting on something here...while buying SFH is a nice start for a lot of people due to the affordability and simplicity of the asset, you would need a small army of SFH to get you where you want to go financially through straight buy and hold.

    My recommendations are as follows:

    1. Look at commercial multifamily property (i.e. apartments, mobile home parks, etc). It would take quite a while do get to 100 doors through SFH, but you could close 100 doors in 1 day through an apartment deal!

    2. Evaluate different strategies. You may be able to rapidly build cash through a different strategy (i.e. fix-n-flip) for the first couple of years and then go aggressive after cash flow once you've got a bigger piggy bank to work with.

    3. Start somewhere! Remember, with the cash flow from investments (as well as the tax benefits), every year you should be able to save/invest more money than the previous year. This should allow you to accelerate the velocity of your money and grow your passive income exponentially.

    Hope this helps...best of luck!

    2Reply
  • Jeff Bridges
    Investor · Hyattsville, MD · Member since 2012 · 822 posts · 441 votes
    10y

    @Scott Taylor

    Looking back at one of my early 2016 SFR acquisitions in the Northern baltimore suburbs, MD market, I see there that I earn 10% CoC return unleveraged on a cash sale of 75k with 19k rehab. I'm going to refinance that and cash out in 3-8 months. I expect it to be appraised for 120-130k or so, and will be able to either take out the full original investment of 94k and only have about 3.6k invested from original closing costs or instead cash out about 80% of of acquisition+ rehab costs and have 20% skin in the game to increase cashflow a bit. with 20% invested, I make about a 23% return on my cash. With a full refinance for full amount, I get 100% return on 3.6k initial investment remaining. I think the takeaway for you is a) you need to find the right deal that can create better cashflow than 100/month to make your investment vehicles work better for you than you originally envisioned (this is easy to say but hard to find, they won't fall in your lap) b) You need to have creative strategies with financing to leverage and amplify your ROI, all of which you can find on BP i.e. BRRR, private funding, conventional financing owner occupant with 5% down then move and convert to rental after a year etc. c) Your home market might not necessarily be the right market to achieve the returns you want so you don't have to resort to needing 100 units and can possibly achieve with much less. Just like stock market, you need to find value plays and they don't always live only on the Nasdaq or only NYSE for example. You might need to look outside of california market to replicate anecdotes like mine and others on BP.

    I think books highlighting average ROI or average per door cashflow each month are helpful to understand expectations, but they are just that; average. There are plenty of investors that can easily exceed this with finding off market properties, negotiating better prices, finding beat up properties that are scary and highly discounted and cashflow well after rehab. Its also easy to feel defeated in a sellers market where competition is stiff and obvious discounts are few.

    1Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    10y

    You've done the math.  You know the numbers.  They are accurate.  

    That said, when it comes to investing, you have essentially two levers you can play with -- TIME and RETURNS.

    For a passive investor who doesn't want to actively search for, negotiate and manage investment deal flow, you're going to find that your returns are somewhat fixed at between 5-15% (these days, likely closer to 8-12% unleveraged or 10-15% leveraged).  By deciding that you want to be a passive investor, you're fixing your RETURNS and have no control over TIME.  Depending on your capital situation and your cash flow goals, it will take however long it will take to meet your goals -- you've done the math above, and it's (for the most-part) accurate (it's accurate during the amortization period of the loan).

    Now, if you want to control the TIME aspect, you need to play with the RETURNS lever.  In other words, you need to find better deals.  This isn't easy, but finding great deals with owner-financing or subject 2 (where your cash out of pocket is very low, and your returns are nearly infinite) or using more active strategies like flipping or arbitrage (where you are increasing your capital position) can allow you to generate returns well above more simple and passive strategies.  Again, if you can gauge your RETURNS, you can calculate the TIME it will take using some simple math.

    Long story short, as you've already figured out, there's no rocket science here.  The math is straightforward.  It's up to your to pull the levers you can pull in the ways you want to pull them...

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    1Reply
  • Ed Emmons
    Specialist · Milford, ME · Member since 2016 · 630 posts · 378 votes
    10y

    Scott, have you ever played the game of Cashflow? Financial independence can be achieved much faster when set up your lifestyle to achieve it. In the game it is usually much easier to obtain independence on the salary and lifestyle spending of a truck driver than Doctor . I have seen the same in real life. If your income and expenses are lower it is relatively easy to replace that through real estate. Once it is replaced you can buy more real estate to pay for more wants. I have done it twice in my investment career each time in less than a year. The first time my life was simple and it only took 6 rentals and two flips to do it. The second time it took about 50 units and a few flips. Both times when I did it, I had a lot less than $100,000 in cash. The first time I had about $1000 and the second time I may have used $20,000 but I doubt it. If a person works less than 60 hrs a week, there is sufficient time to make a lot of money in real estate if you are willing to work it yourself. Everyone talks about doing everything passively and that is fine for a person who wants a side income or has been doing this for quite a while. But if you want to replace a current income fast, you have to work it yourself from my experience. 

    2Reply
  • Scott Taylor
    OP
    Investor · Oakland, CA · Member since 2016 · 57 posts · 16 votes
    10y

    @Ed Emmons Yeah, I've been meaning to play Cashflow - the one time I tried to play it, I lost immediately (!) and otherwise it was a ghost town.  I figured out, though, that I can probably register under a temporary email address and play myself - which will give me double the experience!

    One of the real challenges here is that I can neglect my job somewhat (I probably work less than 40 hours a week now, but very hard when I do), but unfortunately I can't do a lot of the house hacking / flips / etc since I'm a high priced area and plan to invest out of state. OTOH - I'm considering the BRRRR strategy. I don't really know anything about housing stock arbitrage - thanks for opening my eyes to the idea!

    0Reply
  • Scott Taylor
    OP
    Investor · Oakland, CA · Member since 2016 · 57 posts · 16 votes
    10y

    @J Scott Great advice.  I'm thinking actually there may be really good deals in smaller cities that no one is really investing in (like 100k population cities).  I've seen a few in one city on the east coast that seems to be returning ~25% with multi-families.

    But thanks for the advice.  You mentioned a lot of avenues that I haven't even heard of (subject 2 and arbitrage) - let alone have explored.  Both you and @Ed Emmons have mentioned that it's going to take active time to get deals in the pipeline.  I never expected it to be easy or to be completely passive (at least before the deals), but did expect it to be a bit more formulaic.  OTOH - "Average returns are for average investors".  Thanks for pushing me to look further than the "formulas".

    0Reply
  • Jennifer Nguyen
    Orange, CA · Member since 2016 · 36 posts · 4 votes
    10y

    I'm a newbie and on the same boat. I want to get in the game, but So Cal is out of my budget. The idea of multiplexes is intriguing. Thanks for sharing Brandon's 7 years to 7 Figure Wealth. As a newbie, it seems the majority of experts recommend to start with an SFR. But if my end goal is eventually to do multiplexes/apartments, should I dive right into it or get my feet wet first with an SFR given I have no experience?

    0Reply
  • Scott Taylor
    OP
    Investor · Oakland, CA · Member since 2016 · 57 posts · 16 votes
    10y

    @Jennifer Nguyen's question is also one I have.  Should I go Sfh at first just to "learn the ropes" at first?  Or will those headaches the first time around be different the second time around (second time being with a multi)

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free