How to create a six figure income with real estate investing

Have you ever thought about what your life would look like if you could create a six figure annual income from your long term real estate investments? Today’s post is about how the investments we plan and execute today could get you there at some point in the near future.

The math of creating a six figure income from your real estate investments is quite simple. Essentially, there are two, very different routes to get there:

The Blueprint Method we advocate involves fewer properties and much lower risk. The concept is simple but it requires a solid plan and the discipline to execute it. Look at it this way: each free and clear property in your portfolio produces an income of $11,000/year. In order to generate an annual income of $100k you would need to own 9 such properties. But you don’t have the capital to acquire 9 properties with cash today to produce that kind of income. Thing is, you don’t need to. We advise our clients to purchase quality assets with 20-25% down and then use the positive cashflow they produce to aggressively pay down the mortgages one at at time with focused intensity. For a more empirical illustration download the detailed analysis of this domino strategy on a portfolio of nine single family homes. In that example, the entire portfolio worth over $1.25M becomes free and clear in 12 years and produces a six figure annual income before taxes. Can your IRA or 401(k) match that kind of performance? Not only that but the speed of reaching your goal is completely up to you and how aggressive you want to be. In comparison to the Perpetual Leverage Method below this strategy involves significantly less risk for two reasons. First, the number of mortgages you undertake is less than half. Second, these mortgages get paid off quickly in 12-27 months instead of lingering in your portfolio for 30 years. The management issue is resolved as well: Any investor can easily manage 9 properties using management strategies we teach. And finally, conventional loan guidelines allow for any investor to take out up to 9 mortgages so you won’t be locked out of financing using this method.

The Perpetual Leverage Method involves more properties and higher risk. Say you acquire a property that produces $4,000 in annual income after operating expenses and mortgage payments by putting 20% down. If you want $100k in annual income using this method, you have to own 25 such properties producing the same income each. I call it the perpetual leverage method because it involves keeping the properties leveraged for 30 years according to the original loan terms and using cashflow to create the passive income. There are three major downsides to this method. First, the risk to the investor rises with each loan added to the portfolio and since the loans are being paid off on 30 year schedule, the risk is virtually unchanged, throughout three decades. Second, managing 25 homes is not easy and not for everyone. You would think this would allow you to be financially free and quit your job when in reality you’re just changed jobs and became a property manager. Last but not least, acquiring 25 properties is difficult due to loan guidelines that restrict the number of properties with a mortgage any one investor can own.

The next question then inevitably becomes: If it is so simple, why isn’t everyone doing it? Because math isn’t the real issue. It’s a planning, commitment and discipline issue. In order for our Blueprint strategy to work, you have to start with a solid plan, you have to be committed to it long term and finally you have to execute it. Twelve years might sound like a long time from now, but think about where you were 12 years ago. You might’ve started your 401(k) and IRA 12 years ago. Is there 1.2 Million in there now and is it producing six figures a year for you? It’s time to take charge of your future. That life you would live if you were financially free is within reach in a few years but only if you push Start now.

 

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Comments

  1. I like the domino strategy…

    The problem I see is that you must own all 9 properties in year 1 for that to work in 12 yrs. It takes time to acquire 9 properties while saving up 20% to 25% for down payments to acquire each one.

    Do you suggest waiting to get started until you have the 180k+ laying around for the down payments and acquiring them as quickly as possible? Or should the cash flow from the first plus investor savings be accumulated and used for the next down payment until you have all 9 purchased?

    I would be interested in hearing about the years when you have only 1 or 2 properties… would the cashflow be accumulating for the next downpayment or immediately be put towards mortgage paydown of the first property?

    Jeff

    • Great question Jeff!

      As with most great questions,the answer is … “it depends..” 🙂

      You’re absolutely right that the example in the case study assumes that all properties are owned at the same time. But that’s a simplification I made to illustrate the domino strategy more clearly, not a prescription for every investor’s situation or a general rule. In reality, most investors won’t have the capital to acquire all properties at once and even if they do, it takes time to assemble a portfolio.

      My recommendation is: Start with what you got and work your way up. If you have enough capital to purchase one property, you execute that purchase until you have the capital to execute the second purchase.

      Your question about “Recycling the cashflow as down payment money” vs using it to pay off debt is a frequently asked one. The short answer is: It depends on your income and savings capacity. If you can save enough money to make the purchases in a timely way while still eradicating debt, that’s best case scenario. If not, it’s perfectly fine to recycle the cashflow and use it to save up down payments for future purchases faster.

      If you’re interested in a deeper answer, I’ve written about this at Bigger Pockets:
      https://www.biggerpockets.com/renewsblog/2013/02/14/pay-down-debt-recycle-cashflow/

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