$500,000 Passive Income Per Year With Rental Properties?

50 Replies

Hello,

This is my first post, and am still very much in the learning/education phase of my REI journey. (So please dont be too hard on me!)

I'm 26 and my goal is to make $500,000 a year in passive income by acquiring rental properties. I want to reach this goal in 20 years. I've done some rough estimations using the following criteria.

Rentals Acquired Each Year: 5

Avg. Cashflow per property per month: $350

Avg. Purchase Price: $100,000

Down Payment on each house: 20%

If I were able to stick to this plan, I would be making $441,000 a year with 110 rental properties by the year 2036. That's AWESOME except for one thing: I would be in debt around $8 million. 

Here is my question:

Even though I am making $441,000 a year, it would take 16+ years to pay off all my debt even if I devoted 100% of the income towards paying off the mortgage. The thing about rental properties that attracts me is the "worry-free" mindset that comes with it. However, due to the massive leverage that is being used, and thus huge debt, it doesn't seem like such a great option anymore. Thoughts?

@Brandon Low  , why would you even care about the $8M in debt?  

If you purchase good deals and plan for ALL expenses including the debt service, then all that debt is being paid by the tenants and there is still money leftover for you.

The leverage isn't the problem. The problem is finding 110 properties that meet this price point and cash flow criteria, the cash for a 20% down payment on each of them, and financing for all of them. Also, you being in San Fran makes this unrealistic in your market. You'd have to have a good understanding of another market where prices meet your criteria and also a strong network to make 5 properties a year happen. There's a lot of variables to getting to that level.. Where there's a will, there's a way though. 

@Brett Russell  - It looks like you've answered my question with another question. I guess being in debt (even if its huge) doesn't really matter as long as the tenants are the ones paying for it. But are there any scenarios that can happen where having such a large debt could come back and haunt me?

@Kyle Doney - Yes, there are definitely a lot of holes in my plan and things that I have not considered yet. I just wanted to see if having such large debt would be viewed as a bad thing. Now that I know it's a moot point, I can start refining my plan and investing more time in learning.

Thanks for your advice!

Awesome goal Brandon. I think it's great you set your sights high. I, like you, am young with lofty goals. Those goals should be the motivation to educate yourself enough.

I see a couple of potential issues. As mentioned earlier, your region would limit your ability to find adequate rentals at a reasonable price. Also, the issue of down payments could lose a problem. Listen to a few podcasts about creative financing and lending to give you some ideas.

Hope to hear more about your adventure. All the best.

Originally posted by @Jay Hinrichs:

@Brandon Low

you will need appreciation to off set cash flow

Can you explain what you mean by this?

On BP, or on any other site that deals in some way with investing or personal finance, you will get responses right across the spectrum. Some believe debt is bad and some believe its good. Ultimately, you need to use the "ability to sleep at night" metrics to determine what works for you.

I'm not sure what your analysis looks like, but being someone who loves spreadsheets, have you factored in the snowball effect of using the income (the $350 per door) to put money into new properties or pay down debt. The more income you can create, and the longer you can defer actually needing to use it, etc. 

Most banks, at least in my area want 25% down for rental property. If you want 5 properties per year that's $125k in down payments.

Also in your area I'm sure 110k homes that are rent ready are very hard to come by.

It's good to have goals but don't set the bar to high and get discouraged.

A few thoughts here:

First, I love the ambition! It's where I see myself as well.  

Secondly, this will not be a straight line progression, it will be an accelerating curve. As someone mentioned before, you probably don't have the ability to invest $125k per year of your own money right now.  However, in years 15-20, you may very well be investing $1MM of your own money per year.  It will snowball.  Start slow and steady and know your business inside out. 

Third, the most successful corporations in the world have billions of dollars in debt, and there is a good reason for this.  The key is having well managed and well used debt.  Buy at cap rates higher than the cost of your capital so you earn a spread on the money and you'll be fine if your properties are managed sustainably.  Leveraging for consumption is a problem: it increases your burden without increasing your means.  Leverage for investment is powerful: it has the ability to increase your means more than enough to offset any increase in burden.  

Best of luck!

Originally posted by @Brandon Low :

@Brett Russell - It looks like you've answered my question with another question. I guess being in debt (even if its huge) doesn't really matter as long as the tenants are the ones paying for it. But are there any scenarios that can happen where having such a large debt could come back and haunt me?

The main scenario would be where you bought bad deals and/or didn't account for all expenses.  IE didn't plan for vacancy or capital expenditures.  In those cases, a big expense would mean the property would take money out of your pocket rather than putting more into it.  

@Brandon Low   If your debt is 8M and you had been putting down 20% like you said, you would be a multi-millionaire worth 2M with a wheel barrel full of money each month.  So what's the problem again.... ?

319‑213‑7458 | Podcast Guest on Show #110

Couple of thinjavascript:;gs. I think if your goal is to get 400k a year in income from real estate, you're likely going to need to look at Multifamily to get the economies of scale.

That being said, the other thing I'd add is why you need to put down 20% on each of your deals for sf? Use hard money to buy and rehab. If you find the deals, your out of pocket should only be around 5% or so.  So if you're doing 100k deals, you're out of pocket should be around 5 to 6k.  

Another thing to keep in mind is that you're probably going to have at getting 110 homes is that you're going to have to hire some help to manage that many.  Unless that will become your full time job at around 50 or so. 

But here's the thing. When I first started, I was buying 3 houses a year. I did that for the first 6 or so years. Eventually, I reached a point where the business was able to feed more purchases and the lending really opened  - partially because the market improved and banks viewed sfh loans better and partially because I think I hit critical mass with the number of properties (18 at the time) and they viewed me as having "made it". 

I'm currently averaging about $400/mo gross profit per house and am now adding houses at a rate of about 8 to 10 a year. Hit 32 at the end of last year and picked up 3 more so far this year. 

I started with a HELOC of 43k. Haven't done a single flip. But have put every penny and then some (cashed out 50k of my 401k last year) back into my reserves and towards adding more properties.

I think my net on these 32 ends up around 8 to 9k per month.  To get to 35k a month, I'd have to be at 120 houses or so at today's numbers. But thats the one last thing I'd point out. Time is your best friend as a buy and hold investor. 

These same houses that are cash flowing 400 a month gross profit should be cash flowing 500 to 600 in 5 to 10 years. 800 to 1k in 15 to 20 if you some basic historical averages for rent increases and the like. 

And at some point, these houses start paying off and then the cash flow would really jump.

So, honestly, if your timeframe is 20 years or more like 25, I think you could realistically get to 400k a year in net profit from about 60 houses. Assuming you buy 5 a year for the next 4 or 5 years and then ramp up to say 10 a year after that and you're very aggressive in preserving your capital and paying down your mortgages.

If you could get to 60 houses in 8 years that have a gross profit (rent minus PITI) of 400/mo or more, you should be able to hit 400k a year in 25 years.....

And even if you don't, you should still have an incredible amount of cash flow of equity in those 60 homes.

I know, for myself, there's no way I would have ever been able to save up enough in my 401k to be worth a million dollars or to have a really good post-retirement income. But I took a 43k heloc and now have 33 homes and 2 more that will be closing next month and more net income than I have from a pretty good job.

But what I love more is that my rental income is only going to grow over time. Its not like a retirement nest egg where people end up spending a portion of it every year and having to wonder if they're going to out-live it.

As an investor with 30+ homes, my rental income will eventually reach the point, once the homes are all paid off, that I'll be making more money off the rentals than I'll need.

So, while the big picture in using sfh's to get you to that lofty income goal (and 400k is pretty lofty) may seem a bit daunting, the fact is that sfh's are probably one of the few investment vehicles on the planet that us regular people can get into at a relatively low cost of entry (I'm picking up 140k houses for a total of 5 to 6k out of my pocket) that can truly generate the kind of life changing wealth most of us aspire to have.

The key is picking a pace you can handle and working the deals. There is definitely a tradeoff in time to get to where you want. But if you love doing it and can see how its going to help you and your family in the long run, its the most rewarding thing you'll ever do.

And, lastly, lets say you have a goal of 100 homes and only hit 20, that shortcoming is still going to leave you with one of the best retirement funds you can possibly have.

20 homes fully paid off in 20 to 25 years? If they're worth 150k today, that would make them worth 300k in that timeframe based on historical doubling of home values. Thats 6 million dollars - each of which should be cash flowing, once paid off, 1k a month? I'm pretty sure that 240k a year would be better than any income any 401k could pay out. :-)

So, it looks like your plan overall requires $2M+ in capital with a 20%+ return consistently on each investment as it comes in the portfolio.  I suppose everyone would want this metric of performance, right?  Tough to achieve and highly ambitious for sure...but be encouraged that just developing a plan like this and moving toward it will yield so many new relationships, experiences and likely toward a particular specialization and investment structure that you could have never designed at the outset.  I say go for it and see where it ultimately leads.

@brandon 

@Brandon Low  I had pretty much the same plan to reach my goals then I got my first couple houses and decided it would be better for me to buy multiple "homes" at once via apt communities. You can reach your goals with homes, apts or any other real estate asset but I suspect you'll likely want to eventually scale up so you buy bigger and do fewer deals. 

Medium logo1Joe Fairless, Best Real Estate Investing Advice Ever | http://www.apartmentsyndication.com | Podcast Guest on Show #227

I think you max out at ten mortgages.  Its a good plan but maintenance, vacancy, repairs, and property management will eat up alot of your profit. My goal is to pay off onehouse at a time. I will take the profits and reinvest in other properties.   I hate paying interest to the bank.  

@Brandon Low  

Do yourself a favor and get the word "passive" out of your vocabulary. That is a word carelessly thrown about by people selling books or guru sessions.

110 single family rental properties is about as passive as a Mack truck going 70MPH. You will work hard, very hard, to acquire, renovate, manage, re-capitalize, and then liquidate each and every one of them.

Can you do it? You betcha. Will it be "worry-free" as you say? Not a chance.

Low,

Think you got plenty of advice already here but......

1) You can buy in other places from afar, you don't have to live there ok.

2) You said something about rentals being "worry free" or something of the sort - not true, there is an enormous amount of work that goes into knowing how to make rental units worry/input free. This will take you time and some bruises to learn and dial in.

3) These guys are right, there is "good debt" and "bad debt". Good debt makes money, bad debt doesn't, so don't worry about the issue of debt, it's all the particulars that make the difference.

4) The only thing that can hold you back or push you forward is yourself, so aim high my friend!!

** At the rate you would be going the debt wouldn't be an issue as much as trying to stay ahead of yourself with having a new bank to go to once you max out your loan limits with the current lender or having private financing on hand to mort the next deal.

Originally posted by @Brandon Low :

@Brett Russell  - It looks like you've answered my question with another question. I guess being in debt (even if its huge) doesn't really matter as long as the tenants are the ones paying for it. But are there any scenarios that can happen where having such a large debt could come back and haunt me?

@Kyle Doney - Yes, there are definitely a lot of holes in my plan and things that I have not considered yet. I just wanted to see if having such large debt would be viewed as a bad thing. Now that I know it's a moot point, I can start refining my plan and investing more time in learning.

Thanks for your advice!

 Yes. If you over pay for property and the market swoons and you suddenly can't get renters, man you are..........screwed. It happened to me. 

One of the reasons why I only do cash real estate now. 

I like your goal, but you have to be able to get the houses at the right price to make it workable.

Worry free rentals? I'm sure it's possible, not in my experience. But I'm sure someone here will say otherwise and that's fine and dandy! :)

Originally posted by @Brandon Low :

Hello,

This is my first post, and am still very much in the learning/education phase of my REI journey. (So please dont be too hard on me!)

I'm 26 and my goal is to make $500,000 a year in passive income by acquiring rental properties. I want to reach this goal in 20 years. I've done some rough estimations using the following criteria.

Rentals Acquired Each Year: 5

Avg. Cashflow per property per month: $350

Avg. Purchase Price: $100,000

Down Payment on each house: 20%

If I were able to stick to this plan, I would be making $441,000 a year with 110 rental properties by the year 2036. That's AWESOME except for one thing: I would be in debt around $8 million. 

Here is my question:

Even though I am making $441,000 a year, it would take 16+ years to pay off all my debt even if I devoted 100% of the income towards paying off the mortgage. The thing about rental properties that attracts me is the "worry-free" mindset that comes with it. However, due to the massive leverage that is being used, and thus huge debt, it doesn't seem like such a great option anymore. Thoughts?

A couple of things you are leaving out, appreciation and rental increases. Start slowly, you'll be amazed at how things will happen and how debt can be reduced over time, especially with appreciation.

I know a few people who make around $1m passive per year.  All are primary investor/owner of multifamily companies.  They are the largest single investor in all of their deals, but raise money for every deal as well.  Without getting into great detail, if you follow this model you'll need to own approximately 5,000 apartment units to hit $500,000 per year passively, assuming you own approximately 15-20% of each deal.

Wow! This forum is great... Thank you for all the helpful tips and different perspectives to think about! I've already learned so much in this ONE thread.

@Bradford Myatt - You are right. In my area, I could never dream of using this strategy! I am preparing myself to go out of state in order to carry out this plan. I am currently still researching which area's I would like to invest in. Thanks for the tip on creative financing!

@Wendy Noble - I haven't finished my spreadsheet (not even close), but I will definitely need to factor in the snowball effect. Once I have it all mapped out and have accounted for every detail, I will be glad to share it.

@Jason Vandermark - Good point on setting attainable goals. I would still like to strive for my original goal, but I am definitely plugging in different numbers to see how different scenarios turn out.

@Kevin Wright - Your comments about good debt and bad debt definitely help me put it in perspective. Being in debt $8 million sounds like a really scary idea, but I know that I will have to use leverage in order to reach my goals. I suspect that I will feel less and less worried about debt as I become more experienced.

@Brett Russell - I see, that makes sense. Hopefully, if I ever reached a critical mass of 100 properties, I would most likely be very experienced and would have a majority of my properties fall in the "good deal" range. My question is: What happens when we experience another real estate crash? Are cashflowing properties more "resistant" to a real estate crash? I've read that even in a crash, rents stay relatively stable, and obviously, people still need to live somewhere (and thus still have to pay rent). And of course, there is always a risk of a natural disaster wiping out a huge chunk of your properties. In this case, I assume it would be smart to diversify into different areas.

@Glenn McCrorey - I think I was worried about having all that debt and then the market crashing. But I've now learned that if I buy my properties "right" and have a good margin for error, I should be fine.

@Mike H. - Thanks for taking the time to write out such a detailed response. Hearing about your story is truly inspirational and adds more motivation for myself. I fully intend to utilize a team, but have to admit that owning 100 properties seems like a daunting task regardless. Once I get a few SFR's under my belt, it's probably a good idea to start acquiring some apartment buildings. Thanks for the tip! I don't know much about financing besides the 30 year fixed I have on my own home. Once I start researching the different financing options, I am sure I will reference your post and have plenty of questions! Since you have already gone through the process of buying a ton of rentals, would you say it is possible to do this on your spare time (if you have a team) or would you say this is only possible if you do this fulltime?

@Franklin S. - It would be interesting to see what percentage of people who make a plan (especially a long 20 year plan like this) actually stick with it. I fully expect the plan I make to change as new obstacles or opportunities come up, but am excited for the journey.

@Joe Fairless - I definitely see buying apartment complexes as a better strategy in reaching my goal. How many SFH's did you get under your belt before you made the transition to apartment complexes?

@Daniel Andrews - Thanks for the info on maxing out at 10 mortgages. I did not know that but haven't had the time to research all the different financing options yet. Its next on my list!

@Nate Garrett - Very true... I know full well that this is going to take a lot of hard work and energy on my part. I guess I just used the word "passive" because that is what is associated with rental income vs flipping houses.

@Jeff McCaskey - I am going to be looking out of state, do you have any recommendations? Also, just to clarify, when I say "worry-free", I was really referring to the fact that I won't have to worry about a paycheck due to rental income coming in every month.

@Joe Pickett - I read somewhere that even if the market crashes, rent stays relatively stable. And since people always need to live somewhere, they will still rent - making this strategy seem less risky. This is one of the reasons why I am attracted to acquiring rental income properties. Is this not true?

@Jay Hinrichs  - Ya, its crazy.... a $125k downpayment at 25% down would get you a 600 sqft studio. 

@Mike F.  - I did not account for rental increases (due to inflation?)... is there a site that shows rental increases and appreciation overtime for the different markets? I'm not going to depend on appreciation (contrary to what we do in CA) but if there is a market that has strong cash flow, decent appreciation and increasing rents, that would be ideal.

Account Closed - Is there another thread or article where I can learn more about this model? I'm very interested in other strategies that can lead me to my goal.

@Daniel Andrews  

10 mortgages conventionally? Yes. That's why you find a good local bank that lends for their own portfolio. AKA...Portfolio lenders. The terms vary but mostly youre looking at 15/20 years amortizations at 75% LTV. Some will offer 5yr balloons or ARM terms. Like I said, it varies from bank to bank.

You'll never grow as fast or make as much money as someone willing to let their tenants pay off their debt with the strategy youre discussing. I have went from 4 units to 42 units while only making $14/hr the last 3.5 years. I quit that job last May though :)

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