Please Evaluate My Plan

42 Replies

Thank you Erik for explaining how you forced appreciation.  I am finding that my rehab costs are about 5-7,000.00 per unit and am able to raise rents an average of $100.00 more that what the previous landlord was charging.  Are you planning on repositioning and selling with a 1031 exchange and get bigger and bigger complexes?  Are you planning on holding and paying off loan some day.  What is your end game?

Swanny

Hi Brent,

I have a realtor in Mira Mesa, where I live that I went to high school with and represented me on all the purchases in San Diego. They are now handling all the sales.  They haven't steered me wrong yet. 

Continue your path to financial freedom with passive cash flowing real estate!!! If a lowly paid school teacher can do this in a pricey place to live like San Diego, anyone can!!!!

Swanny

Hi Swanny,

I have a couple of possible exit plans:

1. If interest rates and thereby cap rates rise, I may 1031 exchange over into commercial NNN leases. Less cash flow, but no management. If I buy close to the cap rate peak, I'll see increases in value as cap rates go back down again.

2.  I can 1031 exchange into larger properties and keep going with the rehab work as long as I feel up to it.  

3.  I can hold it indefinitely as it will cash flow enough to live comfortably once it is up and running properly.

Erik

Hi Brent,

I have a realtor in Mira Mesa, where I live that I went to high school with and represented me on all the purchases in San Diego. They are now handling all the sales.  They haven't steered me wrong yet. 

Continue your path to financial freedom with passive cash flowing real estate!!! If a lowly paid school teacher can

Swanny

Sorry about reposting the same on my last one.

Swanny

Hi Erik,

I have thought about commercial with NNN leases too. However, I don't have any experience in that area. What are some advantages and pitfalls in this sector?

Swanny

@Michael Swan

Swanny,

I don't have any NNN leases, yet, so this is not from personal experience.

The advantages are:

No landlording duties, the tenant is responsible for all expenses and maintenance.

Long leases, sometimes with rent increases built in.  If cap rates decrease, you could see a significant increase in value.

Solid tenants, no wondering if they are doing a midnight skip.

You can 1031 exchange from apartments (or any other investment real estate) into NNN leases.

The disadvantages are:

You are overpaying for the real estate, a large part of what you pay for is in the lease, not the dirt and the building.  Thus, if the tenant elects not to renew the lease, you are left with a building worth much less than you paid for it, albeit at the end of a very long lease.

Long leases, if cap rates go up, you could see a significant decrease in the value.

The best analogy I can come up with is that it is a little like buying a bond, but you can do it with 1031 funds and you often have built in rent increases.  Your risks are that the tenant will go out of business or not renew the lease at the end of the term.

This would be my "retirement" strategy, removing me from the active business, but I don't want to do it unless the cap rates are higher, to avoid getting stuck if cap rates increase significantly thus reducing the value of the NNN properties.

I don't want to do major rehabs when I'm 75!  Nor do I want to pay hefty capital gains taxes and roll my equity into financial investments I don't have any control over.

What does your retirement plan look like?

Erik

Hi Erik,

I expect in ten years to have $50,000,000.00 in total real estate earning $1,000,000.00 in cash flow each year. I also expect to have a net worth of over $16,000,000.00. I will keep trading up, until I have two or three large apartment complexes and at least 1,000 front doors. I will defer, defer, defer, defer, and die. Hopefully, my kid will inherit the properties and do the same. The 1031 exchange is an amazing tool for financial freedom!! I will have to look into these NNN commercial with long term leases as you say. That might be another avenue to maintain my defer, defer, defer, defer, and die financial freedom plan. I just manage the property managers anyway. I too will not be rehabbing etc... in my twilight years. You can take that to the bank.

Have a great weekend my new friend,

Swanny

sometimes real estate is not about cash flow..  your midwest properties will most likely not appreciate as much as the one's you had in San Diego.

the midwest is about yield.. the coasts are about capital appreciation.

personally I would keep a few of the San Diego properties for diversification..or try to find properties that you feel will appreciate the most (SFH perhaps) in the area via 1031. long term you may do better with the San Diego properties. I could tell about low yielding properties in Brooklyn.. which over the coarse of 20 years appreciated over 10x.

That's an interesting take Marc,

These are Condos in San Diego. They have HOA fees etc.. Those fees are constantly changing. I would never have paid the prices they are selling for now. They would barely cash flow at these inflated prices. The return on equity currently is less than 3%. That is unacceptable. The only reason I purchased them originally was to eventually replace my W2 earnings as a teacher. I teach in the daytime at a catholic school and at least two nights a week at the local community college. I wasn't making enough W2 earnings. Soooooo, appreciation was just an incredible benefit that happened. I love teaching, but I just turned 50 and want to first replace all my w2 earnings and then far surpass those w2 earnings and then keep deferring taxes with the 1031 exchange and leave a significant economic legacy that my child could continue if he chooses. I just read Brandon's article on the 1031. It is amazing and clearly explains my defer, defer, defer, defer, and die strategy. The 1031 exchange is a phenomenal tool to build wealth and if you combine that with Multifamily business model and your clearly understand that apartment complexes are valued based on NOI and not comps, you can find high cash flowing properties that will give you 10%-20% cash flow and at the same time increase the NOI and at the same time increased the value approximately 10X the increased NOI.

My 3 rules now are 1. Never lose money 2. It must cash flow. 3. You CAN'T get rich slowly. 10 years from today, I own $50,000,000.00 in total value of all my real estate and $16,000,000.00 in net worth.  At the same time I will be cash flowing approximately $1,000,000.00 per year.  What happens if I don't reach my goals and only reach half.  $25,000,000.00 in total value of all real estate and 8 million in net worth and $500,000.00 in annual cash flow wouldn't be bad either.  Albert Einstein once said, " reality is merely an illusion, albeit a very persistent one."  My ladder was leaning against the wrong wall and I have moved my ladder against a new and improved wall.  As I said earlier.  If a lowly paid Catholic School teacher can do this, anyone can.

Education and learning from successful people that have already been down the path you are traveling is a sound way to approach you financial future.  I never take advice from people that have less money etc... than me.  I mean financially that is.  Right now after 4 short years, I have 4.5 million in real estate and 2 million in equity or net worth.  I take financial advice from people that have a lot more than I do.

Take care,

Swanny

Originally posted by @Michael Swan :

...I never take advice from people that have less money etc... than me.  I mean financially that is.  Right now after 4 short years, I have 4.5 million in real estate and 2 million in equity or net worth.  I take financial advice from people that have a lot more than I do.

... and from people who had a lot more at one point and lost it, I hope.  ;)

That's right Justin.  The ones that had it and lost it didn't follow those rules I speak of.  1. Never lose money.  2. It must cash flow.  3. You can't get rich slowly.  All three are must exist so you never lose it.  Speculation is the culprit here.  Not into gambling anymore.

Swanny

Swanny,

it's good to have big goals and I'm all for it! I too am going for the fourth level of REI ($1M/yr). I'm planning to get there by having $10M in equity, with a 10% cash on cash return.

What I find interesting about the big goals is how it forces your brain to focus differently.  If you set as a goal to make another $500/month, your brain starts focusing on how you can put in additional hours at work.  If you set a goal to make another $5K/month, your brain starts thinking about RE or starting a business on the side.  If you set as a goal to make $1M/year, your brain starts focusing on how to acquire larger properties. 

One step at a time, but it's easier when you have a clear idea of where you are going and why.

Erik 

Great point Erik,

Whatever the mind can conceive and believe, it can achieve.  That was a clear point that came across in Napolean Hill's book, Think and Grow Rich.

Swanny

@Michael Swan

Swanny,

A $50M real estate portfolio will keep you rather busy...  even if you are only managing the managers at that time.  Do you have a plan for scaling back your personal involvement in the business?

Erik

I again Erik,

Right now I teach during the day full time and teach 2 nights a week and Miramar College.  If I could just focus on my real estate eventually and manage the managers, that would be an incredible retirement for me.  If I do this right, in the next ten years, when I turn 60, I will most likely be just managing the managers.  Maybe my son will take over someday, when I am no longer interested in working at all.  Who knows.

Swanny

@Michael Swan

Swanny, 

you seem like a very organized person, have you made detailed plans to get you to your desired exit point in 10 years?  You are working a lot in your regular job, will you taper off, or go cold turkey once you hit a certain income from the real estate?  Have you set up target income levels from the real estate portfolio?

I was (still am?) self employed, so I was able to taper down the regular job as I tapered up the real estate.   Even though I have a manager at each property, I am swamped running the rehab projects.  Once the rehab is done, I can slow down a little and just focus on managing the managers; or more likely, buy another rehab project...

BTW, I still keep an office in San Diego, on Black Mountain Road, about 2 blocks south of Miramar College.

Erik

Hi Erik,

I live in Mira Mesa. What a small world.  I have my 6 months plans, 6-24 month mid term plans and my 24-36 month secondary mid term goals and my 36-48 month long term goals etc.. I have also outlined the size of complexes that I am continually trading up to achieve these goals.  Eventually, I have 2 or 3 large multifamily complexes and 1000-2000 front doors.

Swanny

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here