Concerning the article about building wealth
Rental Property Investor · Thackerville, OK · Member since 2016 · 26 posts · 8 votes
My comments will open a can of worms....but it's been weighing on my mind a lot lately after reading that article.
I see many folks coming in and talking about the BRRRR strategy...and I see many folks coming in and using other people's money to leverage themselves into more properties to chase the dream of financial independence. I've also read the article about the $35,000 "pigs" that folks seem to hate.
At the same time, I'm buying distressed properties that were previously rentals that are absolutely trashed from neglect of the previous landlord. I looked at a home two weeks ago (via photos from the agent) of a home that belonged to a prominent investor in the midwest that was "Occupied up until the Sheriff's sale in December" that looked un-inhabitable to me. I wouldn't live there
I don't see this as being a way to financial freedom unless you can accomplish two things:
1) Reduce your lifestyle (pay off your personal home, get out of debt, reduce expenses to the basics)
2) Own your properties free and clear.
By leveraging yourself into your next rental, you're reducing your cash flow. Say you buy a property (distressed or otherwise) and pay cash. You rent it out for $725 per month and 40% of that goes to reserves/insurance/property taxes. That leaves you with $290 month net (or $3,480 per year) of free cash flow. Put a mortgage on that property and you reduce that profit to less than $100/month. That's peanuts. You might as well save yourself the anxiety and stress of rentals and just give up that Starbucks habit. People will argue that they are building equity and that tenants are paying that off for them but equity doesn't by you your ham sandwich for lunch (financial independence)....what it does is it ties you down into an investment that your kids might benefit from or that your nursing home will benefit from when you get old enough.
...and what do people do...they get tired of maintaining that house that's making them $90 a month and try to pull more money out of it by not keeping a reserve for repairs or capex and they let it go the way of neglect....which reduces it's value....which means it loses the very same equity they argued about 15-30 years prior. Throw in market factors when you don't have 5 years to wait for a market recovery and you're screwed in retirement.
The solution (and I agree with the article) is buy the first house with cash - even if it is a $35,000 "pig", save the net profits (after reserves), buy another one with that profit, and let it snowball. That's the only solution. You have to have time and patience...and in many cases more time than patience.
I recently read "The Tao of Charlie Munger". In the book, it talks about how Charlie and Warren Buffet started out by leveraging...and then they stopped because they realized it was a fools game. I recommend the book for a different perspective.
I haven't yet but i don't think it is necessarily a goal that cannot be attained in a desirable amount of time....i think it all depends on your income level that you are trying to replace. Obviously the more you make the longer it will take but it can be done. For me personally if I'm looking at $200/door cashflow then i have to buy at least 85 sfrs to get there...that's a lot of houses. So my strategy is mfrs which will be less than that. If i want to get even more aggressive then i work on paying these properties off and I'm looking at maybe 10 mfrs. It can be done, just needs time and creativity!
@Justin Young, I am no help. I have been investing around 25 years. It is get rich slow for me. It started off as a hobby/ side job, then I got more and more into it. About 3 years ago I got really serious. It will make me a $million, but it took 30 to 35 years to do it. this does not count money I made from my main job. If you think making even $6K or $7K a month will be passive you have another thing coming. If you get $200 per month cash flow per sfr you are still talking 30 to 35 rentals. If you are only making $100 per month per rental you are looking at 60 to 70 units. That is a lot of work.
I also agree and disagree. The article also talks about earning high income some way or another through a sales job (you are really good) or having high W2 earnings such as being an engineer, CPA, doctor, etc. This way you can funnel it into real estate faster than doing rentals over time slowly, basically, I think was his point.
It's easy to say "Oh just build a business" or read Inc. Magazine to read about all these amazing stories about startups and decide to replicate. They are outliers and lot of people are not cut out for that and are not entrepreneurial. If the business makes it past the first few years (profitable and paying your bills) even then it's a long, long road even through the business sale. I've had my own company for over six years now and am going through that. There's no easy road, but there are plenty of stories even on this forum about great buys in houses where people made a lot of money quickly through rehabs, good deals, adding value, etc. Doesn't the general economy/market timing play into it? If you bought something 3-5 years ago in many areas the appreciation has been amazing. I think it's a bit of luck, hard work, outside forces, and smart moves that dictate how things will play out. In the end nothing is easy no matter how you focus on earning money and becoming financially independent.
@Erin Shine Agreed. Whether it's real estate or attempting some other business, timing and luck play a HUGE role in the ultimate outcome.
The failure (or mediocre outcome) rate of running a business is soooo high - I'm not convinced the risk adjusted returns are any different from real estate.
I read the article and the author includes RE operated as a non-passive pursuit as a business (it may be in the article comments). This implies if you are doing forced appreciation, actively leveraging, performing profitable flips, etc then you can make significant money because you in effect have made RE a business. The passive investor will need some good luck.
My first buy n hold that was mine was from 2003 (my family has had buy n hold since the late 1970s)and I have a fairly good paying 9-5 job so I did not start from scratch. However, I started investing in RE in earnest in 2012. The purchases made in 2012 and 2014 have done fabulous. So it somewhat depends on the definition of a lot of money. Do I expect the same returns going forward? I wish but I do not. Do I think it was luck? Not so much luck even though I could have made poor purchases and did quite well. I do not consider it luck because I was very confident the local RE market would appreciate. I mostly purchased properties that had an opportunity for forced appreciation
(one exception and it was priced a little below market at a time that I had no time for a rehab and desired a near zero effort property).
So if RE is your chosen path then run it like a business. Think about forced equity. Think about leverage. Realize there are risks and know when the risk is worth taking. These are ideas that are common to many business pursuits. RE as a business is not much different.
Good luck.
yes. There are definitely different ways to a comp which this in less than 10 years. I was able to accomplish this, but it was decades ago. Here are some items I would ask you to consider:
don't just purchase all your single-family residences on a buy and hold program. If you purchase the property correctly and are able to turn it in a short timeframe for a profit, your net worth will grow quickly.
when you look at your retirement years, where will it be, and what will it cost you. I live in the most fantastic retirement area in the country, The Villages, Florida. There are 34 golf courses available daily for free, 140 pickle ball courts, over 200 softball teams available after try out, free entertainment every evening, and over 100,000 like people that just want to play. A couple could live a fantastic retirement life on less than $5000 per month. This would assume a free and clear residence, no car payment, and does not include annual income tax.
Audrey – my calculations say $17,000 per month. I don't know how someone wwould need to get to that number.
Jerry W.-Hi Jerry. I noticed you were catching me in total posts, so I decided to get back involved with bigger pockets. Nice to see a few of the old-time members are still around.
Erin- I don't know whether someone could do what I did in the current economy. I do know I have properties in the Dallas area that were purchased less than two years ago that I can sell now where I would net three times what my down payment was (. Total net of approximately $4 million) . It continues to be a very strong area and I would assume if someone had bought enough single-family residences in the same timeframe, they would have made close to the same return.
Justin – I agree 100%. I was doing my investing in the right place and at the right time. That definitely helped my quick progress and retirement.
Dan – I agree with everything you posted.
@Andrew Johnson hit the nail on the head. Real Estate is a "get rich slowly" game. Of course there are the weekend sales gurus who show you photos laying by the pool in the Bahamas asking you for 5K so they can teach you to be rich too! ...and in just three short days!!! But the reality is that you have to purchase wisely, you make your money the day you buy a property. The "potential" belongs to the future, not he seller.
The article was interesting and does make a valid point, it takes continued investment to make it big in the REI arena. If you are simply buying homes and flipping them you have to deal with eating your profits along the way, and taxes. The quickest way to the finish line of wealth is to A. Win the lottery and invest in RE B. Work your day job and invest everything you can into your future (for me that is RE) C. Join a commune where money is not considered wealth (Instant satisfaction!?)
I know a dozen or so people to live off of their real estate income and most of them have done it in 3-5 years. These people belong to three categories:
IMO, it's about personal drive - - the willingness to 'make it happen with sweat & tears'. If the effort isn't there, running a business or REI, then the results will not occur.
Those that are familiar with me know I lean heavily into MFUs over SFRs for the economy of scale and profits/door. Being a remote LL, I can't be driving all over the county for $100/door/month - - too much effort for far too little return for me at least. With a simple 6-plex, I was drawing over $500/door/month for years and that WAS worth the effort.
Did I quit my W2 job? No. I needed to expand and get a few more MFU+5 properties and I elected to constrain myself at this level - - see, I didn't have that drive.
My comments will open a can of worms....but it's been weighing on my mind a lot lately after reading that article.
I see many folks coming in and talking about the BRRRR strategy...and I see many folks coming in and using other people's money to leverage themselves into more properties to chase the dream of financial independence. I've also read the article about the $35,000 "pigs" that folks seem to hate.
At the same time, I'm buying distressed properties that were previously rentals that are absolutely trashed from neglect of the previous landlord. I looked at a home two weeks ago (via photos from the agent) of a home that belonged to a prominent investor in the midwest that was "Occupied up until the Sheriff's sale in December" that looked un-inhabitable to me. I wouldn't live there
I don't see this as being a way to financial freedom unless you can accomplish two things:
1) Reduce your lifestyle (pay off your personal home, get out of debt, reduce expenses to the basics)
2) Own your properties free and clear.
By leveraging yourself into your next rental, you're reducing your cash flow. Say you buy a property (distressed or otherwise) and pay cash. You rent it out for $725 per month and 40% of that goes to reserves/insurance/property taxes. That leaves you with $290 month net (or $3,480 per year) of free cash flow. Put a mortgage on that property and you reduce that profit to less than $100/month. That's peanuts. You might as well save yourself the anxiety and stress of rentals and just give up that Starbucks habit. People will argue that they are building equity and that tenants are paying that off for them but equity doesn't by you your ham sandwich for lunch (financial independence)....what it does is it ties you down into an investment that your kids might benefit from or that your nursing home will benefit from when you get old enough.
...and what do people do...they get tired of maintaining that house that's making them $90 a month and try to pull more money out of it by not keeping a reserve for repairs or capex and they let it go the way of neglect....which reduces it's value....which means it loses the very same equity they argued about 15-30 years prior. Throw in market factors when you don't have 5 years to wait for a market recovery and you're screwed in retirement.
The solution (and I agree with the article) is buy the first house with cash - even if it is a $35,000 "pig", save the net profits (after reserves), buy another one with that profit, and let it snowball. That's the only solution. You have to have time and patience...and in many cases more time than patience.
I recently read "The Tao of Charlie Munger". In the book, it talks about how Charlie and Warren Buffet started out by leveraging...and then they stopped because they realized it was a fools game. I recommend the book for a different perspective.
@Account Closed, I think you're wrong on #2 of your points. It's not about absolute number of profit/unit but rate of return. If you own a property free & clear your rate of return is 5-10% depending on the market and you have to tie a lot of your cash in that property. If you own it with leverage, your return is 15%+ on the same money invested and you have a way to get your money out of that deal to do a next one. In some cases you may have technically infinite rate of return if you have no money in the deal.
A couple of examples:
1) SFH - ARV is $120K, "all-in" cost is $90K. Refinance and take $90K out (75% LTV). No money in the deal - infinite return.
2) MFH - buy an apartment for $4M ($1M equity from investors, $3M debt). Increase NOI by 33%, it is now worth $5.32M (8% cap rate). Refinance $4M out (75% LTV) and give $1M back to investors. Now you have an asset that pays you, yet you have no money invested in it. Same infinite return.
@Account Closed, I think you're wrong on #2 of your points. It's not about absolute number of profit/unit but rate of return. If you own a property free & clear your rate of return is 5-10% depending on the market and you have to tie a lot of your cash in that property. If you own it with leverage, your return is 15%+ on the same money invested and you have a way to get your money out of that deal to do a next one. In some cases you may have technically infinite rate of return if you have no money in the deal.
A couple of examples:
1) SFH - ARV is $120K, "all-in" cost is $90K. Refinance and take $90K out (75% LTV). No money in the deal - infinite return.
2) MFH - buy an apartment for $4M ($1M equity from investors, $3M debt). Increase NOI by 33%, it is now worth $5.32M (8% cap rate). Refinance $4M out (75% LTV) and give $1M back to investors. Now you have an asset that pays you, yet you have no money invested in it. Same infinite return.
OK so let's take your #1 example. You've taken your initial investment back out and you're renting the house out for $1,200 per month. 40% of that is going to reserves, property tax, insurance, etc. That's $480 per month overhead. Your $90,000 note at a rate of 6% is going to cost you another $540 per month over 30 years. Your net cash in hand (financial independence) overhead is now $1,020 per month. Your cash in hand is $180. You are making $180 per month. How many leveraged homes at $180 per month do you need (OCCUPIED) to live off of? Without the loan, your cash in hand is $720 per month. How many non-leveraged homes at $720 per month do you need (OCCUPIED) to live off of?
See what I'm getting at....your efforts are making the bank money and you aren't achieving that goal of financial independence. You're making the bank rich!
I understand what you're saying about having that $90,000 back in hand....and you're going to need it to buy all those other leveraged homes to make up for that monetary difference :)
Let's say that I want $10000/mo. That's 56 leveraged houses or 14 non-leveraged based on the numbers above.
How much money do I need to buy those 56 house provided all of them fit in the same model?
$90K! That's all. Just keep cycling it through.
In the second case, I need $1.26M! How long would it take me to save $1.26M? 20 years, 30 years?
That's the difference between leveraged vs. non-leveraged.
Let's say that I want $10000/mo. That's 56 leveraged houses or 14 non-leveraged based on the numbers above.
How much money do I need to buy those 56 house provided all of them fit in the same model?
$90K! That's all. Just keep cycling it through.
In the second case, I need $1.26M! How long would it take me to save $1.26M? 20 years, 30 years?
That's the difference between leveraged vs. non-leveraged.
True...but how long will it take you to cycle through 56 houses? One every year and a half including rehab, marketing it for rent, and seasoning it? So that's about 37 1/3 years to get $10,000 per month using your numbers and leveraging that same $90,000.
The difference is you're focusing on accumulating assets. The article (and myself) are focusing on generating cash in hand so you can live off your rentals.
Personally, I have 20 years to the traditional retirement age...14 non-leveraged homes is a much more realistic number for me than 56 leveraged homes - especially with that 10 loan lending limit.
Michael – it is great to see someone with a plan and apparently the drive that you have. Go get them!
Nick B. – If you can accomplish number two, I like that one better.
On another note, did I see your name recently on the list of books that were purchased from me? If so, report back when done.
I just read the article that was on this site " Investing in rental properties won't build wealth but this will".
To sum it up and NOT verbatim is says, it's a good idea to invest in rental properties but to think you can be financially independent quickly, won't happen. It says the best thing to do is build a business and then buy real estate. It would take to long to have enough cash flow to support your living.
I agree and disagree. In a way it's frustrating to me. Iv been working toward this goal ( to be financially independent from rental property cash flow) for the last eight years.
My question: Has anyone became financially independent quickly from buying rental properties?? I'm talking 3-5 years.
If you have then can you please share how you have done that, your strategy and your goals???
Or just leave a comment and let me know what you think.
Thanks.
HI Justin,
I reached the below in 3 years but it depends on what you mean by financially independent (FI) because there are many levels of independence:
- enough unearned or passive income to pay all base level bills
- enough unearned or passive income to pay all base level bills and fund entertainment
- enough unearned or passive income to pay all base level bills, entertainment, and misc/etc/vacations
- then the millionaire real estate investor book's definition which is to have sufficient unearned income or passive income to fund your life's purpose which I think is beyond level 3. I like the MREI's definition even though its pretty grey in terms of what specifically it means. The definition would vary from person to person but thats the way it should be because everyone is different.
What's your definition of FI?
@Account Closed,
Yes, I ordered your book, and yes, I am working on the #2 from my examples. I'd rather syndicate 3-4 apartment deals than buy 56 SFHs :-) Same net result with less work.
I also look at that and with the analysis, bargaining, inspecting, arranging of contractors, supervising,and that seems like way more than a part time job.
I also wonder about the BRRR strategy as it kicks the can down the road, yeah, in 30 years you are rich, and yeah, you are now playing with none of your money, but I want opex. I don't want to bank on appreciation or the day that it pays off 30 years from now. How do you find that many "deals" in that time frame also? That is a lot of mailers sending out if you are doing them, and that takes time also in the sending and the calls you may get. Following up leads, etc.
I am buying properties by saving up cash, putting 20% down, carrying smaller mortgages and earning profit by either saving up for a downpayment or rolling all extra into one mortgage to pay it off as quick as possible. I know many can't do this but the brrr strategy seems like it is really hard to pull off, and I can imagine feeling like what is going on when you look at your account but never really see it grow and you own properties.
I guess if you want to expand as big and as fast as possible brrrr works, you are really leveraged, and you have a bunch of properties, and if everything goes well, you could do what I do and roll all the profit to pay down one and still pay it down quickly and soon it would become a steam roller of fully owned properties.
I just can't imagine being able to find all these "deals" and expand my empire that quickly that I would be able to get the returns I feel comfortable with.
@Rich Weese I had 14 properties when I read your book a couple years ago. Seen then I have almost tripled my portfolio. See you in The Villages.
Franklin
My initial example was a pure exercise in what's possible based on what some people I know did in the past. The market cycle is important. It was possible to buy $120K properties for $90K and no money out of pocket in 2009-2010 and many people did that. Now, it's a different story and you may need $20-25K out pocket for a similar deal. That's why I put "assuming all 56 are available" in my example. "Available" as in "all I have to do is to offer on it and close".
As for BRRR, it does not rely on appreciation. Essentially, it does what I described earlier: if you buy a distressed asset below after repair value, your appreciation has already happened - it's the difference between your cost and ARV. Then you rent it out for cash flow and go to the next one. In short, you have both: cash flow AND appreciation if you practice BRRR correctly.
I love your progress. Have you purchased out of state ? If you worked exclusively in CA., you proved me wrong. Great progress on your path to self sufficiency by way of Passive Income.
I like all 4 definitions of FI. When I was talking about my area where retired people live in the 4th level of FI for the amount I quoted.