The average annual household income in the US is approximately $53,000. Besides a primary residence, most Americans are not investing in real estate – but I believe they should be.
When you can replace this salary income with passive rental income, then, you’ll be able to “retire”. In my opinion, real estate is a fast way to accomplish this. In fact, I have seen at least 7 people use the following strategy and it has worked for them – as they are all now retired from their desk jobs!
My friend that is a bit of a financial extremist didn’t make enough money to even warrant filing a tax return 5 years ago. Now, he literally had to build an extra garage just to house his extra cars (Audi, Lambo, WWII Jeep, etc.)
So let’s set some expectations:
This plan is perfect for:
- The extreme
- The entrepreneurial
- The hard-working
This plan is not for
- The weary
- The lazy
- The comfortable
But for those investors who are willing to put in the up-front work, it can really pay off. Within just a few short years, your friends will start to ask “I haven’t seen you in a while, where’d y’all go?”
Your response can simply be “on vacation, again”!
Let’s get started. This is how I would suggest building a real estate portfolio that will help you retire within 5 years. Best of all, I’m going to show you how, with only $30,000 (and some hard work).
Here’s the goal:
|Annual Profit||Bank Account Balance|
|Year 1||Salary + $7,860||$25,860|
|Year 2||Salary + $23,720||$5,860|
|Year 3||Salary + $34,304||$35,164|
|Year 4||Salary + $34,304||$69,468|
|Year 5||Salary + $53,200||$116,688|
|Year 6 and Beyond||Passive $53,200||...|
Note: This model requires you to have a full-time job/income while you build up your rental portfolio.
Year 1 – Getting Started
1. Separate Your Finances
The first and arguably the most important part of this plan is to establish a separate checking account. I know this doesn’t seem that important but it is. It really, really is.
2. Try Airbnb, Make $8K
Hopefully, you already own a house in a desirable neighborhood – even if this is your primary residence. If you do, you should consider taking professional pictures of it and listing it (or the extra bedrooms) on Airbnb.
You can choose to either rent individual rooms or the full house. Friends of mine that have implemented this plan have used both strategies. I personally only rent out the full house as a single unit.
It’s completely reasonable to make $8,000/year as a “host” on Airbnb. Granted, you have to be very attentive to your guests, and be available for move-in/move-outs at a variety of times.
3. Buy a Duplex, Make $7,860
Consider buying a duplex this year. Every market is obviously different so I’m just going to use the assumptions that work in Chattanooga (my market).
Note: Every single one of my friends that has used this strategy and rented out their house has made at least $8,000 in profit.
- Find and buy a “Class B” duplex for $100,000 and get $800/rent for each side. Even so, I don’t even consider this aggressive or a great deal – but it can be easily accomplished.
- Let’s assume you put 20% down so now you have an $80,000 mortgage on a 20-year amortization at 5%. Again, these are not aggressive assumptions.
- This leaves you with a debt payment of $645 and let’s add $300 a month for taxes and insurance for a total payment of $945.
- Annually, this duplex will have annual revenue of $19,200 and PITI (principal, interest, taxes insurance) of $11,340 for an annual profit of $7,860.
Year 1 cash-flow profit is $7,860/year.
Therefore, at the end of Year 1 you have an additional $15,860. You’ve already spent $20,000 for the deposit therefore there is still $10,000 left from the original $30,000 budget.
Your checking account balance should be $25,860 ($10,000 + $15,860).
Year 2 – Rinse & Repeat
This is an easy year because you are going to follow the exact the same steps that you did in Year 1.
You are going to rent your house out and make another $8,000 in profit (or more since you now have a following) and you are going to buy another duplex using the same assumptions in year 1.
Therefore, with the duplex purchase your cash reserves are going to go down from $25,860 to $5,860.
Year 2 cash-flow profit increased to $23,720/year.
Year 3 – Use Seller-Financing
You only have $5,860 in your checking account so you aren’t going to be buying another duplex with 20% down. This year you are going to find a highly motivated seller.
If you don’t know how to find a motivated seller, just tell a couple of wholesalers (or real estate agents) that you need someone to sell you a property using seller-financing. You would be surprised how many connections you’ll make and options you’ll have.
You find a highly motivated seller of a quadplex that is willing to sell his $200,000 quadplex for $170K. He is willing to finance the entire note over 20-years at 7%. Here is the problem: he is behind in his taxes and owes $5,000 in back-taxes.
You purchase the quadplex and your checking account balance is now a paltry $860. You haven’t quit your job yet have you?
Your payment on the seller-financed note is $1,318 and let’s add $600 a month for insurance and taxes for a total payment of $1,918 ($23,016 annually). The rent is below-average in this quadplex with $700/unit but it is fully occupied. Therefore the gross revenue for this quadplex is $33,600. The cash-flow profit is $10,584 for the entire quadplex.
Year 3 cash-flow profit of $34,304/year.
The cash in your checking account is the $34,304 annual profit plus the $860 which equals $35,164.
Year 4 – Flip a House
In year 4, since you’re making some real money now, you should consider doing something very unconventional. You are going to flip a house.
Find a quaint single-family foreclosure that you can buy for $50,000 and invest $30,000 in new plumbing, paint, roof, windows and appliances.
Because this is a foreclosure, the bank (hopefully a small bank) will lend you the money for the purchase and the renovations. If you think this is unrealistic, think about it from the bank’s perspective.
They turn a piece of real estate into a good loan (read: income earning asset for them).The worst-case for them is that you buy this, fix-it up and can’t sell it.Regardless, they have earned income the entire time of the flip and you have improved the condition of the house the bank currently owns.
The after-repair value (commonly referred to in the industry as ARV) is $140,000. You pay a real estate commission of 6% ($8,400) and pay closing cost (est. $1,600) so your net sales price is $130,000.
You are going to put the money in a 1031 exchange and buy an apartment complex at the beginning of year 5. Your net profit on the flip was $50,000 ($130k minus payback of the $50K purchase loan and $30k renovations).
Year 4 cash-flow profit remains at $34,304/year
However, the cash in your checking account has increased by year four’s profit, totaling $69,468. The title company retains the $50,000 allocated for the 1031 exchange.
Year 5 – Buy Another Quadplex
The final year – you made it! I suggest finding another motivated quadplex owner willing to do seller-financing.
As an example, you find a great house, but the seller is a little crazy as he will not budge off of his $200,000 asking price. However, he is willing to finance 75% of the sales price at 7% over a 20-year amortization period. Since you have $50,000 from your 1031 deal, you decide to pursue the acquisition.
The tenants in this quadplex are drastically underpaying at $700/unit for monthly gross revenue of $1,400 (for 2 units) and annual gross revenue of $16,800. You’re able to convince two of the tenants to move out, and then you perform some cosmetic repairs (paint, carpet, countertops, etc) at a cost of $6,000. Then you’re able to rent them for 1,100/month each, yielding $26,400 annually for the other two. The total revenue for all 4 units is $45,600 a year.
The payment on the seller-financed note is $1,357. Let’s add another $600 a month for taxes and insurance cost for a total payment of $1,957. Your monthly cash flow profit is $1,843 and your annual cash flow profit is $22,116.
At the end of year 5 you have annual cash-flow profit of $53,200 in annual cash-flow profit.
Year 5 cash-flow profit increases to $53,200/year, plus, you now have $116,688 in your checking account.
Not only would you own 12 doors by this point, but now you have quite a bit of equity. In most parts of the county, with a nice six-figure checking account and annual cash-flow profit of $53,200,
If you are like the majority of Americans and make you are ready to retire!
The 3 Big Caveats
1. What About Maintenance Costs?
If you have been a landlord for any length of time you have been screaming this entire article: “but Jimmy, you forgot maintenance cost.” Au contraire, my friend. You’ll need to fund maintenance cost out of your personal account where your job income goes.
The checking account I had you set-up in year 0 was a “freedom” checking account – dedicated to growing your net worth, cash-flow, and establishing financial freedom. Your personal checking account is for maintaining your net worth and cash-flow (at least under this model)
2. What About Net Worth?
You will also notice I didn’t talk too much about net worth in this article. It’s because nobody is ever interested in their net worth after they retire. They are only really interested in their living standards and cash-flow.
3. Partial Ownership
Cash-flow assumptions and cash balance assumptions all assumed a full-years worth of ownership. In reality, you might by a property in the middle of a year, or maybe at the end of the year.
Instead of criticizing my assumption, think creatively how you can use this template to retire early.
Related: The Landlord Lifecycle
What’s Your Story?
Have you retired using real estate or does your retirement plan already include real estate? I’d love to hear more about it in the comments!