Downsides for conservative investing?

Downsides for conservative investing?

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

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.

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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.

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Mia Gold
Real Estate Agent · Florida State, FL · Member since 2019 · 9 posts · 1 vote
7y
@Scott Pearson sounds great
0 Reply
Mia Gold
Real Estate Agent · Florida State, FL · Member since 2019 · 9 posts · 1 vote
7y
@Erik Whiting you are exactly right :)
0 Reply
Mia Gold
Real Estate Agent · Florida State, FL · Member since 2019 · 9 posts · 1 vote
7y
@Dennis M. Yup so true
0 Reply
Guy Pierre
Member since 2019 · 23 posts · 1 vote
7y
That’s sounds like a great plan to me. I’m planning the same thing as well but I’m planning on 20k/month. I really love multi family.
0 Reply
Tanya F.
Rental Property Investor · Madison, WI · Member since 2013 · 629 posts · 339 votes
7y
Great plan, but I don't find it conservative. $10,000 a month is a lot. We have stopped at 6 units, we've sold one so now we're down to 5 units. Our gross monthly rent is $5600, and after all rental expenses, the PITI for our primary residence are all covered by our rental income. So we live free, and my W-2 income is all gravy (plus health insurance). We've been living like this for some time. I'd say stop at $5000 a month and see how that feels for a while, before you decide on your final goal amount. That is, if you really want to think about conservative investing, as you call it.

I like your plan to not use too much leverage. We're around 50% LTV now overall, and all should be paid off in ~10-12ish years. Maybe we'll buy one more place. Not sure.
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Josiah Sia
OP
Rental Property Investor · Member since 2019 · 91 posts · 30 votes
7y
Originally posted by @Tanya F.:
Great plan, but I don't find it conservative. $10,000 a month is a lot. We have stopped at 6 units, we've sold one so now we're down to 5 units. Our gross monthly rent is $5600, and after all rental expenses, the PITI for our primary residence are all covered by our rental income. So we live free, and my W-2 income is all gravy (plus health insurance). We've been living like this for some time. I'd say stop at $5000 a month and see how that feels for a while, before you decide on your final goal amount. That is, if you really want to think about conservative investing, as you call it.

I like your plan to not use too much leverage. We're around 50% LTV now overall, and all should be paid off in ~10-12ish years. Maybe we'll buy one more place. Not sure.

Thank you for the insight Tanya. So you continue to have your W2 job right? I think in my last job I didn't have benefits it was going to be $400-500 for health insurance/month... I think that's why the increase was built into my calculation just in case. (But I love my job so I'll probably just be able to use that health insurance)
Do you feel comfortable with just 5k + your W2 job with saving enough for cap ex and other expenses that might be incurred from the rentals? You said your gross monthly is $5600 after rental expenses, what is it before?
Appreciate the experience share!
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Tanya F.
Rental Property Investor · Madison, WI · Member since 2013 · 629 posts · 339 votes
7y
Originally posted by @Josiah Sia:
Originally posted by @Tanya F.:
Great plan, but I don't find it conservative. $10,000 a month is a lot. We have stopped at 6 units, we've sold one so now we're down to 5 units. Our gross monthly rent is $5600, and after all rental expenses, the PITI for our primary residence are all covered by our rental income. So we live free, and my W-2 income is all gravy (plus health insurance). We've been living like this for some time. I'd say stop at $5000 a month and see how that feels for a while, before you decide on your final goal amount. That is, if you really want to think about conservative investing, as you call it.

I like your plan to not use too much leverage. We're around 50% LTV now overall, and all should be paid off in ~10-12ish years. Maybe we'll buy one more place. Not sure.

Thank you for the insight Tanya. So you continue to have your W2 job right? I think in my last job I didn't have benefits it was going to be $400-500 for health insurance/month... I think that's why the increase was built into my calculation just in case. (But I love my job so I'll probably just be able to use that health insurance)
Do you feel comfortable with just 5k + your W2 job with saving enough for cap ex and other expenses that might be incurred from the rentals? You said your gross monthly is $5600 after rental expenses, what is it before?
Appreciate the experience share!

I think you missed the commas I included. Our gross monthly is just that. Gross monthly $5600

After expenses (taken out of that), we have enough left over to cover all the PITI for our primary residence. That's taking into account all of our expenses for the rentals. We've had these rentals for 18 years, and have been putting a lot of the income back into them. Only in the last 5 years have we been able to pay for ALL of our PITI from rental profit. Formerly the PITI had been paid for by about 1/2 from the rentals and 1/2 from my W2 job

Yes, I still have my W-2 job. Sitting at it right now. :-)
1 Reply
Josiah Sia
OP
Rental Property Investor · Member since 2019 · 91 posts · 30 votes
7y
@Tanya F. haha thank you for the clarification. Oops, umm... I have glasses... that's my excuse :P

Sorry for the misunderstanding. That makes sense now!
0 Reply
Tanya F.
Rental Property Investor · Madison, WI · Member since 2013 · 629 posts · 339 votes
7y
Originally posted by @Josiah Sia:
@Tanya F. haha thank you for the clarification. Oops, umm... I have glasses... that's my excuse :P

Sorry for the misunderstanding. That makes sense now!

Not a problem! :-)
My point is, pause after a small collection of units (5-ish) and see how that goes for a while. Then you can better set your goals for the long term.

2 Reply
Brent Paul
Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
7y
I had this exact same conversation with my girlfriend yesterday. Paying in cash is definitely something we are looking into as well. It gives you instant cash flow and not only that but will allow you to build up your reserves faster for buying more properties.

Buying one and waiting a few years is smart. That will give you a feel for the business and see how things go what breaks, etc.

I made a simple spreadsheet in excel that helped us figure out just how many houses we need to reach our goals. 10 SFH is the sweet spot for us. That's with half having mortgages and other half paid off. If they were all paid off we could live with 7 or 8 houses. The other nice thing about having a house paid off is you can use that equity at some point if needed.
A relative of mine has a substantial amount of real estate and they buy everything with cash. I asked him why and his response was because cash is king. Never in my life have I met someone that takes that many vacations in a years time.
0 Reply
Josiah Sia
OP
Rental Property Investor · Member since 2019 · 91 posts · 30 votes
7y
Originally posted by @Tanya F.:
Originally posted by @Josiah Sia:
@Tanya F. haha thank you for the clarification. Oops, umm... I have glasses... that's my excuse :P

Sorry for the misunderstanding. That makes sense now!

Not a problem! :-)
My point is, pause after a small collection of units (5-ish) and see how that goes for a while. Then you can better set your goals for the long term.

Great advice. I'll plan to do that. Marking the middle point of my current goals excel sheet "pause, now what?" :)

0 Reply
Josiah Sia
OP
Rental Property Investor · Member since 2019 · 91 posts · 30 votes
7y
Originally posted by @Brent Paul:
I had this exact same conversation with my girlfriend yesterday. Paying in cash is definitely something we are looking into as well. It gives you instant cash flow and not only that but will allow you to build up your reserves faster for buying more properties.

Buying one and waiting a few years is smart. That will give you a feel for the business and see how things go what breaks, etc.

I made a simple spreadsheet in excel that helped us figure out just how many houses we need to reach our goals. 10 SFH is the sweet spot for us. That's with half having mortgages and other half paid off. If they were all paid off we could live with 7 or 8 houses. The other nice thing about having a house paid off is you can use that equity at some point if needed.
A relative of mine has a substantial amount of real estate and they buy everything with cash. I asked him why and his response was because cash is king. Never in my life have I met someone that takes that many vacations in a years time.

That's awesome! #GOALS!
How much cash flow are you calculating per SFH?
0 Reply
Brent Paul
Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
7y
@Josiah Sia Roughly $400 per month. Rents are higher here which will allow a little more wiggle room.

I made a spreadsheet showing 250, 300 and 400 which helped to put things in perspective. Because she couldn't visualize how this could work for us. With changing the numbers in a few columns it really helped us to see how even just having 1 house paid off makes a big difference in the long run.
One of the things we decided was we have to have 6 months in reserves for each property before buying another one. I know it sounds a little extreme, but it gives us a little piece of mind knowing we will have a little safety net.
0 Reply
Josiah Sia
OP
Rental Property Investor · Member since 2019 · 91 posts · 30 votes
7y
That's awesome! I did the same hahah
50, 100, and 200 cash flow per MFH unit and when they are fully paid off. Helped my wife get on board :)
0 Reply
Mario Am
Specialist · Nashville, TN · Member since 2019 · 187 posts · 83 votes
7y
@Josiah Sia I totally recommend you to buy the book “multi family millions” from amazon.
It is a goldmine and priceless.
Your wish can be done by just 1 deal, What I would do is instead buying a 1 multi unit for 600k (which will generate 5-6k a month best case).
I’d put it as a down payment for a 3milion dollars multi unit that will generate 25k a month minus 50% expenses and WOOP here u go u got 12,500 a month in a minute)
What is so fun about multifamily that they can generate good money VERY FAST.
0 Reply
Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
7y
I always recommend clients a middle ground. Use some leverage, do a light value add, etc. It's not all or nothing. You don't need to 100% cash out BRRR to get rich in real estate but leverage is what makes real estate return higher then stocks. Mortgage rates are at 4% right now investing is very profitable with a moderate amount of leverage.
In regards to the 10k a month awesome goal!
1 Reply
Frank Maratta
Rental Property Investor · CT · Member since 2019 · 105 posts · 68 votes
7y
@Henry Lazerow
I agree re: leverage. once the OP gets started he will realize the power of leverage and realize that the return seen on paying off a house is better spent acquiring the next deal with 25% down.
We all say, “I’ll buy this or that and pay it down sooner” but in reality once someone gets started, they get the bug, realize the power of leverage, and save up for the next deal instead. It just doesn’t happen.
Solution: take 15 or 20 year mortgages
0 Reply
Josiah Sia
OP
Rental Property Investor · Member since 2019 · 91 posts · 30 votes
7y
Originally posted by @Mario Am:
@Josiah Sia I totally recommend you to buy the book “multi family millions” from amazon.
It is a goldmine and priceless.
Your wish can be done by just 1 deal, What I would do is instead buying a 1 multi unit for 600k (which will generate 5-6k a month best case).
I’d put it as a down payment for a 3milion dollars multi unit that will generate 25k a month minus 50% expenses and WOOP here u go u got 12,500 a month in a minute)
What is so fun about multifamily that they can generate good money VERY FAST.

Thank you! I'm always looking for more books to read and learn from. Trying to finish @Brandon Turner 2 books right now. 3/4s through Rental Property Investing right now!
That's quite a bit of capital to save up for my first purchase... Maybe I do a quad first and then get experience with that and build up :P
0 Reply
Josiah Sia
OP
Rental Property Investor · Member since 2019 · 91 posts · 30 votes
7y
Originally posted by @Henry Lazerow:
I always recommend clients a middle ground. Use some leverage, do a light value add, etc. It's not all or nothing. You don't need to 100% cash out BRRR to get rich in real estate but leverage is what makes real estate return higher then stocks. Mortgage rates are at 4% right now investing is very profitable with a moderate amount of leverage.
In regards to the 10k a month awesome goal!

Everyone keeps telling em this! Must be right! hahah
I'll definitely pivot my plan a bit to maybe do what some others here have recommended where I use my financed properties to help pay off half my other properties.
Great advice!

0 Reply
Josiah Sia
OP
Rental Property Investor · Member since 2019 · 91 posts · 30 votes
7y
Originally posted by @Frank Maratta:
@Henry Lazerow
I agree re: leverage. once the OP gets started he will realize the power of leverage and realize that the return seen on paying off a house is better spent acquiring the next deal with 25% down.
We all say, “I’ll buy this or that and pay it down sooner” but in reality once someone gets started, they get the bug, realize the power of leverage, and save up for the next deal instead. It just doesn’t happen.
Solution: take 15 or 20 year mortgages

We'll see how this bug affects me when it bites! I'm going to adjust the plan a bit already to purchase more properties vs buy and pay down and not buy until paid down. Sounds good!

0 Reply
Steve K.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
7y
@Josiah Sia owning a property outright feels good and everything until you realize you could get a conservative mortgage at say 60-75% LTV with a 4% interest rate and make a much better than 4% return using that money on another investment be it stocks, additional properties or whatever you choose, while also benefitting from the associated tax advantages. There's a substantial opportunity cost of money to leaving dead equity in a property when interest rates are so low and investments providing much better than 4% returns are plentiful.
0 Reply
Josiah Sia
OP
Rental Property Investor · Member since 2019 · 91 posts · 30 votes
7y
Originally posted by @Steve K.:
@Josiah Sia owning a property outright feels good and everything until you realize you could get a conservative mortgage at say 60-75% LTV with a 4% interest rate and make a much better than 4% return using that money on another investment be it stocks, additional properties or whatever you choose, while also benefitting from the associated tax advantages. There's a substantial opportunity cost of money to leaving dead equity in a property when interest rates are so low and investments providing much better than 4% returns are plentiful.

It's funny you mentioned this. I just got to Chapter 15 on Brandon Turners Rental Property Investing book and be breaks the difference of going all in cash vs utilizing a conservative LTV. Now I'm re-thinking...
I might adjust the plan to when the year is dry to pay off half to support the other half that is financed. And do something balanced like some of the previous suggestions. I'm sure more things will pivot along the way since plans are just meant to be a stepping stone and not always followed to the T. I'll keep this in mind as I'm starting to understand the benefits of the financing route a bit more.
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Steve K.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
7y
Pivoting is key, it’s a dynamic biz! Being over-leveraged without reserves is one thing, but a safe amount of leverage is a powerful tool to scale and build a portfolio sooner rather than later. The idea of paying off properties as quickly as possible is somewhat a relic of the days with double digit interest rates (in the 80’s when my dad bought the house I grew up in, his first mortgage was 18%). If you had loans like that you’d want to pay them off as quickly as possible, but with interest rates as low as they are, it makes a lot of sense to take that money and put it to work somewhere that you can conservatively make it grow at a much higher rate than the interest.
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