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

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

Marc Alexander
Member since 2021 · 18 posts · 4 votes

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!

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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
    4y
    Originally posted by @Marc Alexander:


    How are you measuring your "money" if you aren't comparing it against your original investment?  

    If you invest $200k in a property that nets $1k of cash flow per month, it sounds great on the surface.  You can say you're making $1k per month, but when you compare that $1k return against the initial $200k investment its only ~6% .  That is why percentages are very important.

    Using your $50k example, I would be looking for at least a 25% COC return ($1,050.00/mo)for my $50k investment. If I can't get that type of return then I won't go after the deal. I use that ratio for all my capital. It doesn't matter if I am going to deploy $100k or $10k, I want to see the same >25% ROI regardless of the initial investment amount. Using this method I am guaranteed to hit my target of X cashflow against my specific capital value.

    Just looking at monthly cash flow in a vacuum, without monitoring how much of a return you're making on your initial investment, I don't understand how you can measure progress.

    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%?

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  • Marc Alexander
    OP
    Member since 2021 · 18 posts · 4 votes
    4y

    There are a lot of things I don't agree with when comparing REI to stocks, but it seems the main point of your reply was centered around only needing 20% of property value in order to buy 100% of the property.  My response is that you can do the same with stocks, its called leverage.  Leverage is a common tool people use in the stock market to enter a position they don't have capital for.  Similar to what we do with a with a mortgage when buying RE.  

    Also, you can gain/lose money quickly in both markets.  Much more so with stocks IMO due to the high volatility, but that is another topic.

    Using your last analogy; I would take a 15% ROI over a 5% return all day long.  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.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Originally posted by @Marc Alexander:

    There are a lot of things I don't agree with when comparing REI to stocks, but it seems the main point of your reply was centered around only needing 20% of property value in order to buy 100% of the property.  My response is that you can do the same with stocks, its called leverage.  Leverage is a common tool people use in the stock market to enter a position they don't have capital for.  Similar to what we do with a with a mortgage when buying RE.  

    Also, you can gain/lose money quickly in both markets.  Much more so with stocks IMO due to the high volatility, but that is another topic.

    Using your last analogy; I would take a 15% ROI over a 5% return all day long.  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.

     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.

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  • Marc Alexander
    OP
    Member since 2021 · 18 posts · 4 votes
    4y


    "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.

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