Cash Flow Average

[Jason Stimac]

Hi, I'm new to real estate investing and I have read a few books by Brandon Turner. In his books and the podcasts I hear about how great these forums are for helping new investors. I have a plan and I'm wondering if anyone can help me figure out if it's within reach or if i'm overshooting. I live in northern IL not to far from Chicago. My goal is $60,000 of passive income within 6 years. This year I would like to by my first property either a 4 unit multi family or a 6 unit. A 4 unit financing would be easier and a 6 unit things would be kind of tight with not much remodel money. I'm considering taking out a loan against my 401 K to make it happen and selling some stocks. Without doing a bunch of underwriting I'm wondering if anyone in my area or close to my area is getting about $200 cash flow per unit with a management company? Without a management company would $300 per unit be a reasonable average? My plan is to buy my first property this year say a 4 unit multi family. I Would use a management company for now because I have kids and work a full time job to busy right now. So $200 per unit would be $800 per month cash flow. After owning my first building for about a year and doing a little work I would try to cash out finance after a year and buy a second building. I would repeat this process every year. I would need about four 4 unit buildings then my cash flow should be about $38,400 a year. After about 5 years when life gets a little easier ( kids in school full time ) I should be able to manage the properties myself and increase the cash flow to $300 a unit? So my cash flow would end up being about $57,600.00 . This is my plan but is this possible in the real world? Has anyone been able to do this? 

Thanks

[Kevin Sobilo]

@Jason Stimac, a couple thoughts:

1. $60,000 in passive income in 6 years may be doable, but probably not as easy as you think it is based on the things you said. 

2. One of your limiting factors is that it sounds like you are starting with $50k max since I believe that is the max loan you can take from a 401k. So, that means you are looking at maybe $200-250k purchase price on a rent ready small multifamily. 

I live in an affordable market and I cannot get a 4 unit in that price range now. I might be able to get a 2 unit for that. 

3. You talk about doing a cash-out refi after 1 year after only doing "a little work". 

There are a few issues with this. First your original loan may very well have a prepayment penalty. Many have penalties for the first 5 years starting at 5% and decreasing by 1% each year. 

Second, what equity do you plan to "cash-out". In only 1 year with a little work done to the property it may be worth the same or even LESS depending on market conditions. Even if its worth a little more the costs of the new loan would likely exceed or close to exceed any gain.

Often times the LTV (loan to value) ration on a cash-out refu maxes at 75% which also may mean you have less ability to oull money out than the loan you use to purchase.

3. It sounds like you are thinking like a BRRRR (Buy Rehab Rent Refinance Repeat), BUT you are missing a KEY KEY factor the REHAB... A good BRRRR deal typically involved a SERIOUS rehab. To force enough equity with a rehab to pull your money back out (or more) you often need to buy a vacant uninhabitable house and do a full rehab.

4. Another thing to consider is how you figure cash-flow. Many people count it as any money above their hard expenses. However, if you are counting on the income, you want to make sure you include budgeted expenses in your calculus like Vacancy, Cap Ex, and Maintenance which many people would say should be around about 15% of your rental income. 

5. From a big picture perspective, you are only putting ~$50k to work and don't describe how you yourself are going to put much work in to add-value. You need to realize that to be an investor, you need to INVEST SOMETHING whether its time, money, specialized skills etc. The inputs you describe are modest compared to the result you want to see. 

6. My suggestion would be 2 basic things. 

First, save save save. Save money OUTSIDE your 401k to invest so that when you get started you have more to work with. 

Second, do a self assessment. Figure out where you want to add value. A plumber, electrician, accountant, etc often add value using the skills from their vocation. Perhaps you can do that. Perhaps you have other skills or interests. 

You mention managing the properties eventually. Work on that NOW. Go take the classes required for a real estate license. Learn the foundational information needed to be an agent and to do property management. 

This way, when you are ready and have more time to invest you can make bigger things happen faster.