A lot of people want to use REI to escape their 9-5 and replace their W2 income so they can live the life they want. That leads to the reasonable question 'I need/want $7/10/15k/ month in free cash flow(FCF) from my RE portfolio, what is the best and fastest way to get there so I can leave my soul sucking 9-5?', which if you spend any amount of time on BP you've seen a dozen times. IMHO the question is interesting, but not the best version: it is too abstract for people to give concrete actionable advice, not to mention there is no one best or fastest way to do things like this. Plus it doesn't lend itself well to being quantifiable. How many SFR doors is $10k/month free cash flow? What I would ask is, how do I get to $100k/month in revenue. If someone wants $10k/month from owning RE that they then rent/lease, some form of debt will come into play. Using a DSCR of 1.3 backs into a NOI of $43,333/month. [Skip if you don't like math: FCF= NOI-Debt and NOI/Debt=DSCR. If DSCR=1.3 then NOI=1.3debt. Plugging that in to the first equation yields 1.3debt-debt=FCF or debt=FCF/.3] Using a 55% expense ratio gives us $96k/month of top line revenue. [More math, NOI=Rev-exp, if exp=55% of rev, then NOI= Rev-.55 Rev or Re=NOI/(1-.55) ] Reasonable minds can differ about the DSCR and expense ratio by asset class, but it gets us in the ball park. Now we can get to a number of doors one would need if we wanted to do, say SFRs ( in Suffolk County MA, which has a median rent of $1,524/month, that's 66 doors) and number of doors, gets us to number of down-payments we need, which determines financing strategy, how to manage ect. So, the question is: how would you get $100k/month in revenue from RE investing (either the debt or equity side) and how long do you think it would take? Or is this even a worth wild goal? If not, why? I'd be interested to hear from @Steve Vaughan @Mike Dymski @Jim K. @Steve K. @Jay Hinrichs @Joe Splitrock

There is an extremely small percentage of investors who quit their jobs with a passive real estate portfolio. And nearly all of them don't have a passive portfolio...they run real estate businesses. The other part I don't get is why so many people do jobs they hate. Managing residents, investors, and contractors is not exactly a solution for high job satisfaction either. Lastly, I think most investors who do end up scaling do it organically rather than following a formula...and they make tons of pivots on the way that are not aligned at all with the original formula (markets, interests, and opportunities change). The growth is not linear...may be one or two properties in one year and a bunch in another, then a pause, sell some, keep others...it's a fluid business.

@Bill F. I feel compelled to answer this because I have ~100k/month in revenue. I've been investing for 15 years, own 75 units with a mix of student rentals, commercial offices and a handful of lower income properties with gross rents in the 120k/month range. It's been my experience that "passive income" in real estate is at best on a spectrum and at worst a complete lie. I have in-house management for most of my portfolio and outsource management to 3rd parties for some of my other properties. I spend a lot of time and energy managing the management across all of this. Passive income suggests (at least to me) that no effort or time is required. That is not true in me experience. Even on commercial leases. Yes, the grass is greener on this side. But it still has to be watered.

grass is always greener on the other side of the hill.. constant social media of how to get rich with non of your own money etc etc. really just an extension of MLM marketing at its core..

Agree Mike those that live on RE estate generated income are in the business.. I am sure there are plenty that sell a company or get an inheritance and start kind of at the top.. but thats the outlier.. Its just a business with inventory and a service and a tough one at that.

Great post @Bill F. I could be wrong, but I honestly think the majority of those who post such questions on the forums wouldn't even have the motivation or patience to grab a financial glossary to understand the terms you just just used (NOI, DSCR, FCF, expense ratio etc) let alone develop a spreadsheet and plan outlining their financial goals with realistic numbers and timelines. Replacing income to be able to "retire" in 1-2 years is in vogue right now and while RE is a great way to do that in the long term, many don't understand the amount of education, work, persistence, and time it takes for 99% of people to get to that FI number. What you've outlined would be a good starting point though to help understand just how much needs to be done to truly hit the free cash flow targets that we aspire to attain.

Two points: First, there's a real, obviously intended conflation on Bigger Pockets between two concepts: a "freedom number" and a more limited concept related to the financial independence blogosphere and community, a "financial independence number" or "FI number." Your FI number is based on a simple calculation: do you have 25 times your annual spending budget in broad-based stocks and bonds index fund investments? If you do, then there's good data that shows that you'll be able to retire for life, taking out an annual spending budget of (4%) from your saved money annually. So if you have $1M saved, for instance, and you are able to live on $40K a year, then you'll be able to take $40K a year out of your investment portfolio to spend and you won't die broke.More information on that: How to Retire Forever on a Fixed Chunk of Money On the other hand, this is a Bigger Pockets's take on the "freedom number" concept:How to Calculate Your Freedom Number by Learning Your “Real” Net Worth Since many number of people here on Bigger Pockets are not interested in the slightest in curtailing their personal spending or even doing the work of accounting for it, the whole "freedom number" notion, which depends on rigorously controlling your spending, gets mighty fuzzy around here. We have also largely agreed in this thread that there is no such thing at 100% passive real estate investment, or to reuse @JD Martin's very useful phrasing, "the idea that 99% of people are going to have a totally passive portfolio that runs itself while they drink Appletinis on the beach is pure fantasy." With that in mind, you can really start to see the strings trailing off that freedom number. --------------------------- Second, I don't think everyone starts off hating their job. I think this society is relentlessly trying to brainwash you into the belief that your career should be your passion. I think that's possible for a lot of jobs, especially when you're at the beginning of working in them. It certainly was for what I used to do for a living, which was teaching English to speakers of other languages. I could be passionate as hell about the general occupation...until the reality that doing it came with the cost of spending my life with very little financial security in a world of ever-increasing financial insecurity made itself perfectly clear to me. But that didn't happen for years. You kind of get sucked into it. I'm pretty sure that on Day 1 at Facebook, for instance, no dude sitting in front of a screen working on a team of guys that are delegated the task of improving one possibly better way to share cat pics thinks of himself as a "feline image viral distribution facilitator." They have larger ideas about their job...until time comes along and teaches them better. From that point on, hate starts to take over. Hatred and a blind urge to be free. So is it any wonder that so many uphappy people leap at real estate investing as a wonderful chance to change their stars? Just look at the way it's sold in late night infomercials. They never have a DIY dude like me in a filthy T-shirt talking about fixing a water heater that failed because the idiot who installed it didn't know what a dielectric union was. Nobody ever explains how they lost their shirt buying their first place with credit cards. Who have you ever heard in an infomercial detailing the difficulties of overseeing the creation of a scope and order-of-work schedule when you only have minimal construction knowledge? No, the guys selling the fantasy are all laid back, sitting on boats, explaining how they have all the free time in the world after raking in $10K before lunch. Go to the real estate seminars. All of the speakers are emphasizing their free time...their time to do what they love...their time to spend with their families... They all make it sound like a machine that quietly prints money and makes it magically appear in your back pocket. What person whose only moment of happiness in their job is opening their bank account and seeing that the biweekly direct deposit of their salary is in wouldn't want a machine like that?

How to Get $10k/month Cash Flow: That's the Wrong Question

Bill F.

OP

Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes

6y

@Todd Goedeke great point, but BP favors those asset classes to a certain extent, plus the fact that the requirements for NNN ownership are a little higher from a capital and sophistication point of view limit the number of people who can/want to take that on. It is still a great option if you have the cash, they are very close to the passive dream everyone alludes to.

@Will Gaston that is awesome to hear! Congrats on the success, which has come after lots of years of hard work no doubt. You demonstrate a great point; you don't reach your goal by just sticking to one asset class or style of investing. You have moved around as different opportunities present themselves. You counter the too common dogmatic approach here on BP of "I buy C Class SFRs and they are the best thing ever, anyone who doesn't own these is a moron".

If you don't me asking, how many hours a week do you spend working on your 75 units and how many growing the portfolio?

@Juan Pardo great point, but I think the study a bit more general, kinda in the vein of all else being equal, someone likes their $60k/yr ultrasound tech job a lot more than a $25k/yr housekeeper at a hotel.

@Joe Splitrock valid critique, but how do you get the cash? 1. Have the capital to invest from somewhere else ( savings from W2, inheritance, other investments ...) or 2. wait the 15-30 yrs to pay off the loan. or 3. some hybrid or 1 and 2. If I had to get to $100k/month in revenue, I'd take the hybrid option, save my W2, do some value add rentals that I sell/refi over 10-15 yrs to take advantage of appreciation and debt pay-down in addition to cash flow with the goal of having the ability to buy the exact assets that fit my lifestyle in cash, but unfortunately I don't think that's a super popular strategy, more for psychological and cultural reasons.

@Steve Vaughan Big moves! congrats on the 11 unit and dipping the toe into the PM world, willing or not. Maybe it fits your lifestyle and personalty, maybe it doesn't, but you don't know unless you try.

"What kept us going was knowing we were front-loading and it would end. We knew once stabilized, the assets would perform for years to come."

THIS IS AWESOME, probably the best thing I've read on BP all month. You know what drives you and have found an investing style that suits who you instead of going with the herd. This outlook/method, would solve lots of people who want out of the cube's problems better than loading up on SFRs yielding $200/door/month FCF.

Successful investing has much more to do with psychology and personality than people realize...

2 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

6y

Originally posted by @Steve Morris:

That should have been done before the offer was made, and the offer that was made was based on that. Once the offer was turned down, or countered where the counteroffer didn't make sense, then move on. Hanging on just leads to you making a bad decision, trying to get the property. You don't want properties...you want deals...and there is a huge difference between the two.

0 Reply

Juan Pardo

Member since 2020 · 201 posts · 118 votes

6y

Originally posted by @Jim K.:

OK,@Bill F.

Let me clarify that every time I hear "best and fastest way" in this business, I'm really hearing "get-rich-quick." There is no best and fastest way to do ANYTHING in real estate, as far as I can tell. There is a small group of higher-probability ways to do something and a much larger group of lower-probability ways to do the same thing. The one great standout way, the royal road, simply does not exist.

The question, as I'm reading it, is how to go from taking home $120,000 a year FREE AND CLEAR (FCF= Free Cash Flow), to taking home $1.2M FCF.

Imagining that it's going to come from ONE WAY is a mathematical wet dream. So many single-family homes or so many apartments in apartment buildings equals net operating income for each minus capital expenditures for each equals free cash flow). Adding up, scaling up, zoom-zoom-zoom in the one way I'm using to make money off real etate.

By the time you get to that point, you're always buying assets with one hand and selling assets with the other. You're never just ringing the same gong over and over. If you're in my space, cheap rental SFR in low C-class neighborhoods, well before you get to $120K FCF per year in any given year you're renovating one or more to sell to the retail market and acquiring one or more for additional rental income. It's never just a simple math equation of real estate income from X number of houses that you're renting.

So there's never going to be a straight line in real estate investing from $120K a year to $1.2M a year. If it comes at all, it's going to come from multiple, diversified sources of income within RE, not just straight rental take. In single-family rentals, you would make money renovating and selling appreciated properties, you'd make money in rent, you make money wholesaling, you'd make money renovating and selling new acquisitions. It's all going to work together. We're talking a large operation, with a number of employees. And certainly by the time you get even close to $120K/yr FCF, you're also diversified into multifamily, commercial, moneylending, etc. That's just the normal order of things.

So I'd stop looking for the "best and fastest" straight lines. What's going to work for one person with one skillset isn't going to work for another person with another skillset. And then in the worst kicker, the ones that do the best in the beginning are often also the first to lose their shirts when thins go belly-up.

"By the time you get to that point, you're always buying assets with one hand and selling assets with the other." - I think that's a very good point that tends to get overlooked.

0 Reply

Juan Pardo

Member since 2020 · 201 posts · 118 votes

6y

Originally posted by @Justin Thorpe:

@Jay Hinrichs

You nailed it. There is indeed a massive undercurrent of subliminal marketing via social media and other channels pedaling GRQ (get rich quick) ideas many of which include RE as the ticket to nirvana and a 9-5 career as a loser convention.

I don’t speak for everyone but most wealthy people I know worked other professions and found themselves in RE as investors because it offered them a great avenue to invest the wealth they earned from their jobs, ventures etc. I am talking Wall Street bankers, Tech execs, Doctors, Attorneys or entrepreneurs.

Many if not all got their start in the 9 -5 / cubicle world. Also most are highly educated who painstakingly went to college for many years.

So at least the world I see counter argues with the world many “gurus” (guys who lecture to sell their books, videos etc) preach which looks down on the cubicle/ 9-5 culture and higher education (not to mention home ownership) but tells people to skip all of that “nonsense crap” and get right into RE as their fastest ticket to the country club. Makes it all look like the modern day Amway / Quixstar story.

In general, for very rich people, real estate is going to be a small part of their wealth, as the richest people mainly hold stocks or combine CEO roles with company ownership. So they got there on W2 jobs that turned into executive jobs that turned into company ownership.

1 Reply

Juan Pardo

Member since 2020 · 201 posts · 118 votes

6y

Originally posted by @Bill F.: