It’s been a couple weeks, so let’s quickly catch up. I’m seeking my Financial Independence, I’m on a ten-year plan to get there, I need to be making $8,500 a month in income to meet my goal, and I am going to use real estate investing to do it. Wow, that’s alot to say in one sentence, now isn’t it.
I’ve had several weeks to let this soak in, and although the challenge is big, I’m ready to move forward. With these factors in mind, I came up with the following growth plan: In year one, I will acquire two properties that generate $200 a month in net cash flow each. I will do three the next year, four the next, and five per year the next couple years. This gets me to my objective, gives me time to ramp up, and seems achievable.
One of the pieces of advice I’ve been given is that this does not have to be a rigid plan. If I can make more cash flow on a given deal, I’ll go for that, and increase my target. I’ve been told the first year will be the toughest, but that by year five I should be able to ramp up even faster than what I show.
My plan is based on doing rental properties, but I may do a flip here or there as well. But that seems more cyclical, and it is not recurring income, so it won’t be part of my plan for Financial Independence. If I do any flips, that will just be additional side income.
As you will see, I have charted all of this out. You’ll notice I also factor an annual 2% rent increase (inflation) in my income. This is my plan:
Year 1 2 3 4 5 6 7 8 9 10
Starting Monthly Income 0 400 1008 1628 2461 3510 4580 5672 6785 7921
Inflation 0 8 20 32 49 70 91 113 135 158
New Monthly Income 400 600 600 800 1000 1000 1000 1000 1000 500
Ending Income $400 $1,008 $1,628 $2,461 $3,510 $4,580 $5,672 $6,785 $7,921 8,579
A couple of weekends back, I started researching properties. At first, I just opened up Zillow and browsed various listings around town. I didn’t really know what I was looking for, so I just pulled up listings one by one to see what they said. I wasn’t really being productive, so I reached out to one of the other members here for some guidance. He provided me with a spreadsheet that allows you to analyze rental properties, and showed me how to use it. Here’s a video that tells you how to do this analysis:
Together, we pulled up a couple listings. On the first couple rental properties I came across, the numbers didn’t look too bad. I live in the central Ohio area, and I’m told that real estate prices aren’t too crazy here. There are certain parts of town that are a little pricier than others, so I’m avoiding those and sticking with more of the middle market type opportunities.
I came across a duplex I liked, that had a positive cash flow of $200/mo., so I thought I should take a closer look at it. The property also has a 7% cap rate, but I’m not sure yet what that really means. I understand that it shows the over amount the property investment will return, but what’s a good cap rate? I’m told that for a desirable neighborhood, with good schools, a 7% cap rate is good.
The next thing I wanted to know was what it would take to buy it. I’ve only ever used conventional financing before, so I started with that. The asking price is $95,000, and I’d be using a regular bank loan, which I’m told is going to require at least a 20% down payment, plus closing costs. So I’d need around $20-22k in cash to buy this.
As I’ve mentioned before, I have a little cash set aside, but most of it I won’t touch for this. The fact is, I just don’t have $20,000 in cash available to invest right now. Conventional financing on a middle market property just isn’t an approach that is going to work here.
Before I go any further with my property search, I decided to take a step back, and do some more research. I need to be able to find deals that don’t require tens of thousands of dollars to get in on, and I need get sharper on how to do low money down type opportunities. I’m building my network with experienced real estate investors who are giving great advice. In my next post, I’ll tell you what approach I landed on.