When can I quit my 9-5 job?
Member since 2008 · 37 posts · 1 vote
Any advice out there on the best way to pull away from the full time job and make landlording the main gig. special formulas , cash flow, separate income accounts. My biggest concern is that once I leave my full time job, I will not qualify for new mortgages based on my income. Any thoughts out there or shared experiences on how you all made the transition?
don't quit your day job. My CPA keeps suggesting I go back to work to support my rentals and I've been at it awhile. He makes me sick....but he has a point. Let's say your quit your job and buy some rentals. You rehab them and have big write offs for a couple of years. You go out to the local mortgage banker and produce your two years of tax records and....low and behold, they treat you like you're a bum...few of them even add back in depreciation when they look at your scedules. What they want is a W-2 that goes with a job which takes us back full circle.
Be prepared on the financing end of purchasing and holding real estate. The pendulum is definitely swinging back to conservative lending guidelines.
jphsa,
The rental property business is ALL ABOUT THE NUMBERS. If you want to leave your 9-5 job, you MUST buy properties that will cash flow using the real world expense numbers (not the guru nonsense numbers). In almost every market, you MUST buy properties at a BIG discount if you want them to cash flow.
You are absolutely correct that it will become much more difficult to obtain loans once you quit your day job. I would strongly suggest keeping your job until you have enough money from the rentals to support your lifestyle. As a general rule, if you buy right, you should be able to get about $100 per unit per month positive cash flow. If you do the management and maintenance yourself, you will earn at least another $100 per unit per month. Therefore, for every rental THAT YOU BUY RIGHT, your spendable income will increase about $200 per month.
How many rentals do you need to leave your day job? If you make $4,000 per month, then you need 20.
Hope that helps,
Good Luck,
Mike
don't quit your day job. My CPA keeps suggesting I go back to work to support my rentals and I've been at it awhile. He makes me sick....but he has a point. Let's say your quit your job and buy some rentals. You rehab them and have big write offs for a couple of years. You go out to the local mortgage banker and produce your two years of tax records and....low and behold, they treat you like you're a bum...few of them even add back in depreciation when they look at your scedules. What they want is a W-2 that goes with a job which takes us back full circle.
Be prepared on the financing end of purchasing and holding real estate. The pendulum is definitely swinging back to conservative lending guidelines.
I also spend a lot of time wondering when I will be able to quit my 9-5 job. In fact I day dream about it everyday.
My concerns are not only having a financial basis to be able to purchase more property, but being able to not keep my current standard of living, and even increase it. There are also other things to consider, like health insurance for my family. That will be a big expense that I will have to take on if I no longer have an employer who pays for it. (My plan is to finance the insurance thru my LLC that I have established for the investments.)
So, I have taken my current income, and doubled it. It is a very rough estimate, but that is how much passive income I wll need before leaving my 9-5 job.
With my first investment just days under by belt, I am 25% there.
Good luck!!!
I was just helping a family member with his taxes. He and his wife bought in the 70's and have made a living from real estate. With a rental income of $212,000 they netted just $8,500. Their taxes and insurance alone stand at $45,000. They buy low and flip short term to have a decent living standard.
They have done everything they could but are still having a tough time really "growing the business". Real estate is a fulltime committment and the numbers have to work before you consider living off of it.
jphsa,
The best way to move from a job to a rental property business is to do BOTH until you can afford to live off of the rental property business. This will take a few years of VERY HARD WORK. The question is whether you are willing to pay the price to get there? I worked six 12-hour days per week for more than 2 years.
There isn't any easy or magical answer. Getting free from the 9-5 will require a LOT of work and will take sacrifice. Is it worth the price? YES!
Good Luck,
Mike
The statement is only true is you narrow the conversation to certain lenders or certain loan types.
1. Assume that after 10 mortgages many lenders can not handle you from their residential side. If they have a commercial division you will likely need to switch.
2. There are a few lenders who are portfolio lenders. They do not sell their loans. If the lender is a portfolio lender they can easily exceed the 10 mortgage limit that other lenders impose. They still might want to impose a limit so their exposure to any one borrower is capped. There are lenders who will go to 100 mortgages with one borrower. A limit but higher than many need.
So, the 10 mortgage limit can be a red herring or a true road block depending on what you want and how you handle lender imposed caps.
John Corey
As a general rule, if you buy right, you should be able to get about $100 per unit per month positive cash flow. If you do the management and maintenance yourself, you will earn at least another $100 per unit per month. Therefore, for every rental THAT YOU BUY RIGHT, your spendable income will increase about $200 per month.
Mike
Mike,
Let me restate what you are saying to verify that I have it straight.
In your market you are more or less factoring in $100 for property management.
If a property is throwing off $100 in income (after all expenses but before taxes) you could also pay yourself $100 for handling the property management. $200 in total ($100 for property management and $100 for free cash flow).
Sticking to just the numbers you are also saying that if you used an outside PM you would be budgeting $100 per month in the above example.
Is that correct?
John Corey
Back to the lender question. There are two banks that I am told keep their own loans and don't sell them BOA was named as one. I don't think BOA is going to lend me over 10 mortgages as they are using FannieMae Desktop Underwriter software probably.
Also, who wants 10 investor mortgages holdng? I use commercial lenders as well but they want 20% down or cross collateralization and they go 15-20 years with a 5 year ballon. Fine if you don't plan to hold over 5 years. Rates are close to 8% right now. Great way to short term finance but I haven't really met a lender with no limits on number of mortgages--and I've done a bunch.
Also, wait until want a be investors start foreclosing on houses they can't hold in U.S. We'll be lucky to get a loan at all despite good credit.
John,
No, that's not really what I'm trying to say, although my post wasn't as clear as it could have been.
In most markets, if you buy at a big discount, about the best you can hope for on residential rentals is a monthly cash flow of about $100 per unit per month.
My point on doing the management and maintenance was that doing these yourself will greatly increase the monthly cash you can spend, because you will earn the management and maintenance fees. Management usually runs about 10% of gross rents and maintenance an additional amount on top of that. So, depending on the gross rents, you will usually at least double your monthly spendable cash by doing the management and maintenance yourself. Of course, in areas of higher rents (and more expensive properties), the management fee is higher. However, in these same areas, finding properties that will cash flow is much more difficult.
So, by doing the management and maintenance yourself, you will generally cut the number of properties needed to quit your 9-5 at least in half.
Mike
Thanks Mike.
John Corey
Don't quit until you have a large cash reserve in some type of savings account.
Until you have high self confidence in yourself and know that you can continue to go out and make money month after month in this business.
Until your cash flow is obviously more than you make at your current job.
Until you have certain houses that you know you can sell to generate large sums of cash in case you need it.
Primo Coach,
Although I don't always agree with you, I do agree with you on this post. Having a large reserve in your savings account is extremely important before someone quits their job.
Good point.
Although I don't always agree with you, I do agree with you on this post. Having a large reserve in your savings account is extremely important before someone quits there job.
good tip.
it also helps a ton as you go to the bank and they want to see 3 to 6 months reserves before they lend to you on your next deal.
i saved like mad for years before my first real estate deal. Having cash on hand helped out the deal (along with good credit and purchasing a good deal).
i have a ways to go before I quit my day job but will continue to save and do real estate deals for that day.
A couple of years ago I was getting tired of being asked this exact question by people and more specifically people that wanted to be my students.
So I took a while, sat down and typed up what I call my "Boss Be Gone" plan. The timeline is 1 year.
In the end the key is "DEBT". The reason you have a job is to pay your bills, right? If you didn't have bills you probably wouldn't work. So, the first thing is to look at your debt, do you have an actual working budget where you track your expenses in life? If you don't. DO ONE IMMEDIATELY.
Then figure out where you might cut back. Do you need the expensive car that you are making payments on? Could you do with a less "flashy" car? Do you need 400 TV channels on your cable?
If you sacrifice you can do this faster. Think about this.. if you and I both make 50K this year, but you have 40K of debt payments, and I have 5K, I now have 35K more than you in one single year. If you had an additional 35K this year, would that make you happy?
Let me leave you with this thought... Don't plan to replace your monthly income either. That is the wrong thinking in REI. Sometimes I get one deal every 6 months, but it is a doozy. So think about that you need say 40K to live every year. That is what you need to shoot for. Rather than saying I need 3,500 each month and shoot for just making 1 deal a month at 3,500k.
Primo is right in that you need to have some put aside before you cut the leash. But plan for it, be specific and it can come true, if you really want it to be true. To many people replace their job with another boss, for one where they are their own boss and you work more hours than you did before for less pay.
Good luck!
Ryan, Michael, & Jason all make great points. Not only should you have reserves before quitting the 9-5 job, you should have them for each and every investment, (regardless if you work or do REI full time) so during an occurance of an unexpected large or even small expense, you have $ in reserves to fall back on, and not use your cash flow to pay for it.
This is a simple strategy to avoid over-extending oneself in REI. That is probably the most common reason for investors properties to be lost to foreclosure. If you have cash reserves or lines of credit, you will not be forced into a "must sell" situation or lose your cash flow to big ticket captial expenses or even vacancies.
Getting back to the original question, one very beneficial strategy to quit the day job and avoid the credit/lending issue is to use partners. If you have the knowledge and expertise to locate, purchase, and manage properties, find someone with credit and no time or experience and have them get the loans for you. You can make them partners, or simply refi using commercial loans once the original loan is seasoned.
Keep in mind that combining several residential properties into one commercial loan can increase your interest rate and teh loan origination fees are generally higher, but if the numbers still work, then it is an alternative strategy for you.
Just food for thought.
My cousin, who does REI full time in Atlanta, has told me to treat the thought of going into REI full time as a layoff from a job.
If you got laid off from a job (i.e., went into REI full time in this context), how long could you last with no income and all outgoing cash flows?
Basically this makes the assumption that you will NOT have positive cash flows once your personal bills are paid.....if you can survive with negative cash flow, how long can you survive?
If you are comfortable with your answer to that question, then you can do REI full time.
If you got laid off from a job (i.e., went into REI full time in this context), how long could you last with no income and all outgoing cash flows?
Basically this makes the assumption that you will NOT have positive cash flows once your personal bills are paid.....if you can survive with negative cash flow, how long can you survive?
If you are comfortable with your answer to that question, then you can do REI full time.
An excellent assessment!
As far as having a W2 form for the banks....
If you put your properties in an LLC, or any other corp, and then paid yourself that money from the corp as though it was a salary, would that not eliminate the bank saying "I want to see a W2"?
My take is to keep the job...until you are mortgage free on every property. Here's why.
Once your job is gone...cash flow is king. So what you should do is shrink your lifestyle today...taking every saved dollar and start with one mortgage making extra payments...use all your other net rental income too..and pay off that first mortgage.
Now use that total rental income plus all the other monies and attack the next mortgage...it snowballs...and you have them all free and clear in just a few years.
Now all rents drop to the bottom line and you can quit your job without fear of losing the underlying assets you worked so hard to acquire.
It's not about aquiring more...it's about not losing what you've built.
Good Luck!
Until you have high self confidence in yourself and know that you can continue to go out and make money month after month in this business.
Until your cash flow is obviously more than you make at your current job.
Until you have certain houses that you know you can sell to generate large sums of cash in case you need it.
I agree, you need to have cash aside for a rainy day. Think of it like "investing in yourself."
I wholeheartedly agree with everyone, my own situation being a combination of all. We rehab properties(quite the difference from rentals, same taste, different flavor). I have manufactured and cultivated many "safety" nets for that leap from the 9-5. Schooling and your network is great for a back-up job if needed, cash reserves should EXCEED 6 months of your current pay. Also, IMO you should have at least 1 property paid in full to secure a line of credit. Between an excellent equity standpoint and the cash reserves, a bank should be more easily accessed.
Good luck
excerpt :-
There are myriad ways to get the money, some easy, some hard, some quick, some slow. But in order to really make the break from being a wage slave (or worse) to being financially prosperous most people will need at least a few thousand dollars of seed money, maybe more, to "prime the pump", to invest in places where within a few months or a few years, at most, they can begin to reap dividends that release them from wage slavery.
Acquiring this "seed" money is likely to be very, very hard for most people, for a host of reasons. It is the "energy of reaction" threshold that stands between many people and prosperity. It can require extreme effort and hard thought to overcome. But once hurdled, far, far greater financial returns are possible, with much, much less effort than was ever before possible.
I always thought to have at least 18-36 months of cash reserves of your current 9-5 salary in the savings account prior to making a full time transition into REI.