All Forum Posts by: Ron Gallagher

One of the smartest things I have read about real estate was buried in the comments section of a blog post about rich dad poor dad.... I'll paste it here:

MARCUS AUERBACH on

How can you make $1,000,000 with rental properties? I ask most of my new investor clients in Milwaukee that question – it’s just a mental exercise to snap them out of the cash-flow-exclusive thinking and show that there is a bigger picture. The math is super simplified, so please don’t hang me for that!

Suppose you make $500 a month in cash flow of your rental property. That’s $6,000 a year. Hopefully tax sheltered for the first few years, but then subject to taxation. It takes 166 years to accumulate a million USD. Plus you have to spend $50,000 every 30-40 years for a general rehab, so there goes $200k for that. (Think about that before you want to buy a $50k property!) Most of has don’t have that much time.

Real estate is a game of leverage. Let's say you accumulate a million dollar worth pf properties, for example five SFR for worth 200k a piece. You can either put 20% down and buy them new or BRRRR them over a few years. Now you have three sources of wealth: cash flow ($6,000 x 5 = $30,000), appreciation (potentially; 6.4% since 1962, or 3.8% if you adjust for the fact that houses became bigger, you pick your assumption, I'll go with 5%, that's 50k on a million dollar portfolio per year) and finally: mortgage pay down (that happens even if appreciation does not) – let's say 3% on average for simple math. That's a total of $110,000 in the first year, more in the years to follow. If you run it through a BP calculator you will see that it takes you less than 10 years to generate a million. And that does not even include the fact that you will probably buy an additional property every year and a half or so just from the cash flow.

The moral of the story is – cash flow pay’s the bills and you need it like the air to breath, but it does not amount to much money. Wealth is created from appreciation (natural and forced) and for debt pay down. So pick your investment wisely, if you want all three forces to work for you. Like Ben L pointed out many times before – a $50k pig won’t cut it.

That's sad to hear... I have been telling my poor friends about NACA... I heard they require more paperwork but it's worth it for 0% down and below market interest rates. Perhaps if I hold my friend's hand during the process we can overcome the ineptitude of the workshop presenters and get my friends into a home with no money down and low interest rates.

For Baltimore, maybe you have a filter set to "show me only properties NOT in a sketchy area" and that will give you 0 results! haha

I wish this crash everyone is predicting would hurry up and happen so I can buy more properties at a lower price.

I agree with this suggestion. I assume you are a first time home buyer so take advantage of down payment assistance programs, tax reduction programs, first time home buyer programs, etc. Whatever is available in your area. Also NACA might be something worth looking into, I believe you can buy a 4-unit home with them.

An interesting observation from a local meet up I attended recently, was that not one person introduced themselves as a "landlord", rather everyone that was a landlord was a "buy and hold real estate investor", the term land lord does sound a little holier than thou since you would be claiming you are the "lord of the land" which admittedly does sound a little pompous. 

Different people are looking for different things. I bought the perfect rowhouse (for me) last year in DC that was in great condition (no reno necessary) but not renovated recently with the super popular modern open concept first floor which allowed me to hang a door in the dining room for $100 and convert it into a bedroom collecting $850 a month for rent. 

The property was on the market for 4 months last summer and @Russell Brazil was able to negotiate $50k off the sales price in a "seller's market"... why didn't someone snatch it up? I don't know. It's odd because I almost met the 1% rule in the DC market which isn't supposed to cash flow. 

I guess you have to look for what other people don't see. I don't know why no one made an offer on this awesome rowhouse that I now live in for free and make $2000 a month by renting out the other bedrooms, but I am glad no one saw the potential in this house that I did.

Sorry to be the bearer of bad news... but I do often see 4-unit buildings in SE DC that might be in your price range ($600k to $800k) and you can use residential financing that will allow you to get into the property with less money down. If you are willing to live in SE then you can even get owner occupied financing. 

I am in the process of applying for my first commercial real estate loan, which is what you would need to finance this 12-unit property, and I am learning a lot about the process. Usually you need to put 25% down for a commercial loan, which is $375k, and then most lenders are going to require you have more cash remaining in the bank for reserves. So you'd need to have around $400k in cash to take this property down, and even if you sold all your stocks and liquidated your 401k, you still wouldn't have enough to come up with the down payment.

I self manage because I tried "professional" property managers and they sucked