How would you do it? Retire at 26 $4,000/mo cashflow?

[Nicholas Daniels]

A couple of things to get out of the way before you read the rest of my layout.

Yes: I can save 70% of my gross income. I’m a minimalist and I require very very little to survive.

No: I’m not planning on having a family at the moment. If I change my mind, I’ll adjust accordingly, but the goal still stands.

Yes: I'm aware real estate isn't completely passive. But I've found multiple deals in my neck of the woods (Michigan) that fit the required criteria of $300 cashflow per single family and $400 per duplex assuming a 7% vacancy, 5% repair l, 5% CAPEX, 10% PM.

My main question is this the best way to get this done? I've tried other formulas but this got me the closest. Am I underestimating the equity I can tap into? I only use 1 cash out refinance or HELOC in this plan. Any issues you see

Goal: $4000 cashflow by 26 years old:

Age 22:

Purchase a $150,000 duplex with a home possible (5% down loan). Investment requires $7500 (down payment), $4000 (closing costs), $3000 (repairs), $1000 (emergency fund), meaning a total investment of ~$15,500. You’ll live on one side of the duplex, rent the other, and have a roomate on your side in hopes of eliminating all housing expenses. Meaning you live for free. When you move out once you have 20% equity this should cashflow $400 ($200/unit).

Summary of Age 22:

Cashflow: $0/mo

Units: 2

Cash reserves: $~3000

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

Age 23: Once we have roughly $26,000 saved, we purchase a single family home for $100,000. This will cost us $20,000 (down payment), $2000 (closing costs), $3000 (repairs), $1000 (emergency fund) meaning a total investment of ~$26,000. This house should cashflow $300/mo and we’re assuming (of gross rents) 7% vacancy, 5% CAPEx, 5% repairs, 10% property management.

Summary of Age 23:

Cashflow: $300/mo

Units: 3

Cash reserves: $~12,000 (35,000+3,000-26,000)

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

Age 24:

Once we have roughly $26,000 saved, we purchase a single family home for $100,000. This will cost us $20,000 (down payment), $2000 (closing costs), $3000 (repairs), $1000 (emergency fund) meaning a total investment of ~$26,000. This house should cashflow $300/mo and we're assuming (of gross rents) 7% vacancy, 5% CAPEx, 5% repairs, 10% property management. You'll also use an FHA loan 3.5% down on a $180,000 duplex. This will cost $6,300 (down payment), $3000 (repairs), $5000 (closing costs), $1000 (emergency fund) for a total of $15,300. You should live on one size, rent the other, and have a roomate in your side as well. This should cashflow $400/mo when you leave. You'll rent out the previous duplex you occupied and that will start cash flowing $400/mo.

Summary of Age 24:

Cashflow: $1000/mo

Units: 6

Cash reserves: $~5,700 (12,000+35,000-26,000-15,300)

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

Age 25:

We purchase 2 single family homes for $100,000. In total both houses will cost $40,000 (down payment), $6000 (repairs), $4000 (closing costs), $2000 (emergency fund) in total this will cost $52,000. You should be able to afford it with your income roughly increasing with inflation and the cashflow from your other rentals. Each should cashflow $300/mo. You'll also use either a HELOC or a cash out refinance in order to purchase another single family with the same parameters as ones before.

Summary of Age 25:

Cashflow: $1900/mo

Units: 9

Cash reserves: $~2000

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

Age 26:

We purchase 2 single family homes for $100,000. In total both houses will cost $40,000 (down payment), $6000 (repairs), $4000 (closing costs), $2000 (emergency fund) in total this will cost $52,000. You should be able to afford it with your income roughly increasing with inflation and the cashflow from your other rentals. Each should cashflow $300/mo. We will also pay down our FHA loan and convert it to a conventional. Move out, rent both sides cashflow of $400/mo. You will purchase another duplex with another FHA or conventional loan.

Summary of Age 26:

Cashflow: $2900/mo

Units: 12

Cash reserves: $~0

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

[Erik W.]

@Nicholas Daniels, yeah, I want you to take 3 days (minimum).  Your future is worth at least that much, isn't it?

Or is it?  I guess we'll see.

@Jay Hinrichs has given you some things to think about, as have I.  The "How" part is easy on paper.  Here goes...do exactly what you put down on paper.  If everything goes according to plan and there are no bumps, you'll get your $4000/income as planned.

But life rarely goes 100% according to plan.

If the economy slows down (and there are many signs it is slowing/will slow considerably), you could get laid off.  You're young, and the old adage of corp America is "last hired = first fired."  Then you won't have 70% of income to save; you may be taking a job as a barista to make your rent.  You also won't be able to get or refinance any of your loans without W-2 income.  Credit tightens in contracting economies.  

Right now, you're plan works....assuming everything stays "as is" right now.  Life has taught me that is not realistic.

A few other things:

1) You're a 20-year-old in college making $50K per year RIGHT NOW?  I'd like to know how that's happening.  Or is that the income you are projecting?  What field will you be going into?  Will you have time to work real estate on the side?  Btw, is that $50K NET or GROSS?  My guess is you'd have to make at least $63K gross to have a net income of around $50K.  Most college grads don't make that fresh out of school, unless you're into engineering or other high-paid STEM type career track.  There are a lot of 20-somethings with college degrees now making barely over $12/hour.  You've heard of them, I'm sure...they all want Bernie Sanders as our next president.  They will be your competitors.

2) Repair budget 5%.  That is ludicrous.  Try 15%.  That's what professional property managers say.  Going back 7 years I see between 12-17% in any given year, so it's accurate.

3) Health insurance for a self-employed person is going to cost you big $$$...much more if you have a family/kids.  I recently priced my family of 5 on Healthcare.gov....$1700/month for a "Bronze" plan that hardly covers anything other than a major catastrophe.  $3,000 per person deductible.  $15,000 out of pocket yearly max.  What's your plan for health care?  

4) Emergency fund $1,000.  An HVAC system that goes out will run you $5,000 minimum.  Roof?   Termites?  Flood?  Sewer backup?  Wind knocks a tree on the roof (insurance deductible)?   Don't think "it can't all happen at once."  It sure can.  Plan for $10,000 e-fund as a base and add about $2,000 per unit.  A person with 5 units should have $20,000, minimum.  If you don't believe me I'll tell you the story sometime about a pissed off tenant who flushed a bag of "Quickcrete" cement down the toilet and the $4,000 sewer line repair that caused...  that wasn't even due to something wearing out normally.  It was a malicious act of vandalism.

5) Life.  You plan on inspecting your properties, I hope.  Getting inside to see how the tenants treat them.  Does your minimalist living budget account for realistic automotive ownership expenses?   That $1500 rebuilt transmission or $3000 for a cracked engine block?

6) You said you thought about a family.  Will your spouse be willing to participate in your ultra-frugal lifestyle?  Any thoughts on how much it costs to have a baby?  Last time we had one (in 2010) the labor and delivery was $7,000.  That will be paid out of pocket unless you/your wife have very good medical insurance.

I'm here shooting holes in your vision of the future.  Not to be cruel, but to help you see life all looks like a well-oiled machine when you're 20.  I used to think the same.  I had a ton of plans on paper, and according to those plans I'm supposed to be a multi-millionaire by now.  Heh, I'm doing well, but not quite there yet.  I laugh at my 20-something self that thought how "easy" it would all be.  I needed 5 people like Jay and me shooting holes in my big plans back then...probably would've helped me avoid some major disappointments.

So yes, I hope to hear from you again in 3 days.  I think you future is worth at least that much careful consideration.