Realistically most investors won’t replace all income W/ cashflow
I don’t mean to burst peoples’ bubbles here, but in my opinion, most investors on BiggerPockets won’t get to a place where they can replace all their monthly income with the cash flow of their properties. Some will. But I see that as more of the exception than the rule. Let’s say that you would like $10,000 a month in cash flow in order to quit your job. How many properties on average do you think it takes to get to $10,000 a month in mostly passive income? Let’s say on average you make $200 a door after accounting for all expenses and savings for cap ex, turn over, and vacancy. At $200 a door, it would take 50 doors to get to $10,000 a month and that is if you manage the properties yourself. Some people have ownership of 50 doors on their own and manage everything themselves but then the income ceases to be passive and becomes active. But most people have partners or employees when they get to that size and then it takes a lot more doors to get up to $10,000 a month when you need to pay other people to help you with the work it takes to acquire and manage so many units
The reason I am writing this is not to make anyone feel bad, or dash your dreams. Rather it is to give people more of a realistic framework of what making $10,000 a month in passive income really looks like. That way people can be more realistic with their goals. I hear a lot of people say that they want to buy rentals and then retire. But I don’t think they really know how much work and the infrastructure that it takes to own and manage the number of units it takes to get to $10,000 a month.
I’d love to hear the opinions and experiences of others on this topic. Also, feel free to share if you think I am wrong or the work it took you and the money it took to get $10,000 a month in passive income. I’d love to hear your thoughts and opinions.
I love down to earth posts like these. I think BP is, and should be, a community of super optimistic investors with 'can-do' spirit. But as with all things in life, there must be balance.
I really enjoyed the thoughtful and practical comments in this discussion.
In my area income won't even be positive for about 7 years (with todays record low mortgage rates) for a door after acquiring it assuming 20% of rent for vacancy/repair/cap ex each year and 2% rent increases per year. With depreciation the tax income will always be negative. This is with property management and most of the work being diy. This includes flooring, painting, moderate repairs, all appliance replacements. Paying a contractor to do anything major would wipe any cashflow for the previous two years. So yes, only with 20 years will there be actual income from the rentals. The flip side is at the B class I buy the properties are each worth 1+ million each to reach meaningful cashflow. So it's a choice of high net worth with moderate cash flow or low net worth with higher cash flow.
I can always sell a property and use the proceeds as down payments for several more or invest it in another asset class. Either way I still prefer real estate where I can make the decisions. If I wasn't young and healthy enough to do the manual labor work myself I might think differently.
It was a bit of a let down starting so late (2021) as most of the podcast advice was created at the bottom of the market and definitely not applicable now.
Shiloh,
Thanks for writing this post - I totally agree! Instead of trying to replace their income with real estate, most folks would be far better off using real estate as a partial replacement to their income - in conjunction with stocks, bonds, pensions, etc.
It's not hard to make $1,000-$2,000/mo in real estate but it's a whole different game at $10,000- $20,000/mo.
Thanks again for writing!
-
Property Manager Texas (#717626)
- Emerson Property Management
@Shiloh Lundahl
Real estate investing is definitely a get rich slow process for most of us. My goal was to make 10-12k/month net in 15 years. I’m on pace for that. My net cash flow now is 7k/month which took 6 years to do so far. It’s enough to replace my wife’s income as a nurse so she’s retiring in 4 months. And finally on board with My RE investing. Lol. Most of my properties are on 15 year mortgages which everyone tells me not to do. But for me, less is more. I’d rather self manage the fewest rentals as possible that cash flow me 10-12k/month when I’m retired. I’m at 12 rentals now which should actually cash flow me about 14k/month which will help cover unexpected issues that pop up.
Originally posted by @Joe Villeneuve:Originally posted by @Nick H.:Originally posted by @Joe Villeneuve:Originally posted by @Kevin O'Brien:IF you're buying properties that only net $200 a month while self managing you're buying the wrong properties IMO. I net 3 times that on all my SFR's that I self managing. So to answer your question of how long it would take for someone with a better strategy to net $10K a month self managing? Maybe 2 or 3 years if they hustle and have some initial investment to BRRR. Seems like you have ruled the idea out but for a lot of people its doable if they buy a couple BRRR's a year. 17 properties at $600 is $10,200. Should be doable in 5-7 years through the slower route. Beside imagine how much more you'll be making once some of these units get re rented while the expenses largely stay flat. In 20 years rent could very well be doable what it is today even at a moderate 3.25% a year increase while the mortgage stays the same. That investor that retires in their 50's after holding for 20 years might only need 10 properties to make the same money. Once they are paid off you'd be even further along. Its definitely a long game but I see no reason why someone who's able to BRRR a few houses a year can't get there.
This is what I meant above when I listed the 3 reasons why most investors won't reach CF/Income replacement level, and the things they could/should know/do that would allow them to reach it. Its starts with REI focusing on CF as if it's a stand alone solution...it's not. Neither is focusing on equity alone. The two of them together is better but they are means to an end, not the end.
Unfortunately, too many REI don't understand what cost is. They introduce interest rates, ROI in percentages (telling them nothing of value), and equity build up...but within the same property instead of total equity. $100k in equity in one property is equal to $100k in equity spread out evenly in 5 properties. The difference is what the true value is in both cases.
Similarly, CF as a percentage of $$$ invested, or a total CF in a property also tells us nothing of value. Why? First think about why we want CF...to replace our monthly income...to cover our monthly bills. $200, $400, $600 per month are just numbers without any context within our overall plan...to achieve a replacement source for out income. Same, even worse, is when we use percentages as our judge of a good deal. Cash flow should first pay us back for the cash we put into the deal the CF comes from. Number one judge of a good deal should be how long it takes to recover that cash in. If a deal that makes $6000/yr costs $60k in DP, that means it takes 10 years to recover the DP. If a $5k CF/yr on a $20k DP only takes 4 years to recover it, which deal is better?
I've read on this forum how there are REI that love deals that cost them $90k in cash (DP, CC, rehab, etc..., and make $3k/month as a good deal. How is that possible if it takes 30 years to recover their cash?
Little confused by this. Can you clarify what you mean by CF as a % of $ invested tells us nothing in value? You're also saying that how long it takes to recover cash in is most important. Wouldn't % of $ invested be the reciprocal of how long it takes to pay back your initial investment... maybe i'm misunderstanding what you mean...
i.e. if I buy a property for $150K, put $50K (all in, including carry cost, etc), and it appraises for $250K, then I have $12.5K of cash in the property at 75% LTV. If I make $6.25K of cash flow, then 1) my CF as a % of $ invested (which to me is very relevant/important) is 50% and 2) my payback is 2 years. They're directly/mathematically related - reciprocals.
IMO most important high level metrics (without getting into the weeds/complication of projecting demographic shifts, etc etc) are pretty straightforward:
1) Payback period (actual cash in in upon refi within ~6 mo or so, if a value add investment, divided by stabilized cash flow. or if not value add, then down payment divided by cash flow). IRR is a similarly good figure to gauge this.
2) Net % margin (either 1: NOI minus capex reserve minus interest expense or I guess 2: NOI minus capex reserve minus debt service, which should essentially be true cash flow). I prefer #1 but #2 fine too. Basically, how healthy is the property. How much downside wiggle room do you have.
3) Total $ amount. I'd much rather buy a $1M ARV value add deal than a $100,000 ARV value add deal even if, say, the payback for the $100,000 ARV deal is slightly quicker. Reason being it takes someone's high level bandwidth (whether yourself, an employee, etc) to find/execute on a deal, which isn't getting included in "cash in", so the more bang for your buck, the better.
The percentage itself tells us nothing. Need to know how much and how fast in exact dollars your cost is recovered.
If you have $50k all in (cash) and the property is worth $250k, then you have a 5 to 1 Value to cost ratio. If the property CF's at $6,250/yr, it takes 8 years to recover your cost.
The rest of your analysis is a combination of equity and cash returns. You can't use equity as a return on your cash...it isn't cash. The equity is a value on your cost though. Those are two different returns. I say this because the equity in a property isn't your money, it's the property's money. You own the property but the property owns the equity. Not the same thing. When you convert the equity to cash, then it becomes yours.
Ok if you take $50K cash in and $250K property value (my example was $12.5K cash in after value-add refi - but either way..) - and you make $6.25K, yes it takes 8 years to recover cash. That's because your cash flow as a % of cash in is 12.5% (1/8 - the reciprocal of 8). Still not sure why you're saying %'s tell nothing of value, if this particular % we're talking about is the same (reciprocal) as # of payback years... They tell us the exact same thing. And of course, generally, %'s do tell us things of value (margins, etc). No 1 metric is the be all end all, and no 1 metric can perfectly give you all context for a deal (i.e. if IRR for a deal is 50% but you can only invest $1, then maybe not a good deal).
Ultimately the right way to analyze any real estate, business, etc starts with 3 main high level metrics: 1) IRR (essentially what we're trying to proxy with "payback years" or "cash flow as a % of cash in), 2) margin %'s and 3) total $'s at play.
Many people want to quit their jobs and dive into real estate, perhaps because they don't like their jobs. I suggest finding a different job. It takes a lot of doors, time and work (far from passive) to match a W-2 income. I personally do not understand how the zero money down, OPM and $200/door thing can work but, its a very popular model so it must. There are many great strategies described in this post that I can comprehend, though. Here is the evolution of our approach:
Originally, the plan was to invest our own money to get started and use the cashflow (no more personal funds) to continue investing without taking on any debt. At retirement, we would live off cash flow. Easy peasy.
The model changed a bit when we realized how hard and slow real estate investing is (we've been at it for 15 years). Our experience is that residential units are a hassle. Most of our stuff is office/retail--we only have 30 residential units in two buildings and will probably get rid of them in the next year or so. At retirement, we can live off cash flow (much closer to passive than residential) or continue investing/developing and begin taking on debt to use as cashflow. The down side on the debt thing is that our kids won't inherit anything, but who cares :)
I may be retiring in the next couple years so I am thinking about changing the model at bit. I enjoy real estate so I am thinking about selling a couple properties and using the proceeds to start 1) a small private money lending business; 2) patiently shopping for commercial properties and flipping them; and 3) getting into land and commercial spec development. I am comfortable taking on debt as I move forward. The downside is that our kids will inherit debt-laden properties. But again, who cares :)
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Nick H.:Originally posted by @Joe Villeneuve:Originally posted by @Nick H.:Originally posted by @Joe Villeneuve:Originally posted by @Kevin O'Brien:IF you're buying properties that only net $200 a month while self managing you're buying the wrong properties IMO. I net 3 times that on all my SFR's that I self managing. So to answer your question of how long it would take for someone with a better strategy to net $10K a month self managing? Maybe 2 or 3 years if they hustle and have some initial investment to BRRR. Seems like you have ruled the idea out but for a lot of people its doable if they buy a couple BRRR's a year. 17 properties at $600 is $10,200. Should be doable in 5-7 years through the slower route. Beside imagine how much more you'll be making once some of these units get re rented while the expenses largely stay flat. In 20 years rent could very well be doable what it is today even at a moderate 3.25% a year increase while the mortgage stays the same. That investor that retires in their 50's after holding for 20 years might only need 10 properties to make the same money. Once they are paid off you'd be even further along. Its definitely a long game but I see no reason why someone who's able to BRRR a few houses a year can't get there.
This is what I meant above when I listed the 3 reasons why most investors won't reach CF/Income replacement level, and the things they could/should know/do that would allow them to reach it. Its starts with REI focusing on CF as if it's a stand alone solution...it's not. Neither is focusing on equity alone. The two of them together is better but they are means to an end, not the end.
Unfortunately, too many REI don't understand what cost is. They introduce interest rates, ROI in percentages (telling them nothing of value), and equity build up...but within the same property instead of total equity. $100k in equity in one property is equal to $100k in equity spread out evenly in 5 properties. The difference is what the true value is in both cases.
Similarly, CF as a percentage of $$$ invested, or a total CF in a property also tells us nothing of value. Why? First think about why we want CF...to replace our monthly income...to cover our monthly bills. $200, $400, $600 per month are just numbers without any context within our overall plan...to achieve a replacement source for out income. Same, even worse, is when we use percentages as our judge of a good deal. Cash flow should first pay us back for the cash we put into the deal the CF comes from. Number one judge of a good deal should be how long it takes to recover that cash in. If a deal that makes $6000/yr costs $60k in DP, that means it takes 10 years to recover the DP. If a $5k CF/yr on a $20k DP only takes 4 years to recover it, which deal is better?
I've read on this forum how there are REI that love deals that cost them $90k in cash (DP, CC, rehab, etc..., and make $3k/month as a good deal. How is that possible if it takes 30 years to recover their cash?
Little confused by this. Can you clarify what you mean by CF as a % of $ invested tells us nothing in value? You're also saying that how long it takes to recover cash in is most important. Wouldn't % of $ invested be the reciprocal of how long it takes to pay back your initial investment... maybe i'm misunderstanding what you mean...
i.e. if I buy a property for $150K, put $50K (all in, including carry cost, etc), and it appraises for $250K, then I have $12.5K of cash in the property at 75% LTV. If I make $6.25K of cash flow, then 1) my CF as a % of $ invested (which to me is very relevant/important) is 50% and 2) my payback is 2 years. They're directly/mathematically related - reciprocals.
IMO most important high level metrics (without getting into the weeds/complication of projecting demographic shifts, etc etc) are pretty straightforward:
1) Payback period (actual cash in in upon refi within ~6 mo or so, if a value add investment, divided by stabilized cash flow. or if not value add, then down payment divided by cash flow). IRR is a similarly good figure to gauge this.
2) Net % margin (either 1: NOI minus capex reserve minus interest expense or I guess 2: NOI minus capex reserve minus debt service, which should essentially be true cash flow). I prefer #1 but #2 fine too. Basically, how healthy is the property. How much downside wiggle room do you have.
3) Total $ amount. I'd much rather buy a $1M ARV value add deal than a $100,000 ARV value add deal even if, say, the payback for the $100,000 ARV deal is slightly quicker. Reason being it takes someone's high level bandwidth (whether yourself, an employee, etc) to find/execute on a deal, which isn't getting included in "cash in", so the more bang for your buck, the better.
The percentage itself tells us nothing. Need to know how much and how fast in exact dollars your cost is recovered.
If you have $50k all in (cash) and the property is worth $250k, then you have a 5 to 1 Value to cost ratio. If the property CF's at $6,250/yr, it takes 8 years to recover your cost.
The rest of your analysis is a combination of equity and cash returns. You can't use equity as a return on your cash...it isn't cash. The equity is a value on your cost though. Those are two different returns. I say this because the equity in a property isn't your money, it's the property's money. You own the property but the property owns the equity. Not the same thing. When you convert the equity to cash, then it becomes yours.
Ok if you take $50K cash in and $250K property value (my example was $12.5K cash in after value-add refi - but either way..) - and you make $6.25K, yes it takes 8 years to recover cash. That's because your cash flow as a % of cash in is 12.5% (1/8 - the reciprocal of 8). Still not sure why you're saying %'s tell nothing of value, if this particular % we're talking about is the same (reciprocal) as # of payback years... They tell us the exact same thing. And of course, generally, %'s do tell us things of value (margins, etc). No 1 metric is the be all end all, and no 1 metric can perfectly give you all context for a deal (i.e. if IRR for a deal is 50% but you can only invest $1, then maybe not a good deal).
Ultimately the right way to analyze any real estate, business, etc starts with 3 main high level metrics: 1) IRR (essentially what we're trying to proxy with "payback years" or "cash flow as a % of cash in), 2) margin %'s and 3) total $'s at play.
Percentages lie, at best they mislead you. How about instead of percentages, you end every statement with the number of dollars those percentages generate. Then we can compare our solutions.
Originally posted by @Joe Villeneuve:Originally posted by @Nick H.:Originally posted by @Joe Villeneuve:Originally posted by @Nick H.:Originally posted by @Joe Villeneuve:Originally posted by @Kevin O'Brien:IF you're buying properties that only net $200 a month while self managing you're buying the wrong properties IMO. I net 3 times that on all my SFR's that I self managing. So to answer your question of how long it would take for someone with a better strategy to net $10K a month self managing? Maybe 2 or 3 years if they hustle and have some initial investment to BRRR. Seems like you have ruled the idea out but for a lot of people its doable if they buy a couple BRRR's a year. 17 properties at $600 is $10,200. Should be doable in 5-7 years through the slower route. Beside imagine how much more you'll be making once some of these units get re rented while the expenses largely stay flat. In 20 years rent could very well be doable what it is today even at a moderate 3.25% a year increase while the mortgage stays the same. That investor that retires in their 50's after holding for 20 years might only need 10 properties to make the same money. Once they are paid off you'd be even further along. Its definitely a long game but I see no reason why someone who's able to BRRR a few houses a year can't get there.
This is what I meant above when I listed the 3 reasons why most investors won't reach CF/Income replacement level, and the things they could/should know/do that would allow them to reach it. Its starts with REI focusing on CF as if it's a stand alone solution...it's not. Neither is focusing on equity alone. The two of them together is better but they are means to an end, not the end.
Unfortunately, too many REI don't understand what cost is. They introduce interest rates, ROI in percentages (telling them nothing of value), and equity build up...but within the same property instead of total equity. $100k in equity in one property is equal to $100k in equity spread out evenly in 5 properties. The difference is what the true value is in both cases.
Similarly, CF as a percentage of $$$ invested, or a total CF in a property also tells us nothing of value. Why? First think about why we want CF...to replace our monthly income...to cover our monthly bills. $200, $400, $600 per month are just numbers without any context within our overall plan...to achieve a replacement source for out income. Same, even worse, is when we use percentages as our judge of a good deal. Cash flow should first pay us back for the cash we put into the deal the CF comes from. Number one judge of a good deal should be how long it takes to recover that cash in. If a deal that makes $6000/yr costs $60k in DP, that means it takes 10 years to recover the DP. If a $5k CF/yr on a $20k DP only takes 4 years to recover it, which deal is better?
I've read on this forum how there are REI that love deals that cost them $90k in cash (DP, CC, rehab, etc..., and make $3k/month as a good deal. How is that possible if it takes 30 years to recover their cash?
Little confused by this. Can you clarify what you mean by CF as a % of $ invested tells us nothing in value? You're also saying that how long it takes to recover cash in is most important. Wouldn't % of $ invested be the reciprocal of how long it takes to pay back your initial investment... maybe i'm misunderstanding what you mean...
i.e. if I buy a property for $150K, put $50K (all in, including carry cost, etc), and it appraises for $250K, then I have $12.5K of cash in the property at 75% LTV. If I make $6.25K of cash flow, then 1) my CF as a % of $ invested (which to me is very relevant/important) is 50% and 2) my payback is 2 years. They're directly/mathematically related - reciprocals.
IMO most important high level metrics (without getting into the weeds/complication of projecting demographic shifts, etc etc) are pretty straightforward:
1) Payback period (actual cash in in upon refi within ~6 mo or so, if a value add investment, divided by stabilized cash flow. or if not value add, then down payment divided by cash flow). IRR is a similarly good figure to gauge this.
2) Net % margin (either 1: NOI minus capex reserve minus interest expense or I guess 2: NOI minus capex reserve minus debt service, which should essentially be true cash flow). I prefer #1 but #2 fine too. Basically, how healthy is the property. How much downside wiggle room do you have.
3) Total $ amount. I'd much rather buy a $1M ARV value add deal than a $100,000 ARV value add deal even if, say, the payback for the $100,000 ARV deal is slightly quicker. Reason being it takes someone's high level bandwidth (whether yourself, an employee, etc) to find/execute on a deal, which isn't getting included in "cash in", so the more bang for your buck, the better.
The percentage itself tells us nothing. Need to know how much and how fast in exact dollars your cost is recovered.
If you have $50k all in (cash) and the property is worth $250k, then you have a 5 to 1 Value to cost ratio. If the property CF's at $6,250/yr, it takes 8 years to recover your cost.
The rest of your analysis is a combination of equity and cash returns. You can't use equity as a return on your cash...it isn't cash. The equity is a value on your cost though. Those are two different returns. I say this because the equity in a property isn't your money, it's the property's money. You own the property but the property owns the equity. Not the same thing. When you convert the equity to cash, then it becomes yours.
Ok if you take $50K cash in and $250K property value (my example was $12.5K cash in after value-add refi - but either way..) - and you make $6.25K, yes it takes 8 years to recover cash. That's because your cash flow as a % of cash in is 12.5% (1/8 - the reciprocal of 8). Still not sure why you're saying %'s tell nothing of value, if this particular % we're talking about is the same (reciprocal) as # of payback years... They tell us the exact same thing. And of course, generally, %'s do tell us things of value (margins, etc). No 1 metric is the be all end all, and no 1 metric can perfectly give you all context for a deal (i.e. if IRR for a deal is 50% but you can only invest $1, then maybe not a good deal).
Ultimately the right way to analyze any real estate, business, etc starts with 3 main high level metrics: 1) IRR (essentially what we're trying to proxy with "payback years" or "cash flow as a % of cash in), 2) margin %'s and 3) total $'s at play.
Percentages lie, at best they mislead you. How about instead of percentages, you end every statement with the number of dollars those percentages generate. Then we can compare our solutions.
They haven't lied to me yet. I treat them well, and they've always treated me well right back. %'s are just a cognitive tool... a very important one
Looks like we live 20 min away, maybe our paths will cross some day and we can go on an even longer tangent about percentages!
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Nick H.:Originally posted by @Joe Villeneuve:Originally posted by @Nick H.:Originally posted by @Joe Villeneuve:Originally posted by @Nick H.:Originally posted by @Joe Villeneuve:Originally posted by @Kevin O'Brien:IF you're buying properties that only net $200 a month while self managing you're buying the wrong properties IMO. I net 3 times that on all my SFR's that I self managing. So to answer your question of how long it would take for someone with a better strategy to net $10K a month self managing? Maybe 2 or 3 years if they hustle and have some initial investment to BRRR. Seems like you have ruled the idea out but for a lot of people its doable if they buy a couple BRRR's a year. 17 properties at $600 is $10,200. Should be doable in 5-7 years through the slower route. Beside imagine how much more you'll be making once some of these units get re rented while the expenses largely stay flat. In 20 years rent could very well be doable what it is today even at a moderate 3.25% a year increase while the mortgage stays the same. That investor that retires in their 50's after holding for 20 years might only need 10 properties to make the same money. Once they are paid off you'd be even further along. Its definitely a long game but I see no reason why someone who's able to BRRR a few houses a year can't get there.
This is what I meant above when I listed the 3 reasons why most investors won't reach CF/Income replacement level, and the things they could/should know/do that would allow them to reach it. Its starts with REI focusing on CF as if it's a stand alone solution...it's not. Neither is focusing on equity alone. The two of them together is better but they are means to an end, not the end.
Unfortunately, too many REI don't understand what cost is. They introduce interest rates, ROI in percentages (telling them nothing of value), and equity build up...but within the same property instead of total equity. $100k in equity in one property is equal to $100k in equity spread out evenly in 5 properties. The difference is what the true value is in both cases.
Similarly, CF as a percentage of $$$ invested, or a total CF in a property also tells us nothing of value. Why? First think about why we want CF...to replace our monthly income...to cover our monthly bills. $200, $400, $600 per month are just numbers without any context within our overall plan...to achieve a replacement source for out income. Same, even worse, is when we use percentages as our judge of a good deal. Cash flow should first pay us back for the cash we put into the deal the CF comes from. Number one judge of a good deal should be how long it takes to recover that cash in. If a deal that makes $6000/yr costs $60k in DP, that means it takes 10 years to recover the DP. If a $5k CF/yr on a $20k DP only takes 4 years to recover it, which deal is better?
I've read on this forum how there are REI that love deals that cost them $90k in cash (DP, CC, rehab, etc..., and make $3k/month as a good deal. How is that possible if it takes 30 years to recover their cash?
Little confused by this. Can you clarify what you mean by CF as a % of $ invested tells us nothing in value? You're also saying that how long it takes to recover cash in is most important. Wouldn't % of $ invested be the reciprocal of how long it takes to pay back your initial investment... maybe i'm misunderstanding what you mean...
i.e. if I buy a property for $150K, put $50K (all in, including carry cost, etc), and it appraises for $250K, then I have $12.5K of cash in the property at 75% LTV. If I make $6.25K of cash flow, then 1) my CF as a % of $ invested (which to me is very relevant/important) is 50% and 2) my payback is 2 years. They're directly/mathematically related - reciprocals.
IMO most important high level metrics (without getting into the weeds/complication of projecting demographic shifts, etc etc) are pretty straightforward:
1) Payback period (actual cash in in upon refi within ~6 mo or so, if a value add investment, divided by stabilized cash flow. or if not value add, then down payment divided by cash flow). IRR is a similarly good figure to gauge this.
2) Net % margin (either 1: NOI minus capex reserve minus interest expense or I guess 2: NOI minus capex reserve minus debt service, which should essentially be true cash flow). I prefer #1 but #2 fine too. Basically, how healthy is the property. How much downside wiggle room do you have.
3) Total $ amount. I'd much rather buy a $1M ARV value add deal than a $100,000 ARV value add deal even if, say, the payback for the $100,000 ARV deal is slightly quicker. Reason being it takes someone's high level bandwidth (whether yourself, an employee, etc) to find/execute on a deal, which isn't getting included in "cash in", so the more bang for your buck, the better.
The percentage itself tells us nothing. Need to know how much and how fast in exact dollars your cost is recovered.
If you have $50k all in (cash) and the property is worth $250k, then you have a 5 to 1 Value to cost ratio. If the property CF's at $6,250/yr, it takes 8 years to recover your cost.
The rest of your analysis is a combination of equity and cash returns. You can't use equity as a return on your cash...it isn't cash. The equity is a value on your cost though. Those are two different returns. I say this because the equity in a property isn't your money, it's the property's money. You own the property but the property owns the equity. Not the same thing. When you convert the equity to cash, then it becomes yours.
Ok if you take $50K cash in and $250K property value (my example was $12.5K cash in after value-add refi - but either way..) - and you make $6.25K, yes it takes 8 years to recover cash. That's because your cash flow as a % of cash in is 12.5% (1/8 - the reciprocal of 8). Still not sure why you're saying %'s tell nothing of value, if this particular % we're talking about is the same (reciprocal) as # of payback years... They tell us the exact same thing. And of course, generally, %'s do tell us things of value (margins, etc). No 1 metric is the be all end all, and no 1 metric can perfectly give you all context for a deal (i.e. if IRR for a deal is 50% but you can only invest $1, then maybe not a good deal).
Ultimately the right way to analyze any real estate, business, etc starts with 3 main high level metrics: 1) IRR (essentially what we're trying to proxy with "payback years" or "cash flow as a % of cash in), 2) margin %'s and 3) total $'s at play.
Percentages lie, at best they mislead you. How about instead of percentages, you end every statement with the number of dollars those percentages generate. Then we can compare our solutions.
They haven't lied to me yet. I treat them well, and they've always treated me well right back. %'s are just a cognitive tool... a very important one
Looks like we live 20 min away, maybe our paths will cross some day and we can go on an even longer tangent about percentages!
Sounds good. Let's plan on it.
@Shiloh Lundahl
Who says you can't buy 1 building or trailer park that has 50+ doors and you reached your goal?
My trajectory is 100k.... a month in passive income. Then I am ramping it to 250k a month. I work in RE already, and the deals keep rolling in.
I agree that "most" investors won't be able to replace all income via only real estate investing, but that's like saying "most" investors won't become millionaires (approximately 8% of the US population https://www.cnbc.com/2021/02/0... according to this article from 2021, or "most" investors won't become part of the top 1% income.
Just like any other endeavor there are individuals who succeed wildly, some who fail spectacularly, and the majority who perform somewhere in the middle.
That being said the broad principles as outlined in much of the Biggerpockets community of: (saving money and not letting lifestyle creep prevent you from meeting your goals, buy right by finding under market deals or "value", do actual analysis on your investment, go into every investment with a plan that includes how it will be managed, rehabed (if needed), financed, and with an exit strategy in place, and continue to have time in the market (in our world the real estate market), are principles that can be applied for any investor looking to grow their net worth and income via real estate. Simply following the above advice puts the bigger pockets reader above the majority of Americans out there living above their means, and not saving and investing for the future.
Is it hard work? YES Is it passive? NO, Will it take time? YES, but these can be said of any business, or road to success. Medical Doctors go to 4 years of undergrad, 4 years of medical school, and then 4 years of residency, plus potentially more time if they do a fellowship. So an MD might make 350 to 400k annually, but only after 13+ years of hard work.
There is NO short cut to success in life! All paths require effort, grit, a level of intelligence, hard work, humility, and a constant pursuit of improvement and excellence. It just so happens to be that our chosen path involves real estate investing, while other people chose a different path. I think this post is great to tease out the discussion that real estate isn't easy money, or no work. It's a nice dose of reality for new folks (myself included) to put their head down and focus on learning the business, to stay focused on big goals, but to also stay humble along the way.
Kind of a silly post. Who does this benefit?
That's like saying most people will not become fitness models, so don't bother eating healthy and exercising regularly...
At the end of the day everyone has their individual goals and it's up to them to achieve them (or not).
BP is a fantastic resource for gaining knowledge, networking and seeing the art of the possible.
Well.. we are finally getting some straight talk here on BP. Starting in this environment? no it's not realistic to think you are going to cash flow enough to quit your job in short order. Might have been once upon a time. Might have been if you were starting out in 2012. Not today.
This is my main gripe with BP. The tune needs to change with market conditions.
Originally posted by @John Brodeur:I agree that "most" investors won't be able to replace all income via only real estate investing, but that's like saying "most" investors won't become millionaires (approximately 8% of the US population https://www.cnbc.com/2021/02/0... according to this article from 2021, or "most" investors won't become part of the top 1% income.
Just like any other endeavor there are individuals who succeed wildly, some who fail spectacularly, and the majority who perform somewhere in the middle.
That being said the broad principles as outlined in much of the Biggerpockets community of: (saving money and not letting lifestyle creep prevent you from meeting your goals, buy right by finding under market deals or "value", do actual analysis on your investment, go into every investment with a plan that includes how it will be managed, rehabed (if needed), financed, and with an exit strategy in place, and continue to have time in the market (in our world the real estate market), are principles that can be applied for any investor looking to grow their net worth and income via real estate. Simply following the above advice puts the bigger pockets reader above the majority of Americans out there living above their means, and not saving and investing for the future.
Is it hard work? YES Is it passive? NO, Will it take time? YES, but these can be said of any business, or road to success. Medical Doctors go to 4 years of undergrad, 4 years of medical school, and then 4 years of residency, plus potentially more time if they do a fellowship. So an MD might make 350 to 400k annually, but only after 13+ years of hard work.
There is NO short cut to success in life! All paths require effort, grit, a level of intelligence, hard work, humility, and a constant pursuit of improvement and excellence. It just so happens to be that our chosen path involves real estate investing, while other people chose a different path. I think this post is great to tease out the discussion that real estate isn't easy money, or no work. It's a nice dose of reality for new folks (myself included) to put their head down and focus on learning the business, to stay focused on big goals, but to also stay humble along the way.
The MD isn't as beholden to market conditions as a REI.
@Account Closed, and the MD is beholden to working long hours and forgoing significant income during those 13 years, taking and passing medical boards, carrying high student loan debt, medical mal practice insurance, (depending on the specialty seeing patients in extreme times of need ER, Oncology etc.), high levels of occupational stress.
The point I was making is that nothing is "Easy" including real estate investing, but if you work hard you can achieve big goals and for some a level of financial independence.
Originally posted by @John Brodeur:@Account Closed, and the MD is beholden to working long hours and forgoing significant income during those 13 years, taking and passing medical boards, carrying high student loan debt, medical mal practice insurance, (depending on the specialty seeing patients in extreme times of need ER, Oncology etc.), high levels of occupational stress.
The point I was making is that nothing is "Easy" including real estate investing, but if you work hard you can achieve big goals and for some a level of financial independence.
Yes, but lets say you want to buy a cashflowing building from a seller in a good area of Los Angeles. There is no work you can do to make that happen right now. It's not a market reality. You can still grind your *** through med school.
@Joe Villeneuve
Got a book, a video, a podcast you recommend something I Can study long term ?
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Juan Campos:@Joe Villeneuve
Got a book, a video, a podcast you recommend something I Can study long term ?
For....?
Hi @Shiloh Lundahl GREAT post! I've been on the BiggerPockets platform for a number of years now, and I have always had these same thoughts. I'm a Realtor and Property Manager in Austin TX and I have clients ask me how they can replace their income with passive cash flow. My answer to them is when are you looking to achieve this goal? Austin isn't a major cash flow positive city like I've heard others say, and a "good" deal in Austin in the current market is a break on cash flow. I know that doesn't sound like a "good" deal to others reading this, but you make your money on the appreciation and loan pay-down. I tell my clients that their plan needs to incorporate a secondary market. Austin is a good wealth building market to stack equity. Every few years 1031 your funds into bigger purchases, and in 10 - 15 years or so (whatever fits your plan) transition yourself into a different market with higher cash flow and lower appreciation. There are other markets in the US that are more cash flow positive.
I think goals are good to have, but you need the right path to follow, and you need to be realistic with your timeline.
Also having a great Realtor/Property Manager helps too! :)
Originally posted by @Account Closed
Yes, but lets say you want to buy a cashflowing building from a seller in a good area of Los Angeles. There is no work you can do to make that happen right now. It's not a market reality. You can still grind your *** through med school.
So don't buy in Los Angeles? Realize that the good area's of Los Angeles aren't immediate cash flow positive markets. This fact doesn't negate that there are thousands of real estate investors reaching financial independence in different markets, or with different strategies. I don't know much about the LA market, but I would bet there are people on these forums still making money in LA. The approach needs to be different (maybe value add, or larger multi-family, or it requires off market deals). Similar to the "grind" of med school I am sure there are investors grinding it out to find the next deal.
Originally posted by @Joe Villeneuve:I agree...mainly because of the large percentage of investors here that focus on 1 or more of three things that won't get them there:
1 - BRRRR
2 - Returns based on % of investment
3 - Paying off properties.
...and not on the three most important things that can get them there:
1 - Understanding what cost to the REI really is, and the importance of recovering it FAST
2 - The difference between spending and using their "seed money", and applying the power of compounding to it
3 - NEVER doing any deal with negative CF
Joe,
It sounds like you don't like the idea of refinancing properties or paying them off, so what is your trick?
-
Real Estate Agent Nebraska (#20210707)
- 402-968-3926
- [email protected]
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Tanner Sherman:Originally posted by @Joe Villeneuve:I agree...mainly because of the large percentage of investors here that focus on 1 or more of three things that won't get them there:
1 - BRRRR
2 - Returns based on % of investment
3 - Paying off properties.
...and not on the three most important things that can get them there:
1 - Understanding what cost to the REI really is, and the importance of recovering it FAST
2 - The difference between spending and using their "seed money", and applying the power of compounding to it
3 - NEVER doing any deal with negative CF
Joe,
It sounds like you don't like the idea of refinancing properties or paying them off, so what is your trick?
Kind of. No trick. Simple logic and math.
Paying off a property adds to the cost of your property. It doesn't save you money. The only cost to the REI is the cash they pay...nothing else...as long as you have positive CF. Paying down the principle, negative CF, are two added examples of adding cost to the REI. It's based on the source of the funds used to do these things. The source of funds to pay the mortgage comes from the tenant...it's called rent. When you let the tenant do their job, it's free money.
Refinancing is a linear return at best. Your just kicking the can called financing down the road. Instead of getting it upfront when you buy, you get it after. When you buy a property using 20% DP, the property is worth 5 times the cost to you. When the property increases in value due to appreciation, it increases the equity equally...at a 1 to 1 ratio. So if that same $100k property you bought for $20k (DP) increased in value to $120k (a $20k increase), the equity also increased $20k to $40k. Sounds great right. No so much. Your equity lost value. When you bought it, the equity was worth 5 times the cost, or $100k. When it went up $20k, it went down to 3 times the cost. IF sold, and used as 20% again, that equity ($40k) would now be worth 5 times its cost again...or $200k...and the CF would go up too.
Repeat this when the same conditions repeat themselves, and you are generating an exponential return on that original $20k
Originally posted by @Joe Villeneuve:Originally posted by @Tanner Sherman:Originally posted by @Joe Villeneuve:I agree...mainly because of the large percentage of investors here that focus on 1 or more of three things that won't get them there:
1 - BRRRR
2 - Returns based on % of investment
3 - Paying off properties.
...and not on the three most important things that can get them there:
1 - Understanding what cost to the REI really is, and the importance of recovering it FAST
2 - The difference between spending and using their "seed money", and applying the power of compounding to it
3 - NEVER doing any deal with negative CF
Joe,
It sounds like you don't like the idea of refinancing properties or paying them off, so what is your trick?
Kind of. No trick. Simple logic and math.
Paying off a property adds to the cost of your property. It doesn't save you money. The only cost to the REI is the cash they pay...nothing else...as long as you have positive CF. Paying down the principle, negative CF, are two added examples of adding cost to the REI. It's based on the source of the funds used to do these things. The source of funds to pay the mortgage comes from the tenant...it's called rent. When you let the tenant do their job, it's free money.
Refinancing is a linear return at best. Your just kicking the can called financing down the road. Instead of getting it upfront when you buy, you get it after. When you buy a property using 20% DP, the property is worth 5 times the cost to you. When the property increases in value due to appreciation, it increases the equity equally...at a 1 to 1 ratio. So if that same $100k property you bought for $20k (DP) increased in value to $120k (a $20k increase), the equity also increased $20k to $40k. Sounds great right. No so much. Your equity lost value. When you bought it, the equity was worth 5 times the cost, or $100k. When it went up $20k, it went down to 3 times the cost. IF sold, and used as 20% again, that equity ($40k) would now be worth 5 times its cost again...or $200k...and the CF would go up too.
Repeat this when the same conditions repeat themselves, and you are generating an exponential return on that original $20k
So if I am understanding you correctly, which after reading this 4 times I hope I am, you believe that putting a down payment on a property, letting time do its thing and then upgrading-rinse-repeat is the best way build a portfolio?
In regards to seed money, do you mean being able to use the 20k, get it moving, pull out original DP, redeploy? I'm trying to understand how it is scalable.
-
Real Estate Agent Nebraska (#20210707)
- 402-968-3926
- [email protected]
Originally posted by @Joe Villeneuve:Originally posted by @Tanner Sherman:Originally posted by @Joe Villeneuve:I agree...mainly because of the large percentage of investors here that focus on 1 or more of three things that won't get them there:
1 - BRRRR
2 - Returns based on % of investment
3 - Paying off properties.
...and not on the three most important things that can get them there:
1 - Understanding what cost to the REI really is, and the importance of recovering it FAST
2 - The difference between spending and using their "seed money", and applying the power of compounding to it
3 - NEVER doing any deal with negative CF
Joe,
It sounds like you don't like the idea of refinancing properties or paying them off, so what is your trick?
Kind of. No trick. Simple logic and math.
Paying off a property adds to the cost of your property. It doesn't save you money. The only cost to the REI is the cash they pay...nothing else...as long as you have positive CF. Paying down the principle, negative CF, are two added examples of adding cost to the REI. It's based on the source of the funds used to do these things. The source of funds to pay the mortgage comes from the tenant...it's called rent. When you let the tenant do their job, it's free money.
Refinancing is a linear return at best. Your just kicking the can called financing down the road. Instead of getting it upfront when you buy, you get it after. When you buy a property using 20% DP, the property is worth 5 times the cost to you. When the property increases in value due to appreciation, it increases the equity equally...at a 1 to 1 ratio. So if that same $100k property you bought for $20k (DP) increased in value to $120k (a $20k increase), the equity also increased $20k to $40k. Sounds great right. No so much. Your equity lost value. When you bought it, the equity was worth 5 times the cost, or $100k. When it went up $20k, it went down to 3 times the cost. IF sold, and used as 20% again, that equity ($40k) would now be worth 5 times its cost again...or $200k...and the CF would go up too.
Repeat this when the same conditions repeat themselves, and you are generating an exponential return on that original $20k
But how would one find a property with the aforementioned 5 to 1 ratio if your current property's equity is only worth 3 times the cost (or maybe even less)? Wouldn't you have to go to a totally different market?