Real Estate Investor · Walled Lake, MI · Member since 2010 · 121 posts · 66 votes
Hello BP. Over the past few years my wife and I have slowly watched as our level of income has been slipping. I'm sure many of you can relate to this, and we have officially decided to get fully into the game of real estate. We have dabbled a little bit over the past year and a half, but we can now see that relying on income from a JOB is not going to cut it for the long term.
We have our plan to exit the rat race...now we just have to execute it. We are currently going to focus on wholesale deals in the near term to build up capital and in the long term we look to be generating passive income through rental properties. Our goal is $10,000 per month in passive income in 5 years. We will do it. We are learning as much as we can at this point through books, seminars coaching, etc., and I think BP will fit nicely in with our education. We are excited to be joining this community and hope to learn a great deal from everyone on here. We also look forward to giving back, and we will try to help everyone that asks us questions.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
In my experience, the guy who owns the business, or the CEO, works the hardest of all. You do different work. Loral Langemeier describes it as "working on your business" rather than "working in your business". IMHO, this whole idea of "owning a business" or "being a wholesale" and generating a bunch of income for very little work is a bunch of guru hype. Those guys are selling educational materials. Their hook is easy money and a dream. Don't fall for it.
Better to think of your goal as being a capitalist. A capitalist is someone who invests money and generates a return. A rule of thumb for retirement is you can take 4-5% of your portfolio's value each year and live forever on that portfolio. If you use the conservative number and your $120K per year goal, you need $3 million.
Now, again IMHO, with real estate you can do better. If you have the money in cash, making hard money loans can be quite profitable. Rates to borrowers are in the high double digits. If you work with a broker, they will take the points, some fees, and maybe a bit of the interest, but returns in the 12-15% are entirely possible. Now the problem with this is that its "lumpy" in that you have to take whatever deals come along. So, you end up with leftover cash you can't get invested. You also have downtime after one loan pays off and another is made. But even at 10% net annual return you only need $1.2 million to make loans in order to hit your goal.
Somehow I've gotten onto a Kase Group mailing list. An e-mail yesterday lists a Dollar General store in NC for $1.2 million with an 8.5% cap rate. Now I tend not to trust cap rates given by sellers or brokers, but with an NNN property its more likely to be accurate. If you can get a 75% 7% loan on that property, you're making 8.5% on 25% of the deal and 1.5% (8.5% cap rate less 7% interest rate) on the remaining 75%. That's a total of 13% on your 25% down payment of about $300K. There's significant risk, since a bankruptcy by Dollar General (think about Builder's Square and Circuit City) really, really kills you. But as a piece of your portfolio, that seems pretty attractive.
Another member, Rich, outlines another strategy. Buy a house a year for 15 years. Pay them off in 15 years. Be sure they're at least break even (again, read in the Rental Property forum, especially about expenses.) Once one is paid off, refinance it. Take that cash and use if for your living money. As long as the new loan keeps it at least break even, the property is self supporting. The cash is not taxable, since its a loan. When you eventually die, your heirs will get the property at a stepped up basis. So, even if they sell right away, they have no taxes on whatever they pocket after paying off the loans. (Tax law is always subject to change.)
Handyman · THUMB, MI · Member since 2010 · 72 posts · 14 votes
16y
Hello fellow Michiganders,
Congratulations on seeing the light about working a JOB. Me and my family are just starting our REI careers as well, Its a nice change of pace. We haven't left our full time JOBS yet but hope to in 5 years as well. Finally something to be excited about again. Theres not been much here in Michigan to be excited about lately. But freedom is our goal. Good Luck to you and your family.
Real Estate Investor · Portage, MI · Member since 2010 · 470 posts · 315 votes
16y
Welcome Todd & wife! My wife & I have been investors since the late 70's and are now buying & selling short sale properties. Our negotiator got us to join BP and it has been well worth it! You will get lots of good info here. We are near Kalamazoo, MI, but invest nation wide. Good luck & look us up if you are in the area!
Bill
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Keep in mind that wholesaling (along with being an agent, fix and flipping, developing and managing properties) are all JOBs. You may be self employed, like the guy who owns a show store. But its still a job. The gurus make wholesaling out like its a matter of sending a few letters or putting out a few signs, and money will role in. From what people write here, and from the number of wholesalers who ask for my buying criteria and never send me a single property, its hard work.
Not only is it a job, its the worst sort of job - a commissioned sales job. You only get paid when you make a deal. You'll have to put effort into it to make this work, and even then you have risk.
Nothing wrong with that. Wholesaling is a great way to learn the business and build your "deal finding" skills. When you find a good deal, keep it for yourself and start your rental portfolio.
Do spend some time reading in the Rental Property forum about the reality of rental properties. Realistically, you're going to need 50-100 GOOD units to hit that goal. Its going to be easier to achieve if you manage them yourself. But then, like that shoe store guy, you've bought yourself a job. In this case, the job managing the properties.
If you truly want passive, hands-off income, you're going to need to try to move into a purely passive investment like a NNN commercial property. With the right sort of investment, like a Walgreens or similar property, and a big chunk of your own cash in it, you really could achieve that goal as a purely passive investment.
Real Estate Investor · Walled Lake, MI · Member since 2010 · 121 posts · 66 votes
16y
Thanks to everyone for your thoughts.
Jon I agree that real estate investing is a job, and I appreciate your insight into the work involved. I think for us, the biggest thing is the ability to control our own desitiny with investing. Currently I have what most would consider a good job as an engineer for a very large company. However, there are sublte signs popping up indicating that my job, while fairly secure now, will not be around 5-10 years down the road.
As Robert Kiyosaki says, ..."plan for the worst times and you will only know good times"...
We are planning for the worst right now, and if nothing else the process will give us the abilty to control our own destiny in the future. The ultimate goal is to generate true passive income as you say. We will always keep in mind the difference between being self employed and being a business owner. The goal is to be a business owner where the systems are in place to have the business run itself. I think NNN commercial property fits with the idea of being a business owner because much if not all of the responsibilities of property management are put onto the tenant.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
In my experience, the guy who owns the business, or the CEO, works the hardest of all. You do different work. Loral Langemeier describes it as "working on your business" rather than "working in your business". IMHO, this whole idea of "owning a business" or "being a wholesale" and generating a bunch of income for very little work is a bunch of guru hype. Those guys are selling educational materials. Their hook is easy money and a dream. Don't fall for it.
Better to think of your goal as being a capitalist. A capitalist is someone who invests money and generates a return. A rule of thumb for retirement is you can take 4-5% of your portfolio's value each year and live forever on that portfolio. If you use the conservative number and your $120K per year goal, you need $3 million.
Now, again IMHO, with real estate you can do better. If you have the money in cash, making hard money loans can be quite profitable. Rates to borrowers are in the high double digits. If you work with a broker, they will take the points, some fees, and maybe a bit of the interest, but returns in the 12-15% are entirely possible. Now the problem with this is that its "lumpy" in that you have to take whatever deals come along. So, you end up with leftover cash you can't get invested. You also have downtime after one loan pays off and another is made. But even at 10% net annual return you only need $1.2 million to make loans in order to hit your goal.
Somehow I've gotten onto a Kase Group mailing list. An e-mail yesterday lists a Dollar General store in NC for $1.2 million with an 8.5% cap rate. Now I tend not to trust cap rates given by sellers or brokers, but with an NNN property its more likely to be accurate. If you can get a 75% 7% loan on that property, you're making 8.5% on 25% of the deal and 1.5% (8.5% cap rate less 7% interest rate) on the remaining 75%. That's a total of 13% on your 25% down payment of about $300K. There's significant risk, since a bankruptcy by Dollar General (think about Builder's Square and Circuit City) really, really kills you. But as a piece of your portfolio, that seems pretty attractive.
Another member, Rich, outlines another strategy. Buy a house a year for 15 years. Pay them off in 15 years. Be sure they're at least break even (again, read in the Rental Property forum, especially about expenses.) Once one is paid off, refinance it. Take that cash and use if for your living money. As long as the new loan keeps it at least break even, the property is self supporting. The cash is not taxable, since its a loan. When you eventually die, your heirs will get the property at a stepped up basis. So, even if they sell right away, they have no taxes on whatever they pocket after paying off the loans. (Tax law is always subject to change.)
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
16y
Jon's advice is great. I use a simple rule of thumb for "passive" income: half of what you earn is yours to spend and the other half has to be reinvested to account for inflation and expected improvements in standard of living.
Since it is fairly easy to make well-secure hard money loans at 18%, I would think that 10% would be a safe after-tax number to use as your passive investment return assumption after accounting for reinvestment risk and other costs. (This could change depending on market conditions, of course.)
In order to get $120,000 per year in income, you would thus need about $2.4 million in capital because only half the money is "yours" as the other half has to be reinvested. Obviously, if you have better investment options, you would need less capital.
Real Estate Investor · Portage, MI · Member since 2010 · 470 posts · 315 votes
16y
Todd,
Remember that even NNN commercial property is not "passive". It's got to be managed! If you have a strip mall, the management company (or you) contracts for the snow, lawn, ins., etc and bills each tenant. This is sometimes hard to collect when times get tough! In the case of a Dollar General store, I'd be careful because a lot of Dollar stores have closed in our area and these nice stand alone investments are vacant. Jon is right! I have found that no one takes care of your business like you do! But, you are on the right track doing your homework here on BP!
Rental Property Investor · Baltimore, MD · Member since 2009 · 624 posts · 559 votes
16y
Todd... best of luck to you and your wife.
The comments to your post pretty much say it all... real estate can support you and your family in many, many ways... but you will have to work for it.
Keep us posted on the successes you are achieving.