Feeling a little lost as to the best way to proceed

8 Replies

I'm in the very early stages of educating myself as it relates to REI, but I've started thinking about what kind of path I want to follow because I believe it is important to have a goal, or at least a path, in mind.

That said, my short-to-mid term goal is to achieve 3k/month in passive income within the next 6 years. When I say passive, I mean as passive as possible.

I have considered multiple real estate strategies and I gravitate towards renting, because it seems to provide the lowest potential time investment after the systems are in place.

However, in my market, it seems like I am doing well to achieve $100/month in cash flow after all other expenses have been accounted for. Here's an example of a recent analysis that I did. Granted, I am still extremely new at analyses so there may be some inaccuracies, however, I am trying to be as conservative as reasonably possible (i.e., perhaps I am allocating too much to CapEx each month?).

Ideally, I would find a halfway decent deal on a multifamily so that I could house hack. That would, presumably, free me of a monthly rent payment and also, hopefully, provide a slight positive cash flow on top. To me, this seems to be the most powerful way that a beginner can start because of the fact that multiple units are being purchased at once for a single, low down payment with FHA, thus, more cash flow power (as opposed to buying a SFR).

Unfortunately, multi families seem to be hard to come by in my market. There are a ton of SFR, but, as stated earlier, I think I would be doing well to cash flow $100-$200 each month after all expenses are paid. So why not just get a ton of SFR? Well, I am limited by cash reserves and the ability to pony up 15-20k as a down payment on an ongoing basis. And let's say I drop 20k on a house that generates only $100 cash flow each month; it will probably be at least another 6 months to a year before I'm able to amass this amount again from working my day job. In the meantime, I'm only (hopefully) getting an additional 100 bucks each month. While this is at least something, I just want to make sure that I'm maximizing my current cash reserves before exhausting it on a single option which provides a low amount of cash flow.

So I'm just trying to work through all of this and determine what the best course of action is with respect to making progress at a reasonable pace in my market. Thoughts?

@Lucas Mills

My first advice would be to attend your local REIA and network with other investors.

There are other avenues of REI that you could look at that are completely passive. You could consider being a private lender. You loan your money to other RE investors who need short term cash to fund their deals. This can be done with retirement and/or non-retirement funds. It would take a while to get to the point where it is going to generate 3k per month, but it is possible.

If you are pre retirement age, then you wouldn't want to invest with the intention of using the earnings to fund current living expenses.

There are many avenues and it may take a combination of different ones to reach your goals.

You could also consider partnering with one or more other people so that you are not coming up with all of your own money to fund your deals.

Good luck on your journey!  Hope this helps.

Ed

Originally posted by @Edmund Ricker :

@Lucas Mills

My first advice would be to attend your local REIA and network with other investors.

There are other avenues of REI that you could look at that are completely passive. You could consider being a private lender. You loan your money to other RE investors who need short term cash to fund their deals. This can be done with retirement and/or non-retirement funds. It would take a while to get to the point where it is going to generate 3k per month, but it is possible.

If you are pre retirement age, then you wouldn't want to invest with the intention of using the earnings to fund current living expenses.

There are many avenues and it may take a combination of different ones to reach your goals.

You could also consider partnering with one or more other people so that you are not coming up with all of your own money to fund your deals.

Good luck on your journey!  Hope this helps.

Ed

 Hi Ed -

Thanks for the input. As to what you said here:

"If you are pre retirement age, then you wouldn't want to invest with the intention of using the earnings to fund current living expenses."

Are you referring to being a private lender, investing in real estate, or investing in general? I thought that one of the major drives of people who are investing in real estate is to achieve "financial freedom" wherein they are generating enough income on a monthly basis that they technically would not have to work if not desired (save for perhaps a few hours a week to keep the wheels turning) - or am I misunderstanding you here?

I have to say that is my primary motivation. I would, in ~6 years, be able to get to the point where I own multiple properties that are cash flowing ~3k/month combined. That doesn't mean that I will necessarily quit my current job and just "do nothing" once that point is reached. And of course I would not stop investing in retirement at that point, either.

@Lucas Mills

Sorry for not being clear.  I meant that if you were going to use retirement funds for private lending, then you would not want to include the income you received for lending these funds in your 3k per month goal. 

You are correct in that many investors use real estate investing as a vehicle to achieve financial freedom.  You are also correct that the monthly income generated can enable someone to quit working a "normal" job if they desire.  One way to figure out your "freedom number" is to take your monthly income goal and divide it by amount of cash flow that you can expect to receive per unit.

IE:  $3,000 per month / $100 per unit = 30 units

The amount of cash flow that can be generated per unit varies from region to region.  If after analyzing many different properties in your area you find that it is hard to reach your goal, you have several choices.

1.  Try to find a way to get a premium rent for your units

2.  Try to cut expenses to increase the amount of cash flow you keep

3. Look for distressed property where you can gain value through sweat equity

4.  Look outside your area

One of the things I find so interesting about REI is the amount of imagination you can use to try and find ways to get to where you want to be.

Ed

Thanks again @Edmund Ricker

This is some good stuff to think about. What I'm primarily trying to ascertain is the best way to begin this journey.

I'm ok with potentially having 30 units. However, to buy my first one I may need to drop 20% for the down payment if it's a SFR (since I couldn't use an FHA loan).

Doing that will almost wipe out my current cash reserves, which means it will be a slow grind back to another 20k or so (probably 10-12 months).

Conversely, I suppose I could try the fix and flip strategy to earn some cash at a faster rate, and then be able to buy more rentals at once, but I am more averse to this strategy because I lack the requisite knowledge/skills/tools for rehab and because it seems a bit more risky going into a potentially problematic property (obviously any property could be problematic but with a fix and flip you KNOW there are going to be problems).

So I guess what I'm looking for are some thoughts as to the most intelligent way to utilize my current cash reserves (about 20 - 25k) in a way that doesn't immediately stunt my growth but also with respect to my risk tolerance and knowledge/skills (or lack thereof). I.e, does it make sense to deplete my cash reserves for a rental that cash flows $100 or $200/month and then just rinse and repeat every 10 months or so? Should I really hold out for a multi family to come available for better potential cash flow? Should I really consider educating myself and gaining the skills necessary for a rehab in order to do some flips or create greater cash flow in a rental? Currently, I would much prefer to contract that stuff out, but can you still make money this way? These are some of the thoughts running through my head. I just want to use my 20k as intelligently as possible, especially at the beginning.

If you can save 20k in a year, do it. While you are looking for a property whether single or multi, keep saving. Think about getting a line of credit with your bank or credit union as a "Just in case". This way if your cash is depleted next month and something comes up, you have the line of credit to use.  And since you are smart and live well below your means, you can pay off the line of credit if an emergency arises.

Lets say that you can in fact purchase 1 property every year for 5 years with 20k down. Now we are at the end of year 6 and you have your 20k ready to go. Instead of buying another property, you put that money down on the mortgage of 1 of your properties. It should take you about 4 more years to pay one of them off. Instead of 100 per month cash flow with a mortgage, 1 of the properties has no mortgage. You wll have closer to 600 per month cash flow on that one property plus 100 on the others or 1000 per month. Now at the end of year 7 you have 12,000 from cash flow and 20k or 32,000. You will probably have to wait one more year or at the end of year 8 to pay off another one of the properties. So now you have 2 x 600 = 1200 + 300 = 1500 per month or 18,000 per year plus 20k per year or 38k to put down on another one of the houses to pay it off. I think you get the point. You can pay off your houses from your work income and the cash flow as quick as possible because when you pay off the mortgage, you supersize the cash flow.

Point is: when you have 5 properties paid off at about 600 per month you get 3000 per month. 5 is a WHOLE LOT easier to manage. BUT if you are not ready to retire yet, you could use the 36k cash flow plus the money you save every year to buy a new house every 2 years in cash!!! This would increase your monthly cash flow about 600 each time.

@Rick Pozos that makes sense.

Let me ask another question - do you think that it makes more sense to get houses with 20% down, or a combination of 3.5% and 20%? In other words, every year I could do another house at 3.5% (FHA "house hacking" style), but the cash flow will be less (somewhat substantially so) on these rentals in which I've only paid down 3.5% of the mortgage. However, that does mean that by year 5 I should have more rentals than I would've otherwise.

Also, as to your point about paying off the mortgage at a certain time -- at what point does it make sense to start paying off mortgages instead of buying more houses? I'm not sure what the math looks like for this as it seems there might be many variables - it's kind of tough for me to wrap my mind around.

You could also seek to use the BRRR method to get some or all of your money out to put towards another property. In any event, it can be difficult to build a rental portfolio off of rental funds. While financial freedom is the goal it isn't necessarily attained quickly going that route.

@Lucas Mills hopefully this just gets you thinking about the many ways you can do this. You can stop at 5 properties, you can keep going until year 20 or 30 when the first one is paid off just from the payments. Your life is your life.

One thing to realize is that you can buy properties that are well below market so that they will have more of a cash flow than $100. When you buy from distressed sellers, you may be able to get super duper deals that cash flow more. You may decide that rentals is not for you and you want to stop at 2 or 3 of them. You may want to sell those 3 properties and create a note with them. There are way too many things to do with real estate. You have to decide what YOU want to do because it is your life. I can tell you what I am doing, but it will probably change somewhat over the next few years with what I believe is happening in the market.

Have fun and do what makes sense to you for you and your situation!!!