Investment strategy by the numbers

6 Replies

Hey all,

First post on BP!  I remember a few years ago after reading a few articles about "what's your magic number" (the amount of money you need to retire), I determined my number (a goal to set out for).  It was close to $3 mil.  Pretty far from that at this point in my life, but the more I think about it and the more I read on BP, maybe my (and countless others) thinking is a bit off.  I'd imagine I could achieve the lifestyle I want much earlier if I were to focus on cash flow rather than liquid assets.

My question is, if the goal is to get to a passive cash flow of $10,000/mo, what's a realistic amount of money to have saved up to accomplish this?  Note: this is more a question of "if someone could save X amount, they should be able to retire quite easily" -- assuming $10,000/mo is the goal.  Of course there's value in investing whatever capital is available now and re-investing the proceeds to get to the goal faster.  This is more of a theoretical question than a practical one.

Also, the focus would be passive investing.  My definition of passive would be buy/hold (with property management in place), notes, etc.  Something that would take a maximum of 15-20 hours per month.

Along with the amount needed, it would be interesting to hear *how* you would do it as well.  Focus your attention on one large apartment complex?  Turnkey investment properties?  Note investing across many properties?  Diversify?  Something else I'm missing that would be considered passive?

I'd love to hear anyone's response to this: from newbies to pros.  Thanks!

@Avi M.  

I had very similar conversation with another BP investor today. If your goal is to get $10,000 passive cash flow, then you first need to see what kind of properties will you buy. To keep the math simple, let's say you find yourself interested in SFHs that rent for $1,000/month and sell for $50,000. Assuming there is no financing, you will need 20 of these houses to get $10,000 net cash flow. 20 houses means $1,000,000 purchase price.

Now if there is financing involved, you will need more than 20 houses to factor in the Principal and Interest payment in your cash flow.

You will need to work backwards into all the numbers starting with $10,000 net cash flow number.

I did this by buying mix of SFHs and some small multi-units (2-4 units). How you arrive there will depend largely on what kind of capital you have available. If you had $1,000,000 available in cash, it will take you a lot of time and effort to purchase 20 houses. It will be lot faster and easier to purchase a big apartment complex assuming similar numbers.

I bought one house at a time based on capital availability and kept reinvesting the income into buying more properties.

@Sharad M.  Great info, thank you!  Based on your numbers and the 50% rule, we'd be talking about a 12% cap rate?  I'd imagine a bit difficult to find without taking on a bit of risk (tenant/area quality), but manageable.  It'd be trivial to tweak the numbers to figure out capital required at the various cap rates if someone wanted a slightly "safer" investment.  Nice of way of thinking about it.

Curious ... if you had to do it all again *with* having capital, would you go straight for the apartment complex?  It seems like a smarter investment, but I'd feel a bit uneasy putting all the eggs in one basket.

@Avi M. In my market it's not very hard to get the 12% CAP rate based on 50% rule, so I have been very fortunate in that regard. Always beginning with the end goal in mind makes me stay focused on the steps I need to take.

If I had the full capital available, I wouldn't probably buy a big apartment complex, I THINK I would have probably bought a mix of diversified properties from SFH to mid size multi units, but I guess I will never know :-)

You also should consider your time frame. So if you bought X houses and financed them you would have, hopefully, a small cash-flow after PITI. But over time those mortgages get paid off. If you use the free cash flow to pay off first one and then another property, at some point you will have everything paid off and your cash-flow drastically improves.

I am a Dave Ramsey fan so I would put all the extra cash-flow on one property until it is paid off, then the extra cash-flow from that property goes to pay off the next one.  Once you get a few free and clear cash cows you will be paying things off very quickly.  depending on your price point and rental rates you will get to the point where, if you want, you can buy a house or two for cash every year.

@Bob E.   I definitely agree this is the way to go. My thought would be to at least have four properties (to my knowledge, this is the soft limit without going through portfolio lenders?) leveraged at any given time. As you pay off each one, you can add one more to the portfolio as a replacement.

Assuming too that the rates would be favorable rates if you went with a 5/1 ARM for example, fully knowing that the property will be paid off within the five year period.

@Avi M. I like your thinking on the 5/1 ARM and paying it off early. Makes a lot of sense.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.