10 years of investing and financially free?

Question

Hello investors!

I recently listened to bigger pockets episode titled "the 7-property retirement plan ($80,000/yr)" August 7th release.

I can't seem to figure out the math behind how this is possible in 10yrs. He mentioned at end of podcast that 10% return on equity is achievable and doable by any investor. How???

the longer you own the property the lower your ROE is over time on that given property. I have a prime example of a property I purchased in 2017 for 250k that's now worth 500k that I kept as an investment. That ROE went from 8% to now less then 2.5%.. but I keep it and don't refinance it because of low interest rate. I just don't understand how what he mentions in podcast is actually doable.
If you are constantly refinancing, your loan becomes higher, meaning monthly payment is higher, which in tern means you cash flow less. Someone, show me some math to prove his point.

Thanks!

Dan H. · Answer

Your math on ROE seems incorrect.

Your property has increased in value $250k in 9 years or an average of $27,7k/year.   I see no way that your ROI has averaged below 8%/year unless it has huge negative cash flow.

If you want to keep the ROE high, you need to keep equity low.  This requires a refi when equity gets high enough to warrant it.   Note it is seldom that rates increase 3x over a couple/few years.  The implication is that normally there is not the negative rate impact that you would currently experience with a refi.

I purchase expecting to recover my investment in no more than 4 years.   This typically requires a value add (including sophisticated value adds).

Good luck

G. Brian Davis · Answer

Hi @Vitaliy Zima, your math is right, ROE mechanically drops the longer you hold without refinancing, because your equity keeps growing while cash flow stays flat. The podcast probably assumes you are periodically pulling equity out through a cash out refi or 1031 and redeploying it.

JD Martin · Answer

I haven't listened to the podcast but I'm guessing that the idea is more or less a basic refinancing that pulls your "dead" cash out of the property and reinvests it into a more profitable property. You are correct in that the more your property is worth relative to rent achievable the lower your return is going to be. Unfortunately right now the prevailing rates make this a lot harder unless you can find something that can do a lot of value add (ADU, rehab, expansion, lot split, rezone, etc).

10 years of investing and financially free?

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