Michigan Family to Exit the Rat Race
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.
Thanks in advance to all! :wink:
Most Popular Reply
#3 Real Estate Deal Analysis & Advice Contributor
- Rental Property Investor
- Mercer Island, WA
- 14,132
- Votes |
- 22,059
- Posts
#3 Real Estate Deal Analysis & Advice Contributor
- Rental Property Investor
- Mercer Island, WA
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.)