How much equity needed to quit day job and live off cash flow?

How much equity needed to quit day job and live off cash flow?

Rental Property Investor · Los Angeles · Member since 2018 · 25 posts · 11 votes

So the title is overly simplified in that obviously no one can answer that question in the abstract for someone else.  But, how would YOU go about determining the answer for yourself?  What metric would you use to roughly calculate your anticipated cash flow from future equity invested?  

Perhaps look at this via a hypothetical situation (not my own circumstances).  Maybe you're about to get an inheritance that you believe will leave you with x$ in cash to buy real estate with and you want to figure out if it will make enough monthly cash flow for you or your spouse to quit your day job.  What back-of-the-napkin numbers would you apply to estimate what your cash flow expectations should be once you've invested the funds (knowing what you know about what you can accomplish in the market once you have the funds in hand)?  Similarly, perhaps you're busy building equity in your current portfolio and are fantasizing about what that equity would have to reach in order to restructure the portfolio to maximize cash flow to enable you to quit your day job and invest full-time.  What assumptions do you make in trying to pencil that out?

I'm fully aware that there are tons of variables (the use of financing or not and the terms thereof, the property type, investment strategy, etc.) - my point is to cut through all of that assuming that you know what you would do with the funds and can estimate what your expectations would be based on your experience.

Thanks for playing!

1Reply
40 views

2 Replies

Jump to latestLatest
  • Scott JensenPro Member
    Financial Advisor · Blaine, MN · Member since 2014 · 478 posts · 387 votes
    7y

    @Mike Akerly  That's a complicated question.  For myself the simple math I use is when annual net cash flow from rental properties plus 4% of my stock market investments equal up to my annual spending I have reached financial independence.  At that point I could do whatever I want without needing to bring in extra income.

    I know that expenses go up over time, (long term care, health problems, kids' college, etc) but as mortgages in the properties get paid off it frees up a ton of cash flow so my net income goes up as well.

    For me though, I'll always be working and I hope to never actually retire. I am just moving towards having more autonomy and doing work I enjoy more.  So, the cash flows from my real estate plus the cash I've saved is going towards me starting a business and doing what I love doing on my own terms.

    On one of the last BP or BP money podcasts the guest said FIRE to him was Financial Independence Retire Entrepreneurship.

  • Investor · New York, NY · Member since 2017 · 263 posts · 118 votes
    7y

    @Mike Akerly I actually gave a response on how to compute equity/capital required to attain a certain surplus cash flow on the following thread:

    https://www.biggerpockets.com/forums/311/topics/717102-what-is-the-easiest-way-to-get-3k-5k-in-monthly-passive-income?page=2

    The capital required is a function of:

    1) Property profitability (net cap rate after expenses)

    2) Leverage (debt percentage)

    3) Cost of capital (principal+interest percent of purchase price).

    You can use the following formula:

    Capital_Req = (1 - Debt_Perc) * Surplus_CF * 12 / ( Net_Cap_Rate - Debt_Perc * Prin_Int_Perc )

    E.g. (1 - 90%) * 4000 * 12 / (10% - 90% * 5.75%) ~=100k in Capital required

    A 10% cap rate, owner occupied property at 10% down payment and a 4% 30-year fixed mortgage through a no-PMI portfolio lender (the latter translates to ~5.75% principal+interest percent) gives you ~100k in capital required to generate 4k in monthly cash flow (assuming moving out of the owner occupied after 1 year).

    Hope this helps you! Let me know if any questions.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.