Financial Plan to $100K yr income

47 Replies

This is uncharted territory for me.  Am I on the right track?

Goal: Generate $100k a year net income from rental real estate.
Background: Currently own a few SFH's and a condo from early 90's
I have long term W2 income, current ratios are good, and good credit.
Plan: 50 units @$200 minimum net per door to account for vacancies.

$50K per unit at maybe 60% occupancy so maybe 85 units total. The cap rates are determined based on actual occupancy and gross rents so this would be paying for the 51 or so units right?

Thinking maybe about $2.5 million?? if 5% down $125K with seller carrying a second for the other 15% and getting a Freddie Mac Small Balance Loan program.. not sure if a seller second would be allowed.

What might this look like..
Prefer A properties but understand this might not be realistic without starting with a huge amount of capital. B properties would also be ok (not sure if this can be done).

I have worked way too hard to be willing to allow for too much risk of the gains we have made over time and money we have saved. I would like to factor in a realistic amount of money that would be needed in reserves to prevent a problem with a property resulting in foreclosure because I didn’t have either enough money set aside or don’t have access to the funds needed to do the repairs. How much would be recommended? I would like problems to be bumps, not the end game.

I have a paid off property worth $270K and I prefer not to sell it, but to leverage it in some way. I understand a blanket loan requires 5 properties and a minimum loan size of $500K. A concern I have with a blanket loan is the higher interest rates and lack of flexibility, in addition to the prepayment penalties. Another concern is the short term loan length of 5-10 years with rates at a historic lows. I knew someone who lost their home in the 80’s when rates where in double digits. I don’t know if this will happen again but I know it has happened in the past.

I would like something I can hold long term that will be solid.

I also have about 3 more years to draw on a unused equity line of $45K and then 10 years to pay it off.

It would probably be best if it is a property(s) with upside potential i.e.. under market rents due to outdated kitchens/baths or older landlord who has allowed a property to be in some disrepair (not to bad though). Or maybe it is in a good area but due to mismanagement has vacancies that can be solved.

Maybe get a property(s) with seller financing or 10-15% as a second to a commercial loan or a cross collateralized loan. Even if I could put more down I am not sure that it would be a good idea because it might be better to have the money in a reserves account.

I have great 30 year fixed rates on my other properties and want to keep them separate.

I would rater develop a solid game plan and get my ducks in a row than jump into something that I will regret. With a plan I will know what I need to shoot for and start determining the steps I need to take.

I understand there are more details and variables but wanted to take a shot at this and see what people think.. Crazy or possible?

@Anna Shaver  

Are you only looking to do this with 1 large property?

100k is a good goal.  48 units across 12 4-family properties netting $175/month/unit gets you the there as well.  Same with 50 SFHs, etc.

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Agree $100k is a good goal.  Just wondering what the thought process was for $100k?

@Aaron Montague I am not sure I will be able to find SFH's in the price range needed to cash flow in better areas. It would be helpful if it is not too many properties because I do have a full time job and currently use property management for all but one. I don't want to manage the properties myself. If they were 4 plex's that would work too but I don't know how long it would take to find enough. It just seems like it might be more straightforward with a larger property or a few larger properties.

Originally posted by @Anna Shaver :

This is uncharted territory for me.  Am I on the right track?

Goal: Generate $100k a year net income from rental real estate.

Just curious.  First two sentences seemed most important out of the whole post with the least amount of detail.

@Kirk R.    Up until more recently I have been more interested in appreciation.  The thought of being able to not have to work as hard is appealing.  I work in sales and sometimes it feels like a hamster wheel because if you don't make sales you don't make money.  I have always had consistent income but would like to not have it be a requirement if that makes any sense.

Like anything a plan takes time, if I don't figure out the process, I won't be able to take the steps, get the education, and put in the time needed to achieve it.  Where we are now didn't happen overnight, it was a long process with careful spending along the way.  

@Anna Shaver  I own one property that I rent out rooms in and pick up leaves mow yard etc.

Right now considering if I really want to take on a 2nd.  I have a downpayment grant I'm elgible for.  So I hate to not take advantage.  But, right now life is pretty good so wondering if I shouldn't just work to pay off the one I own and reduce my risk and continue enjoying life - dang grant.

HI Anna,

If you're taking risk on a new venture perhaps you'd like to make sure the other parts of your financial plan are stable? Like 30 year fixed loans or obtaining money with fixed payments so you can manage your risk accordingly in your other investments while you focus on your new project (risk mitigation).

Id be happy to review your current scenario to let you know what opportunities may be present. PM me if you'd like to chat.

@Albert Bui   Yes, I agree, I am signing this morning to make the last loan a 30 year fixed so we will have only 30 year fixed rates to remove any uncertainty on that end.  Making other money fixed rates, are your referring to the unused equity line or if we take on any new loans?

I will also PM you.

@Kirk R.    It depends on what your goals are.  I have had different goals at different times in my life.  Right now, I need to start saving for my daughters college education, and want to have the money to pay our own house down (over time so I won't be past retirement when it is paid off).  Later I won't need that but will want to make it so my husband doesn't have to work as hard, he is on call 24 hours a day and has been for a very long time which is hard on a person.

Depending on the time you have for your down payment grant, your current financial situation, and the cost of the properties you would be looking at you can determine what your next move should be.  For you maybe you could see if your roommates are willing to move with you and rent out your current property.

Hey @Anna Shaver  - you've got a great plan and it is certainly doable!  I don't know that you'll be able to find Class A properties at $50K a piece that cashflow $200/door.  If you want to be in top quality areas/buildings then you'll generally have to sacrifice on price and cashflow.  I'm also confused where the 60% occupancy number comes from...that's ridiculously low and you'll have a hard time building a business/income off of that.

Your post seems to be all over the place mixing in long term goals with short term situations.  I'd suggest starting where you're at today and defining some milestones that will ultimately lead you to that $100K/year of income.  A good starting point is figuring out how much cash you have available for acquisitions and start looking to put that money to work.

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@Michael Siekerka   50 units after taking into account the vacancy, so actual number of units would be around 80-85.  Apartment buildings are valued based on their net income and if I am understanding this correctly would give me around 30 units to rent which would increase the value of the complex.  I have heard this referred to as the upside potential.  You can do it with the vacancy rates or with improvements to raise the rent and increase the gross income.

It is referred to in podcast #47 with Joel Owens.  He recommends a property with 40-70% occupancy as the sweet spot.  If it is 85-100% rented you don't have the benefit of as much of an increase increase in value.

I am hoping because of the size this might not be a property that would be as sought after.  It it were larger you would have a greater number of larger investors interested.  I am not sure what the 3/2/2 of the apartment complex's are that is in the greatest demand.

I just have been seeing posts recommending coming up with a plan, so I wrote it out at lunch yesterday.  I decided, ok, so if I were to do this, how would it work, and would it be possible without being a long shot.

With any plan it can be tweaked an changed, but first I would like to work through a sample scenario.

I am not sure if something like this would be financed at 6-8% or what.  I would like to work it with both numbers to see how it would look. If anyone has examples of actual costs for number of inspections, what they are called, and the closing costs on commercial that would be very helpful.  Or if anyone knows of a post(s) that run through this.

So are you looking to purchase an ~80 unit complex/building that is ~60% occupied?  You're definitely not going to find any Class A buildings like that.  You'll be lucky to find a Class C building like that and in my area they're typically priced like they've got 90% occupancy because "the potential is there".  Even drug havens in bad parts of town that I would never consider investing in typically have 75%+ occupancy.

Like I said before - it's good that you've got a goal laid out but from your post it doesn't seem that you have any sort of plan to get there.  Are you buying 50 SFRs over the span of 10 years or an 80 unit building next week?

All of the questions you're asking have different answers depending on whether you're buying SFRs, small multis or large multis.  Once you have an idea of what you want to invest in then the questions will be easier to answer and it will be easier for you to formulate a plan.

The suggestion @Joel Owens  made in the podcast is geared towards complexes with a larger number of units which requires a lot more capital, time and effort to get from 60% to 85-90% occupancy.  I know a local company that does this and they're dumping money into these 200+ unit complexes for 2-3 years before seeing any type of positive cashflow.

@Michael Siekerka I don't want to do this with SFH, unless it was with a much smaller number. I don't want low cost properties in bad areas. Right now, I am interested in exploring the idea of 1, 2, or 3 buildings. Prefer one or two because then you can have on site management. So if this were multiple 20 or 25 unit complex's that could work too. As I mentioned previously I do have a paid off property worth $270K and could mortgage it or sell it to do this. I prefer not to sell it if I can.

@Michael Siekerka

Are you saying they aren't making any money for 2-3 years because you are factoring in the repair/renovation costs like repaving parking, roofs, repair/replacing carports etc. ? If this cost was factored in and wasn't part of the holding costs wouldn't the complex be able to cover these costs?

If you have paying tenants and some empty units it would give the ability to renovate without having to wait for each tenant to move out to cycle through the upgrades.  You could offer your newer units to some of your great tenants and renovate the old unit.

If rents are under market I agree you typically would want to bring them up slowly to keep the income coming in.

That came out wrong, if the cost of the up front repairs were a separate number,  would the complex(s) be able to debt service themselves.  And I am interested in 2/1 or 2/2's not 1/1's

Yes, the complexes would be able to service the debt as-is. The problem with something that is such low occupancy is that a lot of lenders won't want to touch it (especially if you don't have experience repositioning a troubled complex). Also the cost to go from 60% occupied to 90% occupied could be close to the acquisition cost and generally isn't going to be financed - especially not at 95% LTV.

An example of a project the local company did was purchased at 55% occupancy for about $4MM.  They put about $3MM into it to renovate and bring up to 95% occupancy.  They were able to get higher rents and much better tenants with great cashflow in the long run and were able to secure solid financing once the project was complete.  BUT, they had to fund all of the $3MM in renovation costs with private investors and/or their own funds and had to come to put 20% down just to acquire the complex.

What you're wanting to accomplish is definitely possible, but it will take a lot of work and require a lot of capital.  You can spread the costs out over a long period of time, but it's difficult to turn a struggling property with high vacancy around without a complete, up-front overhaul.

Hi Anna,

The first thing I do with a new client is I have them fill out a PFS statement where I can see their annual income with their job or business and their net worth and liquidity positions.

Then we usually hop on a call for initial discussion. I know by the PFS statement what the capability of the buyer will be on their own for deal size.

I am glad you listened to my podcast and hopefully others as well.

There is a lot more that goes into it then what I have time for in a hour segment. It barely scratches the surface.

@Michael Siekerka  In the project you are referring to how many units was it?  What percentage of occupancy do you think the commercial lenders would like to see that would still have some growth potential?

If I started with a smaller complex would that be helpful?  I don't want to go too small if possible but am open to suggestions.