It seems we all have a dream of financial freedom, don’t we? But for most of us, we are stuck in a 9-5 with dreams and aspirations, but no way to make those dreams a reality.
You may hear about all of the ads and fads saying “Make $500,000 every month with this 1 simple trick!”
Yeah. Let me tell you, that’s all it is: a fad. If you want to retire with real estate, you have to put in the work to learn yourself, no program can do that for you.
People are trying to make money selling you programs, and courses, and coaching calls, you don’t need that. You don’t need any of that. I’ll tell you what you need: Books, and experience.
Books give you the foundation to whatever industry you want to learn about- in this case, real estate.
Coaching calls can be great, but if it’s someone you aren’t familiar with and they’re charging you for it… are they really all they are made out to be? Why are they trying to profit so much if they are doing so well themselves? Sometimes, their only profit is from people that pay them for their courses and calls.
Books are great, and experience is the gift that keeps on giving. There is nothing like getting into the game yourself, soaking up all of the knowledge you can hands-on, and you can learn how to adapt to certain situations because you have already experienced them before.
Read and do. Read and do. Read… and take action.
Here are 4 very simple ways to retire in real estate:
Simple… Not Easy
Before we get started, all of the example we use will be basic examples that look nice on paper for convenience purposes, every situation is different.
And I said it was simple, it is definitely not easy. There is lots of learning, there are some mistakes to be made, and there is a lot to do. But… once you get the hang of it, it will become simpler.
And the reason you came here… Financial freedom. Retirement. When would it happen using these 4 ways? The answer is,
It depends on your timeline, when you want to retire, how much income you want each month, how much you want your net worth to be, if you even want to stop growing, there is so much that goes into it! Some strategies would work better for you than others.
All this article is, is laying down the information. It’s up to you to pick it up and decide what to do with it. Let’s get started.
1. Rental Property Accumulation
The first way to retire with real estate is simple rental property accumulation. The idea is to buy incredible properties, save the cash flow you receive from rent every month, and reinvest the cash flow into more properties. You can use any strategy you want from this, BRRRR, cash, or just simple accumulation using your own preferences.
Essentially, you buy the property, you rent it out to tenants, and you use the rent to pay the mortgage, taxes, insurance, and repairs, and then you keep the change. The change may not seem like much now, but it adds up. By the next year, if you got a good deal, you should be able to buy another property. If not, maybe 2 years. Or 3. It depends on what your goals are.
However, there are certain things you have to do in order to retire with real estate, and one of the main things is to set down a plan of certain criteria of what you want in real estate, and then adapt real estate to fit your goals.
Set Your Buying Standards
Most properties are terrible investments for the goal of rental property accumulation. This isn’t anything to fear, because a lot of rental properties come and go on the market. If there isn’t an opportunity now, there will be soon.
You need to set standards for yourself that fit your goals, such as:
- How many units do you want? Do you want to stick with single-family homes as you rental properties, or escalate into multi-family apartments?
- How much cash flow do you want from each rental unit/property? Be reasonable.
- Ensure you get the property at a discount. You should be able to buy properties for about 80% of the overall value. Find foreclosures, or motivated sellers.
- Do you want a turn-key property, or do you want to be able to profit even more from doing a light renovation? (Paint, floors, windows, etc.)
- How much do you want the property to appreciate every year? No appreciation typically means that it isn’t a good area.
A lot of standards that real estate investors set for buying deals is deemed as “unrealistic” by those outside of real estate, but it isn’t hard to find good deals. You just have to keep looking. Stop saying, “it can’t be done”, and start asking, “how can it be done?”
Buy Your First Property
Buy what you can get with a 20-25% down payment. If you have $10,000 or less, you can buy a cheap property that needs a lot of rehab, but prepare to do the work yourself. Or, use ideas like seller financing and buying with an FHA loan. These are all good ways to get into the real estate investing scene, but the most popular way is using conventional financing.
Conventional financing is using 20-25% of your money as a down payment, meaning you are 75-80% debt. So if you have $30,000, you can put down 20% and get a $150,000 property. 5x the assets, 5x the cash flow, same amount of money.
Especially since you won’t even be the one paying the debt.
The most important thing is to take action. You can do all the learning you want, but if you get stuck in analysis paralysis, where you are too worried to do anything, you will never get anywhere.
Action is the determining factor between successful and average.
Buying Single-Family Homes
This strategy is fairly similar to the last one, but for many it is an easier route, with less returns.
Now don’t get it wrong, it can still produce great returns, but this strategy isn’t as scalable as say, buying a bunch of fourplexes. Or 16-unit apartment complexes.
If you want to retire with real estate, buying single-family homes is one of the safest, least time-intensive ways to do that. It is basically the index fund of real estate. Here’s how this strategy works:
First, you need similar buying standards as if you were just doing general rental property accumulation. You still need to hunt down the undervalued properties. Try and save 20% or so on your first deal.
Year 1: You find a property. You like it, it meets all of the criteria. So:
Assuming you buy a house for $80,000, (No idea where you live, just adjust), you should bring in a few hundred dollars a month in cash flow. This may not seem like much, but neither did Warren Buffett’s portfolio when he was 50 compared to where he is now.
Here is the criteria of your first home:
- $80,000 Purchase Price
- $16,000 Down
- $500 Mortgage (Assuming a bad interest rate)
- $75 Property Tax (Depends on your area)
- $170 Insurance (Depends on Your Area)
- $25 Maintenance Preparation
- $130 Property Management Fee
- Total Expense: $900 Monthly
- Rent: $1,200 Monthly
- Total Cash Flow: $300
Is this accurate? It depends on the deal, and it depends on the property. You should have more cash reserves in advance, the the $25 was for simplicity purposes and for an extra reinforcement in-case something goes wrong.
Now, you will need to add a little bit of income from your job as well. For example purposes, let’s try to match with $300. You spend the first year collecting rent, and adding $600 in total to your savings. End of the year, you come out with $7,200. Wait a minute, what about that 20% you saved?
When you get a property at 20% under value in a good location, that is typically because it needs a light rehab. Flooring, paint, etc. So a little touch up there should bring the value up about 10%. That is 10% equity for you to use at a later time.
10% in equity gained from forced appreciation (value increases because of improvements to the property) means that you have an extra $8,000 to work with.
At the end of year 1, we have $7,200 in cash, $8,000 in equity. Let’s save our money for year two.
At the start of year 3, we have $14,400 in cash, and $10,700 in equity (assuming the average nationwide natural appreciation rate of 3%).
We can take out a refinance, meaning we get the full value of our property (Now $92,700), pay off our old loan, (Now $50,000 because of loan paydown) and keep the $42,700.
We can take this $42,700, and buy two houses for $80,000. Let’s assume the same scenario, just doubled.
- $160,000 Purchase Price
- $32,000 Down
- $1000 Mortgage (Assuming a bad interest rate)
- $150 Property Tax (Depends on your area)
- $340 Insurance (Depends on Your Area)
- $50 Maintenance Preparation
- $260 Property Management Fee
- Total Expense: $1800 Monthly
- Rent: $2,400 Monthly
- Total Cash Flow: $600
Now note, these are just the new properties, we still have our old property. Our total cash flow is now $900.
10% forced appreciation on the two new properties and 3% natural appreciation would give us $18,400 in equity now, and then saved cash flow equals to a savings of $10,800 for the start of year four.
Now, you save your money through year four. Or, do whateevr you feel like. This is just an example of a path that would work.
At the start of year 5, you have $18,000 added from loan paydown, 3% natural appreciation for each property giving you an added $7,200, along with the equity you already had of $18,400, giving you a total equity of $36,400, coupled with 12 more months of cash flow, giving you $21,600 to start year 5.
End of Year 4: $36,400 + $21,600 = $58,000 after a refinancing.
In year 5, you can afford 3 $80,000 properties. You see where this is going. Assuming the same criteria, you are now getting $1,800 every month in cash flow, and this is using conservative numbers. You can keep adding to this, and build as large as you want.
The beginning always starts slow, but compound interest takes effect and turns the process into a snowball.
This is called the BRRRR Method (Buy, Rehab, Rent, Refinance, Repeat). It does have some flaws, but that was the basic idea given on a textbook example. If you would like to learn more, investor and best-selling author David Greene wrote a manual describing almost every situation you may face in BRRRR, and how to use the BRRRR strategy to retire with real estate.
BRRRR goes far beyond singlefamily homes, but you can keep it simple if you life. Singlefamily homes are a great way to make money in real estate.
Last but not least, house hacking is more of a beginner strategy to get a big head start in real estate. It’s really a way to live for free, and rather, make money for living in a place you own.
Simply put, you buy a duplex, triplex, or quadplex, and you live in it! Live in one unit, rent out the other(s). Any good deal will have the rent of one unit cost more than the mortgage. You are essentially living there for free, and it is a great way to build up cash flow while living for free.
Other Ways of Making Money
There are many ways to make money in real estate, and most of them fall under one of the first two broad categories. Whether it’s small apartment complexes, luxury apartments, retail, they all fall undr one. Whether BRRRR applies to it, or it is simple rental property accumulation.
The beauty of having the ability to retire with real estate is that you can retire in a few years, but you don’t have to. You can scale up as far as you want to go, and you can grow into a force to be reckoned with in the business world, just from using strategies like these!
Credits to Brandon Turner from BiggerPockets
The information from this article largely came from Brandon Turner, VP of Growth for BiggerPockets, the largest real estate community in the United States.
Brandon Turner wrote the book that this article was based on, The Book On Rental Property Investing, widely regarded as one of the best real estate investing books ever written, if not the best real estate books ever written.
The reason the book is so regarded is because Turner took all of the information he learned from his years of accumulating rental properties and achieving financial freedom, and put it into one manual for us to read. It is considered the most complete guide overall for real estate investors of any level, beginner, intermediate, or experienced.