Downsides for conservative investing?

Rental Property Investor · IN · Member since 2019 · 34 posts · 39 votes

7y

As a cash buyer I may be in the minority here. But your plan sounds excellent to me. Swinging a lot of debt is not for the faint of heart and your plan will do the same thing in the same amount of time as someone using a no money down plan. You will arrive at your destination at the appropriate time and sleep better at night if the economy gets rough in Texas. Good luck.

18 Reply

Josiah Sia

OP

Rental Property Investor · Member since 2019 · 91 posts · 30 votes

7y

@Account Closed thank you for the feedback! That's my goal :) Trying to get into quadplexes as fast as possible, fully paying them off and scaling till financial freedom is achieved. Goal is hopefully my wife won't have to work anymore sometime in those 10 years.

Fortunately for me I love my job so I'll likely continue. I'm thinking that 1 year to purchase a MFH, then 1 year to fully pay it off sounds reasonable. That's if I can purchase decent deals in the $150-200k price range. But my thought is if it's just 1 deal everyone couple years, surely I can figure that out!

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Excellent plan goes against the refi till you die and max leverage BP crowd.. although you still are going to have at least 30% overhead to keep your units in nice shape.. so be sure to deduct that from your gross cash flow.

the most successful folks I know that are not professionals in the business have either entire portfolios paid for or substantially paid for.. although as well keep in mind 10k today is 15k in 10 years or more..

When I started in the business in the later part of the 70s 4k a month was a kings sum. Now it barely gets you through the week.

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14 Reply

Josiah Sia

OP

Rental Property Investor · Member since 2019 · 91 posts · 30 votes

7y

Originally posted by @Jay Hinrichs:

Excellent plan goes against the refi till you die and max leverage BP crowd.. although you still are going to have at least 30% overhead to keep your units in nice shape.. so be sure to deduct that from your gross cash flow.

the most successful folks I know that are not professionals in the business have either entire portfolios paid for or substantially paid for.. although as well keep in mind 10k today is 15k in 10 years or more..

When I started in the business in the later part of the 70s 4k a month was a kings sum. Now it barely gets you through the week.

Thank you Jay! That makes a lot of sense and is definitely something I need to calculate out. I'll plan to go above the salary units # I had originally had to account for overhead and inflation. I didn't think of those and I'm glad you brought those up!

P.S. Your podcast was great! You even addressed my question here in the fire round of that episode saying "the quicker you get your buy and holds paid off, the better you are." It's like having a celebrity responding to me on my post!

3 Reply

Scott Pearson

Hunlock Creek, PA · Member since 2019 · 67 posts · 35 votes

7y

@Josiah Sia in my opinion it is a excellent plan.

I'm just starting and will be using an SDIRA to purchase a duplex with cash.

2 Reply

Erik W.

Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes

7y

You used the phrase "replace our income" vs. supplement, so I am taking this to mean you intend to quit your W-2 jobs and go full time real estate once you get to the end of your plan.

I am sure you realize that $10,000 / month from rents isn't like $10,000 pay check. As Jay mentioned, figured a minimum of 30% for maintenance, property taxes, insurance, legal, bad debt, and vacancy. Also, if you truly want "passive" income, then a property manager will cost about 50% of one month's rent to fill a unit and an ongoing fee of 7-10% of monthly rent.

Then there's Cap Expenditures. The boogie man many REIs forget to plan for and so the minute their houses get paid off they have to go get another mortgage to replace the roof, the flooring, the HVAC, the water heater, etc. Set aside 5% of monthly gross potential rent (vacant or not) to build up your reserves. With no W-2 income I'd want a minimum of $10,000 per unit set in reserves.

Also, I'm assuming your current employer is paying for part or all of things like health insurance, retirement plans (Social Security, if nothing else), short and long-term disability insurance, and possibly some other nice perks that will be your own to foot the bill once you go full time RE. Be sure to deduct all of that from your gross.

Bottom line: the folks I have talked to who have left W-2 behind typically get somewhere around 150% of their income before jumping ship. If you have very little/no other debt, then it will certainly be easier. I'd plan for around $14,000 - $15,000/month income, and if I found I didn't need it...hey, gravy on the biscuit!

Good luck....a very aggressive but exciting goal.

13 Reply

Jacob Sampson

Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes

7y

One of the downsides of conservative investing is slower growth the trade off being lower risk. I think you have a great plan. It will probably be difficult to replace $100k income in just 10 years, though. You will need to buy all the properties and in theory pay them all or mostly all off. That does take time.

Life is a grind, enjoy it.

3 Reply

Jacob Sampson

Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes

7y

Originally posted by @Josiah Sia:

@Account Closed thank you for the feedback! That's my goal :) Trying to get into quadplexes as fast as possible, fully paying them off and scaling till financial freedom is achieved. Goal is hopefully my wife won't have to work anymore sometime in those 10 years.

Fortunately for me I love my job so I'll likely continue. I'm thinking that 1 year to purchase a MFH, then 1 year to fully pay it off sounds reasonable. That's if I can purchase decent deals in the $150-200k price range. But my thought is if it's just 1 deal everyone couple years, surely I can figure that out!

I'm not sure how you would pay off 150-200k in a single year, that would be around an extra $10k-$15k per month on the mortgage, but that certainly is an interesting goal.

1 Reply

Josiah Sia

OP

Rental Property Investor · Member since 2019 · 91 posts · 30 votes

7y

@Scott Pearson thank you so much for the affirmation! Good luck to you and your deals!

1 Reply

Josiah Sia

OP

Rental Property Investor · Member since 2019 · 91 posts · 30 votes

7y

@Erik W. I'm planning to mostly replace 50% of my income + my wifes full income. I plan to still work since I REALLY like my w-2 job. With that being said, that's why I really like this plan because it doesn't require a ton of time investment. I buy a quad every other year and work on paying it off. :)

I didn't even think about the insurance and all that. I should have learned from a mistake I made at my previous job hahah (didn't have any insurance, luckily my wife did and could put me on hers) Since I plan on keeping my current w-2 job I can work out insurance for my family in there.

Thank you so much for all that extra insight! I'm going to adjust my "target" $#s now to be 150% instead of just an = match. I'll also account for the $10,000 saved per unit for cap ex or any emergencies. Is there a point where I should stop saying $10,000/unit? I'm assuming at a certain # of units you could always just hold and replenish the cap ex pool instead of continuing to put more $ into it.

Putting these in my notes and calculations NOW.

THANKS!!

1 Reply

Josiah Sia

OP

Rental Property Investor · Member since 2019 · 91 posts · 30 votes

7y

@Jacob Sampson I definitely will enjoy the grind. I've always loved it! (If it interests me. And this interests me!)

I wouldn't really be making enough to pay off $150,000 per year. But because I'm giving myself 1 year break in between, its almost like 2 years to pay off (counting the year I purchased).

Something like this. (#s are all just general assumptions. There is a lot more math in my excel document than this, but hopefully this helps showcase how I plan to pay them off)

Year 1: Have $35k in savings already, save an additional $48k. (We are living below our means and able to save more than 50% of our income thanks to paid off loans, low mortgage, etc.)

Total cash reserves: 83k

Year 2: +$48k from w-2 job. Buy a quad for $150k. Calculating 35% for 20% downpayment, closings costs, and any touch ups/renovations. I'm not planning to buy completely run down places.

Total cash reserves: $78k

Year 3: (saving year) +$48k from w-2 job. +$4800 assuming $100 cashflow per unit.

Total cash reserves: $131k

Year 4: (saving year) Pay off 1st quad. +$48k from w-2 job. +$33,600 assuming $700 cashflow per unit for quad 1 that's now fully paid off. Buy 2nd quad. Assume same #s as first. ($150,000, 20% down) +$4800 assuming $100 cashflow per unit.

Total cash reserves: $45k

Then just rinse and repeat steps 3 and 4 alternating from years I just buckle down and save and years that I pay off the previous quad + buy another. Sorry if I made it sound confusing saying I was going to pay them off in a single year. I'd have 1 year of savings in between for the first couple quads.

Math isn't perfect, but it's the general idea of the plan. Pivot where I need to and adjust.

2 Reply

Cole Raiford

Rental Property Investor · Gulfport, MS · Member since 2018 · 113 posts · 133 votes

7y

@Josiah Sia the approach works fine. The slow methodical nature of one property every 2-3 years is what will be hard. Once you start and understand REI and the potential of it, and once you know what a good deal looks like, it will be hard to stay disciplined to your plan and let good deals pass by. Your plan doesn't maximize your return, takes a long time, etc but if you can stick with it the approach will work.

Spend some time understanding how to analyze deals to make sure you know what you are buying and what your monthly expenses are. You won’t net $700/mo/unit after expenses, and if you are buying a 4plex in rent ready condition, as you stated, for $150K that brings in $2800/mo I will venture a guess that the location and your tenant pool will lead to additional expenses. Go on YouTube and watch deal analysis videos or watch Brandon Turner’s weekly webinars, as they are geared for beginners and focus a lot on analysis. Good luck!!

5 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

7y

Originally posted by @Cole Raiford:

@Josiah Sia the approach works fine. The slow methodical nature of one property every 2-3 years is what will be hard.

Yep, this. Acquisition opportunities come in waves. Then crickets.

I've had years looking for 1 and got 19. Other years looking for 4 and got nada for 3 years. This year I'm selling 2 unexpectedly and 17 others on purpose.

Plans are great and nothing wrong with less debt, but sometimes you need to make hay while the sun is shining. If 3 deals come up in the same year, responsible debt (especially long term low rate fixed resi debt) is ok. You can then accelerate paydowns in dry years.

I've had quite a few dry years so have been knocking out commercial and higher rate resi debt to earn more than 6% safely while I wait with dry powder at the ready. If i hadn't used debt during the good years? I'd be hunting around for skinny deals with everybody else instead of napping.

9 Reply

Anthony GaydenPro Member

Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes

7y

Originally posted by @Josiah Sia:

Howdy!

Looking into getting into REI and have been looking at different systems and vehicles to get me there. We don't have any huge goals of owning 1,000+ units or raking in millions a month. Our goal is just to replace our monthly income of roughly $10,000/month passively within the next 10 years. That's it!

Looking into ways to do this conservatively and one of the methods that really stood out to me was buying a MFH (2-4 units), paying it off, then taking the full rent + savings from our FT jobs and snowballing the same process over and over until our goals are reached.

Averaging the rents around $700/unit in our area, that would only take 15 units to be fully paid off to achieve $10,000/monthly passive income. We have a decent amount of income since we've reduced our mortgage, auto loans, and adjusted our budget to live significantly below our means. This is definitely achievable in 10 years if we buy 3 quadplexes and a triplex, or 8 duplexes, etc.

I know this isn't the normal investing kind of plan I see out there but this is how we could leverage REI to meet our specific goals to reach financial freedom.

I'd like to ask the seasoned veterans here if there is anything inherently wrong with this plan? Is there anything else I should know about before setting this as "the plan." I don't see this kind of plan talked about very often or at all. Most everyone is looking into BRRRR and other types of trade-up systems.

I have met a few people who do this sort of thing. They usually fall into a couple of categories.

1. Highly paid professionals or business owners who have very high incomes and no interest in learning about investing. They buy houses cash and enjoy the cash flow.

2. People who buy very low cost rentals (under $50,000). These properties are often in declining inner cities or extremely rural areas. The cost of the properties are so low that acquiring them with cash and not already being a millionaire is not difficult.

3. Someone who owns several rental properties and literally paid them off over a 30 year mortgage period.

You said in your post that you have a decent amount in income. How much is that? Where I live a 4 unit building costs $200,000+. If you are able to save $30,000 a year, it will take almost 7 years to buy one property.

I don't even consider it a "conservative" investing style because those who do it lose a lot of the benefits of using leverage, which means it puts your own personal money at more risk.

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1 Reply

Josiah Sia

OP

Rental Property Investor · Member since 2019 · 91 posts · 30 votes

7y

Originally posted by @Cole Raiford:

@Josiah Sia the approach works fine. The slow methodical nature of one property every 2-3 years is what will be hard. Once you start and understand REI and the potential of it, and once you know what a good deal looks like, it will be hard to stay disciplined to your plan and let good deals pass by. Your plan doesn't maximize your return, takes a long time, etc but if you can stick with it the approach will work.

Spend some time understanding how to analyze deals to make sure you know what you are buying and what your monthly expenses are. You won’t net $700/mo/unit after expenses, and if you are buying a 4plex in rent ready condition, as you stated, for $150K that brings in $2800/mo I will venture a guess that the location and your tenant pool will lead to additional expenses. Go on YouTube and watch deal analysis videos or watch Brandon Turner’s weekly webinars, as they are geared for beginners and focus a lot on analysis. Good luck!!

Thank you Cole for the advice. The $700 I calculated is after the overhead expenses. Rental is about $900-1200 in the areas I am looking at and trying to be conservative with cap ex and other expenses I just calculated $700/unit for rent.

Great advice on the webinars. I've attended the last 4 and they've been great! Went PRO on the second one!

I completely agree though... any hot deals that come out will be difficult to not strike on. But like they say, strike while the iron is hot. So there will have to be some adjusting and pivoting along the way for sure!

0 Reply

Josiah Sia

OP

Rental Property Investor · Member since 2019 · 91 posts · 30 votes

7y

Originally posted by @Steve Vaughan:

Originally posted by @Cole Raiford:

@Josiah Sia the approach works fine. The slow methodical nature of one property every 2-3 years is what will be hard.

Yep, this. Acquisition opportunities come in waves. Then crickets.

I've had years looking for 1 and got 19. Other years looking for 4 and got nada for 3 years. This year I'm selling 2 unexpectedly and 17 others on purpose.

Plans are great and nothing wrong with less debt, but sometimes you need to make hay while the sun is shining. If 3 deals come up in the same year, responsible debt (especially long term low rate fixed resi debt) is ok. You can then accelerate paydowns in dry years.

I've had quite a few dry years so have been knocking out commercial and higher rate resi debt to earn more than 6% safely while I wait with dry powder at the ready. If i hadn't used debt during the good years? I'd be hunting around for skinny deals with everybody else instead of napping.

Perfect! I'm definitely going to be flexible when it comes to deals. If it's a hot year for buying and deals are popping up, I'll move and adjust my pay off schedule on the "dry" years.

Thank you for the advice. That is definitely 100% something I'm planning to do. I've learned to be pretty flexible when making plans. But having a plan is better than no plan :)

0 Reply

Josiah Sia

OP

Rental Property Investor · Member since 2019 · 91 posts · 30 votes

7y

Originally posted by @Anthony Gayden: