Here is my goal. How would YOU make it happen?

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Here is my goal. How would YOU make it happen?

Cooper B.
Real Estate Agent · Birmingham, AL · Member since 2012 · 73 posts · 11 votes

Hi all,

I recently read a post on the BP blog about the importance of having a defined goal for your investment strategy. So, I thought I might share my goal and see what ideas other investors might have for accomplishing that goal in my situation.

So here is my goal. I would like to use about $150k cash to generate $3k in passive positive monthly cash flow.. The time frame for this goal is 12 months. This would cover our mortgage and student loan payment. After that, I will move on to bigger and better goals. I realize that this is a 24% COC return, so it may take me multiple "steps" to get to the $3k mark. Passive does not have to mean fully hands off, but let's say a few hours/week on average at most.

I am asking for ideas, but I should mention up front the things I am just not interested in for this goal. I like to flip, but that is not steady income nor is it passive. I am not interested in section 8 or other bad-part-of-town investing; it is just not for me. I do not want to wholesale. And, I do not want to invest out of my town (Birmingham, AL) although I might consider Atlanta or Nashville as I am familiar with them.

In addition to the cash, I have a fair amount of time to invest right now (approx 20 hours/week). I have good credit and good debt/income, but do not have any experience buying investment property on credit so I'm not sure what the banks will think of me. I am very handy and can do a lot of repairs/improvements myself, and I know some good contractors.

I am leaning heavily towards investing in a multifamily property in the $500k range. This would be a property to which I can add value and increase rents and/or occupancy quickly. Additionally, 1 building is easier to manage and account for than a bunch of SFHs.

Other strategies that I would consider would be buy/fix/rent SFH, private lending, small commercial property investing, storage units. Any other ideas are welcome.

There is so much experience here on BP, so I would love to get any critiques to my plan or advice about other strategies that I should consider keeping in mind the goal stated above, the current markets, my level of experience and knowledge, etc. Any advice at all is appreciated!

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
13y
Originally posted by Stephen Masek:
You are looking for a return greater than 20% before management, property taxes, and insurance. Are you joking? If any of us knew where such a thing existed, we'd have bought it.

There are plenty of these deals out there that will return these numbers -- you just need to dig them up and be willing to use leverage to bump up your returns.

I recently purchased a property for $36K, put in $4 in basic cosmetic work, refinanced at 80% LTV (5.5% amortized over 20 years), and rented it for $900/month. COC is over 32% assuming 50% expense ratio; total return is over 42% assuming accrued equity is factored in.

This is a nice house in a nice neighborhood where I'd happily let my wife and kids walk around outside in the middle of the night, and I come across these kinds of deals several times per year. They're not everywhere, but they definitely exist.

Not saying they're everywhere, but certainly where I live...

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  • Account Closed
    Real Estate Investor · Leawood, KS · Member since 2012 · 37 posts · 6 votes
    13y

    I recently purchased my first multi-family unit property. I do not have the capital you are talking about only being 18, but have found great success in my fourplex. If you are looking to do some repairs, look for properties with cosmetic issues that are undervalued. I found a rundown property way undervalued by doing some comps in the area, and was able to fix it while still having that initial equity and producing good cash flow.

    1Reply
  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y

    You are looking for a return greater than 20% before management, property taxes, and insurance. Are you joking? If any of us knew where such a thing existed, we'd have bought it.

    You may be able to buy one or two houses outright and make 10%. Newer ones in nice neighborhoods with good schools may also have appreciation potential.

    0Reply
  • Cooper B.
    OP
    Real Estate Agent · Birmingham, AL · Member since 2012 · 73 posts · 11 votes
    13y

    No, obviously I am not joking Stephen Masek. I didn't mean to offend you with my question, but I am being honest with my goal and trying to put my money to intentional use. If it were easily within reach then it wouldn't be much of a goal worth aspiring to. That's my opinion at least. There are many stories and examples of people getting 20+% return on the right investment. Or, like I said, maybe it will take several steps to ultimately achieve that residual income.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    13y
    Originally posted by Stephen Masek:
    You are looking for a return greater than 20% before management, property taxes, and insurance. Are you joking? If any of us knew where such a thing existed, we'd have bought it.

    There are plenty of these deals out there that will return these numbers -- you just need to dig them up and be willing to use leverage to bump up your returns.

    I recently purchased a property for $36K, put in $4 in basic cosmetic work, refinanced at 80% LTV (5.5% amortized over 20 years), and rented it for $900/month. COC is over 32% assuming 50% expense ratio; total return is over 42% assuming accrued equity is factored in.

    This is a nice house in a nice neighborhood where I'd happily let my wife and kids walk around outside in the middle of the night, and I come across these kinds of deals several times per year. They're not everywhere, but they definitely exist.

    Not saying they're everywhere, but certainly where I live...

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    2Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    You do realize that's a very high cash on cash return, so at least you have a realistic view. I don't think you get there with a single multi-unit. Instead, you need to do a bunch of deals like J Scott describes. That's going to take a LOT more than "a few hours/week on average at most." You won't easily find deals that juicy just by looking on the MLS. Or, if you do occasionally find one that good, you won't find enough to reach your goal. At least, you cannot do that around here. Perhaps in your area.

    J Scott mentions the 50% rule. That says that if you're using a property manager, you need to allocate 50% of the gross scheduled rent to expenses, capital and vacancy. If you self manage, I think you can safely reduce that to about 36% (i.e., 14% goes to PM, 10% of collected rents plus half a month per year to filling vacancies.) So, look at want kind of deals are readily available on the MLS in your area. Run the numbers assuming conventional financing and see what return that generates. If its at or above your 24% goal, you may be able to get there easily.

    But notice what J Scott is saying. He bought cheap, fixed, rented and refinanced. He paid $40K for a house that rents for $900. Such deals do not exist in my area. At least, they don't exist on the MLS. So, you would have to do your own marketing and deal directly with desperate sellers. That takes time and some amount of money. Even then, such deals would be difficult to find here.

    If you want a large portfolio, you can't assume conventional financing. That is, rates like 4-4.5% for 30 year fixed. Notice J Scott is saying 5.5% for 20 years. That cuts into your return, though it gets you to a paid off property sooner.

    I don't think Stephen Masek is offended by your post. Rather, you're setting a VERY high goal of 24% return. Then you're saying you only want to spend a few hours per week getting there. Frankly, I don't think that's possible. If you're in the right location and you're willing to put in some significant time, you MIGHT be able to achieve the 24% goal. Doing it with minimal effort is, IMHO, impossible.

    1Reply
  • Cooper B.
    OP
    Real Estate Agent · Birmingham, AL · Member since 2012 · 73 posts · 11 votes
    13y

    Thanks for the reply Jon Holdman. I did not mean that I hope to only spend a few hours a week to make this happen; I only meant that after this income stream/streams are in place I would like to only spend a few hours/week maintaining it (i.e., property management, paying bills, etc). I posted a revision at the end of the original post to clarify.

    I am acutely aware that it will not be easy and will require a great deal of time and effort before I reach that goal.

    Thanks J Scott for the encouragement. I too have seen deals with very good cash on cash returns by using leverage. I am trending towards MFH since it seems so much simpler to get 1 great deal than a bunch....not that either option is all that simple. By the way, I really enjoy your website. I believe the house you are referring to is the one in Austell? Birmingham is not so different in that there are also outer suburbs which are safe, relatively new, and fairly cheap.

    1Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    13y

    You might be able to get there in multifamily depending on your area and what typical deals go for in terms of cap rate. But not from the stuff I see here. Here in Illinois, you're looking at cap rates near 7 or 8 unless you want to go in the rougher areas and I don't and neither do you based on your posts.

    But alabama might be different. If you can find something for a 10 cap, maybe you can get close. 500k property would need 150k down and should produce NOI of 50k (10 cap). You would then be paying on a loan of 350k. That would likely come to about 2k per month and would put you right around 2k per month in profit. Close but not 3k.

    To me, I think you have to go single family to get to that 3k.
    Working backwards, you would need 6 houses making $500 a month. Could you do that? Again, depends on your market.

    But with 150k to play with and assuming you would have other cash in the bank to act as decent reserves, I think so.

    If you could buy 6 of the following houses:
    Worth 100k
    All in for 80k (Purch plus rehab plus closing costs)
    You put down 30% of the all in cost (24k per house) so you owe around 55k per house and your payments are about $300 per month.

    House rents for 1,100 to 1,200.
    Mortgage: $275 per mo
    Taxes: $200 per mo
    Insurance: $50 per mo
    Maintenance and vacancies: 125/mo

    This gets you to between 450 and 550 per month per house
    and your 3k per month total net income.

    With 6 houses, that should limit your passive activity once they're all acquired and rehabbed to well under your 20 hr per week limit.

    Are those deals there? They are where I live. I could easily do this in a year where I live if I had 150k in the bank. But I have no idea what the deals are like in alabama.

    I do believe that sfh's are going to give you your absolute best cash on cash returns - provided of course you buy em right.

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  • Shane Johnson
    Hudson, WI · Member since 2012 · 189 posts · 30 votes
    13y

    I am a newb to all this, but I was thinking exactly like Mike H. I think this would be doable within a 30-40 minute radius of where I live and within a year or two I could maybe find 6 properties that would fit in those parameters. They more than likely would have to be off MLS, as the foreclosure market right now is dry and hot.

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  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y

    Indeed, no offense, and I'm not easily offended.

    I'd suggest using the $150,00 to pay off debt, then start saving to buy real estate. Being in debt is very danagerous if you do not have significant reserves. Of course, now is a good time to buy, but it will not be the last good time to buy.

    0Reply
  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y
    Originally posted by J Scott:
    purchased ... for $36K, put in $4 in basic cosmetic work rented it for $900/month....nice house in a nice neighborhood where I'd happily let my wife and kids walk around outside in the middle of the night...
    How much time involved to find them? The original poster, as with many people is employed, so has limited time available, quite different from someone who does this kind of thing full time.
    0Reply
  • Cooper B.
    OP
    Real Estate Agent · Birmingham, AL · Member since 2012 · 73 posts · 11 votes
    13y

    Thanks for the detailed response Mike H. I have been under the impression that in general MFH will give better returns than single family. Do you find that the opposite is true? Or, do you find that there are just more of the really great deals to be had in SFHs?

    In terms of my stated goal, the idea is to get the greatest cash return on my investment, and so much of that will depend on leveraging that cash. After considering your scenario, it seems like SFH investing will do a better job of this as I can hopefully get longer term loans at lower interest rates.

    I think a good middle ground may be to seek out 2-4 unit buildings to kind of get the advantage of the economy of scale benefit of MFH and the better financing available for SFH.

    The disadvantage of course is that it will take more of these smaller properties to reach my goal than just finding 1 nice $600k apartment building.

    0Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    13y

    Based on what i see here in Illinois, its not even close. SFH has a far greater return than multifamily. You don't get anywhere near the leverage in multifamily that you can in SFH. Multifamily requires 30% down plus rehab out of pocket.

    Also, MF requires a lot more management and I don't think a 600k building would afford you management as a built in expense. I would not want to handle the turnover on a 12 to 16 unit property.

    Although I'm not sure I'd look at 2 to 4 unit properties either.
    Is there any reason my scenario/numbers wouldn't work by you?

    What are typical middle to lower middle class REO's going for in your area? What do they typically rent for?

    Outside of the coasts, most areas have those 100k to 120k homes that rent for right around 1100 to 1300 a month. 6 of those and you should be set.

    If I can put together a portfolio of 17 homes with about 50k to start with and never did a flip to add to my reserves. I'm pretty sure you can pickup 6 or 7 homes with 150k.

    I think you could do it in 18 mos provided the deals are out there.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    13y
    Originally posted by Stephen Masek:
    Originally posted by J Scott:
    purchased ... for $36K, put in $4 in basic cosmetic work rented it for $900/month....nice house in a nice neighborhood where I'd happily let my wife and kids walk around outside in the middle of the night...
    How much time involved to find them? The original poster, as with many people is employed, so has limited time available, quite different from someone who does this kind of thing full time.

    In the past 2 years, I've found 5 properties that come in around these numbers -- all off the MLS. So, time is not the issue (browsing the MLS and making offers is easy)...the bigger issue is that there may not be enough of these deals these days to put all the cash to work.

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  • John McCombs
    Real Estate Investor · Riverside, CA · Member since 2013 · 42 posts · 8 votes
    13y

    First of all let me start by saying that I think you need more than a year to accomplish this goal using SFRs, but I think they are the best vehicle for accomplishing your goals. Start by moving into an apartment, and renting out your current home. (CF $$428 mo)
    Start to research good potential SF flips. Do all of the rehab work that you can yourself. Buy with all cash and turn your 150k into 175k.
    Month 3: Buy second house to flip, all cash. Turn your 175k into 200k. Get prequalified for a loan.
    Month 5: start to buy, improve and hold rental 1. Each SFRs in the 80K range. 20k each for down payment and 5 k for rehab each.
    Keep your FICO above 720 so that you can keep qualifying for the best loan rates.
    Month 7: rent property 1 (CF $428 each) and purchase property 2
    Month 9:rent property 2 buy property 3
    Month 11: rent property 3, buy property 4
    By month 12, you will have $1712 cash flow and you may have to dip into your pot for the next 3 months for passiveive income on your $3000 goal while you continue this process.
    Month 13: Rent property 4 and purchase property 5
    Month 15: Rent property 5 and purchase and rent property 6 before month 17.
    Each of your 7 rentals cash flow with $428 each for a total of $3000
    Set aside about $20k for repairs/reserves.
    With approximately $25k down payment, buy yourself a modest home.
    Easier said than done, but this would be my recommended path.

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  • Jason Burton
    Investor · Salt Lake City, UT · Member since 2012 · 38 posts · 8 votes
    13y

    Cooper B. this is a lofty goal for sure. Please be sure to keep us updated!

    John McCombs that is a very interesting timeline. Thank you for sharing. It makes me wonder how I could pull something like that off.

    0Reply
  • Thomas Williamson
    Investor · atlanta , GA · Member since 2012 · 287 posts · 148 votes
    13y

    Cooper B. I've done basically what you're trying to do, but it took longer than a year. My wife and I were able to accomplish the goal of receiving more than 3,000 per month (after all expenses) in passive income. It took us 2.5 years, and buying all s/f homes in Atlanta. The market has turned in Atlanta, so we don't find the home run deals as often as we used to. For instance a ten year old home on an acre of land that just needed paint and carpet for 31,000. My wife was able to retire at 42 y.o. recently because of our passive income. The key is patience, you'll get there, especially with that amount of money to invest. Good luck.

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  • Suzie B.
    Greentown, IN · Member since 2012 · 140 posts · 18 votes
    13y

    I don't think MFH are out of the equation.

    We bought a duplex 2 years ago for 32k that just needed some updating and outside staircases for the upstairs unit.

    I believe we have a 10 yr loan on it through a local bank w/a payment of $303 + taxes & insurance. We collect $1k a month in rent but could get more. We discounted the rent to the upstairs unit when we rented it because we only had 1 of the 2 staircases done when they moved in and the fact that they are family of some old friends helped them too (we just talked about moving their rent up towards market price a bit each year from here until we reach it. We told them when they moved in that we would be doing that after the outdoor projects were complete- which they are).

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  • Chris H.
    Investor · Spokane, WA · Member since 2012 · 71 posts · 24 votes
    13y

    Stephen wrote:

    "You are looking for a return greater than 20% before management, property taxes, and insurance. Are you joking? If any of us knew where such a thing existed, we'd have bought it."

    However, I don't think it's *that* insane if you know what you're doing...I think Stephen is forgetting the power of buying undervalue. If you buy broken down properties and fix them up, you can earn an instant 20-30% return in terms of equity.

    For example, if you buy a house for 50k, spent 20k fixing it up, and now it's worth 90k...you made 20k. That's an instant 22% gain.

    If you consistently make a 22% gain on each purchase, you can use that 150k to buy ~185k worth of property.

    If you do this with leverage...say, 200k worth of bank loans...you start with 150k, and end up with: 385k in property, and 185k in equity.

    If the bank loans are under 5% interest, this is not the highest risk strategy in the world, and should be capable of generating a return on equity of over 20%. However, it's a lot higher risk and you can definitely expect to not get 20% in practice. I'd probably say ~15% return on equity in practice.

    And I'm assuming you are managing it yourself.

    0Reply
  • Cory Rogers
    Upland, CA · Member since 2013 · 42 posts · 5 votes
    13y

    If I had 150k, I would do my best to use as little of it as possible. Just some thoughts: consider breaking 150k into smaller incentives of $1000 to $2000 or smaller depending on the situation. Put an ad in the newspaper looking for "subject to" or "assumptions" where you can pay as an incentive to their rights for the property - the longer the better, contract wise. Be sure to find these properties that allow for positive cash flow. Then lease option the properties for a cash down payment, expected appreciation and a short contract. Do as many as you can find. Then start attending trustee's sales and look for the average range paid and buy what you can " little as possible down." Lease the home, for cash flow and appreciation ( maybe a premium too if there are a lot of bites). Be sure to have a title company service the loan. I'm no expert and I'm still new. One thing I wish I knew when I had 150k. Also, I have learned recently from my tri-plex that there is only so much you can expect in rent from people. Still need to gain some more insight, but I am starting to think that the people that rent apartments can only pay so much which limits what you can gain in passive income. SFR's ate the same but the gap between apartment rent and SFR is greater offering more room for passive income. Just some thoughts. Good luck

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  • Hunter H.
    Real Estate Investor · Westport, CT · Member since 2013 · 26 posts · 3 votes
    12y

    You can get that kind of return on one MF deal. I did on my first one. I started with a similar situation as you. I wanted (mostly) passive income and around the same metrics ($3k+ cash flow). I looked for a bit then decided to throw my hat into the ring with a 12 unit bldg. It wasn't a broken down building that needed work, it was getting about 12% cap rate when I bought it.

    Negotiated the property down to $400k, spent $40k changing a gutted storage area into another apartment and fixing up another area so it could be habitable (this $40k could have been considerably less if I did the work myself). After the 25% down and capex of 40k, I'd spent $160k. I've raised rents on most of the units/ After owning it for a couple of years, I can pretty accurately say what my income vs. expenses are over time.

    Income: $8100 / mo

    Expenses: $4400 / mo

    Note that this includes mortgage payment of $1756 a month.

    The expenses also includes things like vacancy, supplies, lawn care, repairs, insurance, taxes, etc. I don't live near the property so it also includes what I pay for 'assisted property management' which would be things like, calling the plumber, or propane service or. I do all of the advertising, vetting tenants, leases etc via email.

    So, that's an example for you. $3,700 month passive and I'm paying down the mortgage fast so it will be paid off in about 50 months which will subtract another $1750 off expenses. You're on the right track with your goals, and value-add is where it's at, imo.

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  • Brad Williams
    Real Estate Attorney · Ridgeland, MS · Member since 2011 · 22 posts · 15 votes
    12y

    Don't mean to put you on the spot but, we are a year later so, I'm curious. Update us on whether you made the goal. If not, how close did you get?

    0Reply
  • Sean Kuhn
    Minooka, IL · Member since 2013 · 353 posts · 85 votes
    12y

    I agree with @Mike H. Around here we have trouble getting high caps on multifamily, and get much better returns on single family. My own personal numbers are 70 to 90k purchase price with 20% down with rents of 1000-1300. I net about 200 per month per unit after mortgage, taxes, insurance and repairs. Once I pay them off I will net 500 to 600 per unit. Many people, some on this site, would think I'm crazy with such low returns. Other have the exact same business model. Nice homes in A neighborhoods. Around here you can find high returns in other C and D neighborhoods but its too volatile over there. Not for me.

    0Reply
  • Sean Kuhn
    Minooka, IL · Member since 2013 · 353 posts · 85 votes
    12y

    Basically, it all depends on your market.

    0Reply
  • David HollandPro Member
    Realtor · Baltimore, MD · Member since 2013 · 91 posts · 32 votes
    12y

    Any updates on your progress? I'm starting on the same path.

    0Reply
  • Cooper B.
    OP
    Real Estate Agent · Birmingham, AL · Member since 2012 · 73 posts · 11 votes
    12y

    In the past year I've done some flipping using that capital, and on an annualized basis the return has been greater than the 24% I was shooting for. Of course this is anything but passive and that doesn't account for things like equity pay down or tax benefits of rentals.

    This thread has been really interesting to me. The general consensus seems to be that SFH offers greater returns. However, for whatever reason owning a bunch of SFH doesn't offer the same appeal to me as getting into MFH.

    I believe it is because the thought of keeping up with a bunch of houses seems like a job in and of itself. Plus then there is dealing with financing for all those houses....all of the details and bills and paperwork etc. in my mind seem a bit overwhelming whereas 1 20-unit building seems so much more streamlined. Then again I have never owned either so this is just my presumption.

    I'm still looking into both SFH and MFH for properties that meet my criteria. Does anyone have any experience to share about this concern? Obviously plenty of people on BP have large single family rental portfolios...but is it easy to manage very passively?

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