More Important–Growing Capital or Collecting Passive Properties?

10 Replies

I have a goal of reaching financial freedom within the next 10 years by accumulating rental properties for passive income. While it seems logical to start gathering those rental properties to work towards my goal, I have heard that the best thing I can do as a young investor is to grow capital as fast as possible. So, I must ask, which would you suggest a young investor focus on:

-To start growing a collection of rental properties over the next 10 years to achieve financial freedom (Most likely through house hacking) or

-To master the art of flipping/wholesaling to accrue capital and then later invest the capital into rental properties

    Your input is appreciated and thanks in advance!

    -Evan

    How good are you at math?  I'm assuming your answer is good, based on the fact you can add and subtract the following:

    1 - Time
    2 - Dollars
    ...and use both in a formula.  Why?  You answer is in the math.

    Take the total dollar amount you will need to gain your "financial freedom", then research and figure out the cost to you for each rental property you would need, based on the cash flow from each property, in order to satisfy your "financial freedom".

    Now the fun part begins.  Take that number of needed properties, and multiply by the amount of time you think it will take you to find, fund, buy, rehab (if needed), and fill each of those properties with a tenant.

    Thanks for the explanation @Joe Villeneuve  

    While my goal for financial freedom is 10 years down the road, I would obviously love to hit that goal as soon as possible. While it is possible for me to reach my goal with option number 1 (slowly collecting rentals), do you see any upside to attempting option 2 (flipping to collect capital to reinvest into rentals)? Or would you suggest I keep my eyes on the prize and stick to my 10-year goal? 

    To clarify, I will be investing primarily in the mid-west (Louisville, KY & Cincinnati, OH) if your opinion is dependant on the market.

    -Evan

    Originally posted by @Evan Carrico :

    Thanks for the explanation @Joe Villeneuve 

    While my goal for financial freedom is 10 years down the road, I would obviously love to hit that goal as soon as possible. While it is possible for me to reach my goal with option number 1 (slowly collecting rentals), do you see any upside to attempting option 2 (flipping to collect capital to reinvest into rentals)? Or would you suggest I keep my eyes on the prize and stick to my 10-year goal? 

    To clarify, I will be investing primarily in the mid-west (Louisville, KY & Cincinnati, OH) if your opinion is dependant on the market.

    -Evan

     That depends ....on the following:

    1 - How much capital do you have now
    2 - What is the specific dollar amount you need per month
    3 - The exact micro- market(s) you will be investing in
    4 - What strategies you will be using
    5 - What specific criteria is you will be matching, at the different points in your REI Plan's timeline,

    @Evan Carrico

    Your plan really depends on the applied level of these factors: time, capital, knowledge, skill set, network, effort and maybe some luck.

    Assuming you are investing in a favorable market for short term rentals (STR), you could use STR partnerships or STR arbitrage as a business model to generate much higher monthly cashflow per property and reach your FI goal in less than a few years with fairly little capital to start with. This would be in comparison to the lump sum down payments needed to financing house hacks or the traditional long term rental property over a much longer time period.

    There are so many strategies out there. The speed of your success does depend on how active or passive (level of effort) you want to be along the way as well.

    If you have some access to capital, I'd stay growing passive income. Now that can be from index funds, rentals, renting rvs, etc. I'd start with driving for dollars and get some BRRRR's, wholesale what you don't want.

    Just a passing thought...don’t get lost in the weeds. If you have the capital to buy your first house hack, start shopping and set a goal to have it by x date. If you don’t have the capital yet, do what you have to (extra jobs, wholesale, partners, etc.) to get it and get in a property by y date. The journey of 1,000 miles starts with your first step. My husband and I are “mom and pop” buy and hold investors in Louisville. Happy to chat if you ever need a sounding board!

    Hey @Evan Carrico Great question. So many good replies here already. I would learn one strategy, master it and do it over and over again. Get great at one thing. I would find a way to take action and do that first deal. You may find out you don't like being a wholesaler or you lack the skills to flip. Goals are great but make sure they are in line with what you can actually do. Saying you want 10 buy and holds is great but what if it turns out you dislike being a landlord on deal 1? You will find your niche and find financial freedom within it but it comes through action on that first deal. 

    Good Luck! 

    @Evan Carrico  without knowing about what type of work you would prefer doing whether it's flipping, wholesaling or buy and hold, I would echo what @Kelly Bankes said about house hacking and taking your first step into the world of real estate.

    Here are some reasons why:

    • Your goal is financial freedom. One of the quickest ways to reach that is by reducing your expense. Your biggest expense is going to be having a roof over your head. If you can minimize that to a point where you can get close to a $0 living expense or even get paid to have a roof over your head, you are going to have a huge head start on your path to financial freedom.
    • You are young. You're probably more comfortable having room mates or living in one unit of a duplex. This is great if you're trying to house hack.
    • Your market allows it. I live in the San Francisco Bay Area where you can't even buy an outdated house for under $850K. That makes house-hacking very difficult since your mortgage payments are so high. The numbers make a lot more sense where you'll be looking, take advantage of that!
    • You will learn a ton. The process of searching for a property to house hack, getting exposure to real estate contracts, and possibly getting into some rehab will create a great deal of momentum in your real estate journey. It's also a little more forgiving if you're going to be living in the property: better access to financing, don't have as much pressure to get the house back on the market like in the case of a flip or wholesale, etc.

    Those are my two cents. House hacking will give you a very solid base to start from. And getting that much closer to financial freedom from the get go will take a lot of pressure off of you when you do decide to take the next step and start flipping, wholesaling, and/or buying rentals.

    @Evan Carrico  this comes down to goals and expectations.  Is financial freedom to you working for yourself and not answering to a "boss"? Is it living a life on the road, anywhere in the world?  Owning rentals is a job, a pretty easy one most of the time, especially if you only have a few, but it is a job. Even if you have a manager, you will still be managing the manager, and personally, I have never had good experiences with managers.  And if you self manage, self lease, and handle some or most of the repairs yourself, you are your own boss and will pocket more money, but still have a job.

    Flips are also work.  Most contractors are a pain in the butt to deal with, and those that aren't tend to be much more expensive, so you are either paying with headache or money.

    Now, onto an answer, if you can create a steady pipeline of flips, you will be able to make far more money, much quicker than rentals.  If you only do one flip, this is not true, but if you sell one and buy the next, and continue repeating consistently, you can end up with far more money in a shorter amount of time.  

    Now, house hacking is a good option if you are trying to reduce your cost of living, but my view is it reduces expenses, but doesn't increase revenue.  

    @Evan Carrico you need to focus on skills and adding value. Being an expert in real estate is a lot like a sport you need to learn the rules and then practice and keep learning. You do that and you will get good.

    I personally did flipping Brrrring LTR's STR's FI within about a year and reached FI by 22 but had been studying a ton before that and had saved up a bit from never spending money and getting luck in the stock market before that.

    In my case it was getting enough capital that I could get seed money for Brrrring and then because of the crazy good cashflow from STR's it didn't take many to get the cashflow to far exceeded our personal expenses.

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