Strategy

Real estate investors’ goals vary in nature: Sometimes it’s about growing their portfolio’s value or income from it to a certain amount. In other cases though, it’s all about time. How can they achieve what they want (retirement, financial freedom, quit the job to stay home with the kids) in X number of years? How many assets do they need to purchase and what level of invested capital will be required? And most importantly, how do all the pieces fit together in a coherent strategy?

Our Blueprint Investment Strategy can answer all these questions.

As an example, let’s look at a case study. Say you have a married couple in their mid 40s with 3 kids who have a combined income of $150,000/year. Their goal is to retire in 7 years with an income from their investment portfolio of $75,000/year. Now you might ask: How are they retiring if they’re only earning half of their current income? True, but think about what their current income funds: Their retirement investments, college funds, additional savings etc. All things that go away when you actually, you know, retire. So in this case, they’ve figured out that their living expenses would be comfortably covered by this $75k goal.

So let’s think this through. Each paid off property they will own at the end of 7 years, will produce about $11k/year in pre-tax income. So they will need to own about 7 debt free properties at the retirement finish line to accomplish their desired income. At an average of $30k of invested capital per property owned, that will require about a $200k investment to acquire a portfolio of properties worth about $980k. At acquisition, each of these assets should have a positive cashflow of about $4400/year that we could use to pay off their mortgages within a 7 year timeframe. If this investor were to use nothing but the positive cashflow to accelerate the payoff of mortgages, she could pay off the entire thing in 12.5 years. Since we’re trying to get there in just over half the time, we need to add more firepower to our cashflow to make the process burn faster. So, for this investor to retire in 7 years with an annual income of $75,000 he would have to invest an additional $1,300 each month to increase the rate of debt payoff.

Usually this is the part where things get very quiet. Because it’s a cardinal sin for an investor to invest money monthly in their real estate portfolio, right? I mean, this should be an income producing strategy not an income spending strategy. Think about it this way. Your real estate investment portfolio is being used as a tool to achieve retirement. So let’s look at all the other tools you’ve been using for the same purpose. Mainly your 401(k). You invest about 14k each year in that thing don’t you? And it doesn’t even come close to producing $75k in annual income and over a million in asset value in 7 years. So explain to me, why is okay to invest that kind of money in an “invest and hope for the best” strategy that might get you to retirement at 65 but not in your real estate investing portfolio?

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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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