Hello BP, this is my very first post. I'm getting back into the real estate game after being dormant for well over a decade. My goals are to generate enough passive income to not have to worry about my 9-5 anymore. Ultimately I'd like to retire in ~10yrs and live 100% off passive income, but I think I can actually get it done sooner than that based on the numbers I'm seeing. This is where I need a reality check... I feel like I might be oversimplifying things a bit and would greatly appreciate another perspective on what my goals and expectations are. My high-level plan is to leverage all cashflow producing properties in my general area (NE US) using #1 the equity I currently have in my SFH ($100k-$150k) and #2 using the cash I've been saving/investing ($200k-$300k). Currently I have $400k-$450k available to me as 20% down payments on high cashflowing properties. I don't feel I'll need to use all that capital because I have the ability to raise funds thru investors, but I want to have a proven track record (couple years of solid returns) before I would feel comfortable bringing people on. The numbers I've ran show there are several units in my areas generating +$1k month in positive cash after paying all expenses (mortgage, ins, taxes, any utilities & 1mo vacancy/repairs, self managed) using anywhere between $45k-$55k down to achieve 20% on a 3% conventional loan. On average, I am seeing $1k/mo in cash flow for a $250k-$285k property, thats a +20% return in the first year. The really good stuff is showing 22-24%, but I am trying to be conservative with my forecasts. Scaling up, using all my available capital (I don't feel I will need to, but worse case scenario), if I am efficient with my purchases and stay around a 20% return, which doesn't seem too unrealistic in my area, i should be able to get ~$90k year in passive cashflow in 8 deals or less. That is enough for me to retire on... what am I missing? I feel like the numbers are almost too good and there might be some fundamental cost or expense I am overlooking. Will lenders keep giving me loans as long my debt to income ratio is favorable or will I be cut-off at some point because I am too leveraged? I am currently getting pre-approvals with 2 different brokers and have several properties I am eyeing (both on and off market), ready to inspect and make an offer... Any advice would be greatly appreciated!

REI is one of the few investments where you can put your money in and get it back quickly...but continue to get returns on your initial investment. When you invest in something, like a stock, you get a percentage return based on the amount of cash you put into it. That investment continues to pay, as long as you leave your money in. If you take it all, or part of it out, the return is reduced proportionally to the dollars you left in. What you're really doing is buying time. As long a your cash is still in the stock, you get paid. When it leaves, you don't. Not the same with REI. You can buy 100% of the value of the property, for only 20% cost...and you don't have to pay for the rest (rent does that). The appreciation (growth) is based on the actual property value, not how much cash you put in (what it cost you). The CF keeps coming on top of that. IF that CF returned all of your cost (cash in/cash out) to the point where it paid you back completely, you still had ownership of the property. The returns are measured in dollars: CF, appreciation, etc...and once you recover all of your cost (the faster the better), the return becomes infinite. Let's say you bought a stock worth $100k. Your cost was $100k. Let's say you bought a $100k property. Your cost would be $20k, which means if you had that same $100k to work with, you could buy 5 $100k properties for a total PV of $500k (not just $100k). Here's the reason why I say percentages lie: Suppose I said the Stock went up 15% per year (applied to both dividends and value) and the RE only went up 5% per year (applied to both CF and PV). Who got the better return? 15% or 5%?

"As long as you're comparing ROI against your initial cost basis then you will always be able to see which is the best performer." There is no way 5% beats 15% if you compare apples to apples by looking at the cost basis when calculating ROI. Cost basis being the key phrase here. 15% is always a bigger piece of the pie than 5%. The only way I'd want the 5% is if we were comparing debt, then I'll take the lesser of the two.

How long can you leverage for purchase of a stock. Can you retain the leverage on the stock for 30 years? 5% will win everytime over 15% if you are applying the 5% to REI and the 15% to the SM. I can tell you didn't extrapolate the numbers out.

Can I get a reality check on my goals and expectations?

Eric James

Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes

5y

The question is, if you're numbers are accurate. Is the $1k cash flow for a $280k property a small multifamily? SFH in that price range don't usually cash flow $1k/month with a 75-80% LTV mortgage.

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Joe VilleneuvePro Member

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

5y

With that kind of working capital (seed money), you shouldn't need any other investors money. I'm not familiar with your chosen area to invest in, but with that kind of seed money, there are a number of areas I am familiar with where you should be able to get where you want to get within a 5 year window.

Just don't spend any of that money...use it to infinity, but NEVER spend your seed money.

1 Reply

Marc Alexander

OP

Member since 2021 · 18 posts · 4 votes

5y

Originally posted by @Eric James:

The question is, if you're numbers are accurate. Is the $1k cash flow for a $280k property a small multifamily? SFH in that price range don't usually cash flow $1k/month with a 75-80% LTV mortgage.

Yes, that is the question...

You are correct about not being a SFH, they are mostly duplex-triplex.

1 Reply

Marc Alexander

OP

Member since 2021 · 18 posts · 4 votes

5y

Originally posted by @Joe Villeneuve:

With that kind of working capital (seed money), you shouldn't need any other investors money. I'm not familiar with your chosen area to invest in, but with that kind of seed money, there are a number of areas I am familiar with where you should be able to get where you want to get within a 5 year window.

Just don't spend any of that money...use it to infinity, but NEVER spend your seed money.

Agreed about not dipping in the cookie jar.

Good to know the numbers I'm getting aren't unheard of in other markets.

Can I get a reality check on my goals and expectations?

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