Here’s a common, nasty-surprise scenario many beginner investors have to confront: An investor with a few properties makes a move to expand their portfolio. They have an excellent credit score and are confident that they’ll have no trouble getting future loans. Except that the lender denies them financing. 

What happened? Actually, the investor did nothing wrong, per se—they just hit the conventional loan limit imposed by both Fannie Mae and Freddie Mac. Most new investors are unaware of this cap, which is 10 properties per investor, including your primary residence, until they hit it. 

The wrong conclusion to make here is that, as an investor, you don’t have any way of scaling your business. But the cap does mean that you have to do some financing research and planning beyond your ninth property. Investors should be thinking about strategic financing as early as possible if their goal is to scale their portfolio.

Here’s how to avoid the nasty-surprise scenario and reframe your investment property financing as a scaling strategy decision made before you buy your first property—not a problem you solve when you’re already stuck.  

Why Do Fannie Mae and Freddie Mac Have the 10-Property Cap?

Once you cross the 10-property threshold, Fannie Mae and Freddie Mac stop viewing you as an individual investor and start viewing you as a commercial enterprise, one far more exposed to economic swings. Below that threshold, financing is based on your personal financial health. Beyond it, your personal finances no longer matter: lenders need proof your investment business can weather a downturn or vacancy spike, and your income is disregarded entirely. This makes sense given that Fannie Mae and Freddie Mac are GSEs whose mission is supporting primary homeowners, not commercial investors.

The Mistake: Treating Financing as a Deal-by-Deal Decision

This is a shift in perception, not in your actual finances. Your income and credit score haven’t changed, only how lenders see you. That means scaling investors need a mental shift too: stop treating purchases as linear, one-at-a-time decisions and start strategizing ahead. If growth is the goal, your financing strategy should be in place by property #2, not discovered by accident at loan #11.

The Solution: Portfolio and DSCR Lending

If this is all beginning to sound a little esoteric, rest assured: There are practical solutions that go along with the shift in strategy, and they’re widely available to investors. They are portfolio and DSCR loans, offered by lenders such as LendingOne, which work differently from conventional loans. These are asset-focused loans, not borrower-focused loans (which is what conventional loans are).

Instead of assessing your ability to cover your debt, a DSCR (debt service coverage ratio) loan assesses the property’s ability to cover its own debt. Typically, a DSCR lender will look for a DSCR ratio of 1.2 or higher; that is, they’ll want to see that your property generates at least 20% more income than is needed to cover costs. 

A DSCR loan is a great option for investors who are still planning on buying investment properties one by one. If you’re planning on owning a total of 15 properties, for example, DSCR loans will help you overcome the 10-property threshold. 

However, if your plan is to own and manage a significant number of real estate investments, you’ll need to start looking into portfolio loans, which assess an entire portfolio’s ability to cover unexpected costs rather than the financial capabilities of individual investments. These loans are efficient and crucial for investors looking for significant expansion of their business or those planning to consolidate debt. 

What Planning Ahead Actually Looks Like

It can all sound far-fetched if you’re on your fifth property with conventional loans. But still, if your long-term vision is a substantial property portfolio, you need to start thinking differently from the very beginning. What that can look like in practice is lining up a DSCR/portfolio lender now, before you need one. 

What you don’t want to do is delay this strategic shift until you hit your ninth property and start getting rejected by lenders. Trying to scramble for financing your next property will set you back, resulting in deals that fall through and, ultimately, a less successful investment business. 

LendingOne is a lender built for the investor who plans to scale—not just a “next option” once you’re rejected elsewhere, but a strategic partner from earlier in the journey. LendingOne’s DSCR/portfolio loan products are flexible and come with options for new investment purchases, refinancing, and cash-outs. Moreover, there are options for break-even properties, which will hugely benefit investors who can’t quite meet the stringent 1.2 ratio requirement for a DSCR loan. 

The best place to start is by contacting Lending One to discuss DSCR/portfolio loan options as part of a long-term scaling plan.

Henry:
Real estate investors love to talk about things like cashflow or appreciation, but they rarely talk about the total impact that a single property has on your net worth. You may generate a little bit of cash flow from real estate investments in year one, but the real power comes from buying a great asset, holding it, and letting it run its course. And when you actually do the math on a property you’ve owned for five, 10, or 20 years, the results are eye-opening. Every one ordinary rental property can create hundreds of thousands of dollars in wealth. Today, Dave and I are breaking down a couple of properties from our own portfolios to prove that point. These are actual deals that we own and manage, and we’re going to share all the real numbers. Are there bumps in the road? Of course. As you’re about to hear, you can overpay for a property.
Renovations can go over budget, but real estate is far more forgiving than you think. If you buy a good asset, play the long game, and stay patient.

Dave:
Hey, everyone. Welcome to the BiggerPockets Podcast. I’m Dave Meyer, joined by my friend and co-host, Henry Washington. Henry, what’s up, man?

Henry:
What’s going on, buddy? Good to be here.

Dave:
Yeah, it’s going to be a good show. We’re doing something a little bit different today, and I’m excited to talk about it because we often discuss acquisitions, buying new properties. We debate the benefits of cashflow versus appreciation, but we don’t always talk about what might be the most important thing in real estate, which is sort of the cumulative benefit of real estate and how a single property contributes to your portfolio, to your net worth, to your financial freedom mission over time. So that’s actually what we’re going to be doing today. Henry and I have each wrote down some information about a single deal that each of us has done in the past. And we’re going to talk about the ways that a single deal evolves and changes and grows over time. And I think this is going to help everyone, not just help manage their individual properties and the things they already own, but going back to the acquisition phase, help people pick which deals they should be buying today to maximize that benefit and advantage over time.

Henry:
Yeah, this is super fun because when you study real estate like online, social media, books, podcasts, all of it, it’s all talking about what it’s like to purchase property, what it’s like to disposition property. And there’s tips and tricks for operations, but you never really hear the details of how an individual property is

Dave:
Performing

Henry:
Over time in someone’s portfolio. It’s like this missing link of real estate study.

Dave:
Yeah. People are like, “Oh, I bought it for X and then I sold it for Y,” but they never tell you what happened in between. And although sometimes those equity numbers are real and they are impressive, it’s not the only benefit. Or in between buying it for a hundred and selling it for 300, you put 400 into it and you didn’t actually make any money. So we’re going to go into it. And I picked what I think has been sort of an average deal for me over time. It did well. It’s not the best deal I’ve ever done. It’s not the worst deal I’ve ever done, but sort of just representative of a deal that I think works for people. But let’s do yours first. Tell us about what deal you’re bringing.

Henry:
So I bring this property up because it had a lot of hiccups, but I’ve held on through them and I’m glad I have. It’s an amazing property. So this is an eight unit property that I bought. I closed on it, I believe, January 2nd or 3rd of 2020. So this was literally as the pandemic was becoming a thing.

Dave:
Right before toilet paper weekend.

Henry:
Yes.

Dave:
When everyone was freaking out. When

Henry:
People were wearing grocery bags over their heads, tucked into their clothes, going to the grocery store. When no one knew what was happening, when it was really, really scary still. Oh God. What a
Crazy time to close on a property. And my biggest project to date. So I paid $500,000 for this eight unit property. It’s across the street from the University of Arkansas. So it is a fantastic location, but it needed quite a bit of work. And I made the classic newish investor mistake of underestimating what the rehab was going to take. So given normal times, I underestimated that rehab. But if you remember what happened during that time was it started to get really hard to find anybody that wanted to go outside and do any work. And the cost of materials and labor went through the roof. So I think I budgeted somewhere around $100,000 for the renovation of this property, and we probably ended up spending closer to $250,000 when it was all

Dave:
Set

Henry:
Down. Whoa.

Dave:
And you bought it for five?

Henry:
500,000, yes.

Dave:
Well, that’s a good buy. Eight units.

Henry:
Great

Dave:
Buy. 500,000. Yeah. I mean, 60 something thousand dollars a unit. I imagine even in your area, that’s pretty darn cheap.

Henry:
Phenomenal buy, especially for the location. And so performance-wise upfront, I mean, this property ate my lunch because we blew through that $100,000 pretty quick.

Dave:
How’d you finance that? I mean, if you were budgeting for 100K, how’d you get the other 150?

Henry:
We did a commercial loan from a local bank. It was a commercial construction loan. So they gave me 90% of purchase and $100,000 for renovation. So they gave me 100% of the renovation costs. I had to put down 10%, so I had to put down $50,000. And then we actually got the seller to carry that back on a note for a couple of years. So we paid him 10% interest on that seller carry back of the down payment for

Dave:
Two

Henry:
Years while I was renovating. So I didn’t have to come out of pocket any money to buy this property.

Dave:
But wait, when it went from 100 to 250, where’d you get the extra 150?

Henry:
Yeah, great question. So about 50 grand of that came out of my pocket, maybe a little more. And then the remaining, we were able to tap into the equity because the equity bump that we got during the pandemic years was good enough for us to tap into some of that equity and pull out the rest that we needed. And so the bank essentially gave us a little more on our line of credit to finish up the renovation.

Dave:
Still not looking good for you right now. No. If you’re following along, if you’re betting on this one. No, it’s not great. It’s

Henry:
Not great at this time.

Dave:
Your polymarket odds are very bad.

Henry:
We’re carrying the note during all this time. We’re renovating. There’s nobody living there because we had to essentially put everyone out. Everybody either left and the one or two people that stayed were problem tenants who weren’t really paying anyway. And so we had a completely vacant property that we were renovating. I was carrying the note on it. Those were dark days. Those were dark, dark days. And so when I bought the property, rents were at about between three and $500 a unit. That’s how not great these units were. These people were just slum lording it on this property. And we were able to start getting renovated units leased at between 1,000 and $1,200 per

Dave:
Unit. How big were they? Two bedroom?

Henry:
800 square feet, two bedroom, one bath.

Dave:
I mean, I imagine you get that from a college student all day.

Henry:
All day long we were able to get these rented. We also added laundry to each unit, which helped boost the rent and helped boost desirability. And so once we got that first unit online and saw how quickly we got it rented, we knew we were going to be okay, but it was a long ride to get there. And I want to point that out for people because real estate is truly a long game. When you hear me talk about this property, it sounds great. Yeah, I bought it. I paid $500,000 owner finance on the down payment. I didn’t have to put any money out of pocket. And then we renovated it and we’re renting the units for a thousand to $1,200 a unit. That sounds amazing.

Dave:
I mean, you went into the red for a while, it sounds like. For

Henry:
Several months during the renovation.

Dave:
And even then, your cashflow is still good, but you probably couldn’t have sold it for a profit even though the equity was probably pretty good just with transaction costs and paying off your debt. It just takes time. You have to let the thing run its course.

Henry:
It takes time. And I think the thing that people don’t talk about with real estate is that, yes, I was able to carry that property, but what carried that property? Money from flips and cashflow from my other cash flowing rental properties. Cashflow is great, but you can’t always rely on it. If I was relying to live off of my cashflow, I might not have been able to sustain holding this property through the downtime we had of having to take everybody out. And the renovation, not only was my budget more than doubled,

Dave:
But

Henry:
My timeline went longer because of the state of the country at the time. And there’s literally nothing I can do about that. There was very few people that were working at that time. And so that’s why we say you have to have some other sort of income stream. Just because you bought a great deal doesn’t mean you’re going to be able to hold onto it. My other assets in my portfolio are what kept me afloat with this property. And I’m glad that it did because we talk about real estate being the long game. So now we’ve got eight renovated units. They’re renting very well. And we did an appraisal recently as I was refinancing this property. This property appraised for $1.4 million.

Dave:
Wow.

Henry:
So not only is it cash flowing great now, but it’s got a crap ton of equity in it because of the location that we bought it in, because of the appreciation in this market in general. And that’s the paper appraisal. My agent said that I should be able to sell this for 1.5 to 1.7 all day.

Dave:
And how much debt is on it?

Henry:
$720,000.

Dave:
Okay. So you’re walking with eight after sales expenses? Yeah, it’s amazing.

Henry:
And the cashflow is decent. My note on this property, principal and interest run me somewhere around $6,200 a month. And we’re bringing in over 10 in net cash flow. And obviously it’ll depend. So there’s four units that we did a lighter renovation on and four units that we did a complete gut overhaul on. So the complete gut ones, they get 12, 13, 14 depending on what we can get for it at that time. And the ones with the lighter renovation get anywhere between nine to 11. So we’re above 10 grand in gross rents, paying about 6,200. You take some expenses. It’s not a crap ton of cashflow, but

Dave:
It’s still

Henry:
Positive cashflow and crazy appreciation.

Dave:
Yeah. So what are you going to do with it now?

Henry:
I’m going to keep this one forever.
I love the location. I’d love to be able to give it to my kids. There’s going to have to be some other maintenance items I’ll have to do big ticket. That parking lot in the back will have to be redone at some point. It’s an asphalt parking lot and it’s wearing down. So I’d like to come back with something a little more durable, maybe do some concrete back there. It’s going to be quite a big capital expense on that property. Some of the HVACs are getting older that we’ll have to replace soon. But in terms of location and appreciation and rent growth, you couldn’t be in a better location.

Dave:
So rents are still growing. You think the cash flow will get better over time? The

Henry:
Cashflow will get better over time, especially as I start to pay this unit off. But this is one I plan on keeping in the fold for a long time.

Dave:
So I mean, yeah, the strategy, which I like is you have a great assets that it’s appreciated. Maybe it’s not a great cash cow, but if it’s in a great location, it rents well, that’s like a prime property to pay off over time. Whether you do it quickly or just wait 15 years, that’s just one to hold onto.

Henry:
Yeah, absolutely. The longer I hold it, the more valuable the land and the asset is going to get just because what’s around it. The University of Arkansas has grown since I bought this property. So it’s like they’re inching the campus closer to me. So I’ll take it.

Dave:
Even better.

Henry:
Right.

Dave:
This isn’t some crazy thing. You just bought a good asset at a really good price, renovated it, made it more desirable for your tenants, increased the occupancy and the rents, and that’s it. Yeah. That’s just the formula, but it just takes time. It doesn’t work in the first year or the second year. It sounds like you weren’t trying to pull off a perfect burr and refinance 100% of your money in nine months. It was just like a patient approach. You found a great asset, you figured out what was going to work with this particular property and didn’t try and force anything out of it that wasn’t going to be realistic.

Henry:
Yeah. And I think part of the key here is I didn’t use short-term financing in the terms of hard money. So my interest rate was very reasonable.
And the construction period, so I had a 12-month construction period where I’m paying interest only. That allowed me to keep my holding costs lower than if having to pay principal and interest during a time when it was very hard for me to get this thing up and running due to underestimating the rehab and then the situation that was happening in the country with the pandemic at the time. So yes, this is a very run-of-the-mill real estate deal. Buy a dilapidated asset, add value to it and rent it out. But I don’t think people often understand that sometimes that doesn’t go smoothly. If you don’t want to lose the money you have in the asset, you’ve got to be able to hold. And had I not had other cash flowing assets and had a stream of income through flipping, plus I had my day job for part of this, all of those things allowed me to sustain and carry that property through it bringing in absolutely no income.

Dave:
All right. Well, this is a great example that everyone can repeat. You don’t have to go out and buy commercial property, but what Henry did, buying an undervalued asset, fixing it up, renting it out, getting appreciation, using it to finance other deals. This is the benefits of holding onto real estate for a long time. And we got to take a quick break, but after the break, I’ll share with you an example I have. Very different approach, very different property, but that still showcases how the long game usually wins in real estate. Stick with us. We’ll be right back.

Henry:
All right, we are back on the BiggerPockets Podcast, and Dave and I are talking about properties that we currently own and giving you essentially some behind the scenes on what it’s been like for us to own and operate these properties and what it has done for our portfolios having owned and operating these properties. So I’m very interested to hear what kind of property you brought for us, Dave. I

Dave:
Have the total opposite end of the spectrum. Just a single family home that I lived in for a couple of years. So it’s not a traditional house hack or what most people think of as a house hack where I was renting out one unit and living in the other. My girlfriend at the time, wife now, and I lived in this home for three years.

Henry:
Did you call it a house hack because you charged her rent?

Dave:
I did a little bit. I covered the vast majority. The majority of it, but a little bit. Yeah.

Henry:
Well played, sir.

Dave:
So I bought this house, single family home back in 2016 when I was living in Denver. It was actually right after I started working at BiggerPockets. I got this under contract, I think maybe within a month of working at BiggerPockets, because I remember sneaking out of the office to go cold call someone because I wanted to get houses. Oh, this is your one cold call that you’ve ever made. This is my one direct to seller deal I have ever done. But let me just tell you about why I went out of my comfort zone and did this. I got really into the idea of path of progress and figuring out what neighborhoods were going to be popular in Denver because it was growing a lot, but it was very neighborhood by neighborhood. And the city announced that they were going to be building a brand new light rail that went from downtown Denver at this train station that they were pouring millions of dollars into out to the airport.
That was always this big pain point and it was going to go through this neighborhood that was kind of up and coming. And they were deciding between two different projects. The one route might go north, one route could go south. And so my agent and I went, or he first went to the city planning meeting and figured out that regardless of which one they chose, there was this one sweet spot that they were going to get this park and a train station and the city was going to be investing in it. And I was like, “I got to buy right there.” And so I actually had been in this house six months earlier and though it was too expensive at 425. And knowing what I knew now, I was like, “All right, I’m going to call that guy back.” And so I called him back and was like, “I was in your house.
He didn’t sell it because it was too expensive at 475.” And we finally negotiated for it. And I remember to this day the exact price that was $462,000 is what we agreed on. So more than I thought it was worth. But I was like, “This is crazy because that is the exact price. 462 was the exact same price I had paid six years earlier for a four unit in Denver. And now I was paying that for a single family home and I was like, this is crazy, but I really believe in it.” And so I wound up buying this, and I’ll tell you how much it’s worth and what it’s done for that, but was able to finance it just using money I had saved up and refiing a deal I had bought two and a half years earlier, had done some value add to that and had raised the rents a lot.
So I was able to refi that to go out and buy this.

Henry:
462 for a single family even back then. Wow. Wow.

Dave:
It’s a lot.

Henry:
That’s a lot. So I assume you did just a conventional loan on this one?

Dave:
I did. Yeah. Owner occupied loan. I actually wound up putting 20% down on this. I had saved up enough for 5%, but I did a refi and was able to put the full 20% down. So I got good financing because I really didn’t want to pay PMI. And I think my loan then was five and a half. I refinanced it during COVID, but it wasn’t crazy low rates back then. So even that, I think my mortgage payment was something around 18, 1900 bucks to live there, which to be honest, to rent a two bedroom in Denver, which is what we were doing, it was going to cost 15, $1600 easily. So the payment wasn’t that crazy.

Henry:
And how long would you say it took before you started to realize that your research about what was coming to this area was actually there and giving you the boost you had hoped for?

Dave:
Oh dude, it took a while for the value to get there, but within three months of buying this property, I knew I had hit a home run. But the house that I bought was in decent shape. There wasn’t a lot of value add. The value add I did was living in a very uncomfortable situation for three years because then they just did construction for three years. They eminent domained the houses across the street. Sort of tweakers moved in across the street. They were constantly living in there. There was a triple gang shooting two houses away. Jane and I, they built the train, and I didn’t know this at the time. Sometimes ignorance is split, but the train, when they launch a new train, they have to blow their horn every time they cross a street for two years before it can be quoted a quiet zone.
Oh wow. So 24 hours a day for two years, two blocks away from us, trains were just blowing their horn. So we were just living in this. It was a nice house, but that’s kind of value-add to me. It was like I knew once this was over, it would be worth 700,000.

Henry:
Once you moved out, what were you able to rent this for? And do you still own it?

Dave:
Still own it. So when I moved out in 2019 alone, got 3,000 a month in rent. Rents in Denver have went up and now they’ve kind of come down. And so I think I’m getting 3,250 right now a month. And my payment, because I refinanced it, has actually gone down even though taxes and insurance have gone up. So I’m paying about, I think it’s just under 2,000 bucks a month on my payment for that. And that gives me 1,400 bucks cushion. I do pay a property manager, but it produces 10, 15 grand a year in cashflow.

Henry:
That’s pretty cool. Now, I know Denver has a lot of older inventory in some parts of town, and that can cause you problems maintenance-wise over time. How old is this property?

Dave:
Oh my God. I think it was 1892. I think it was, but it had been renovated. There had been some work done on it. So it’s actually been pretty low maintenance costs for. Man, I moved out of it six years ago. I’ve been renting it out and knock on wood, no major capital expenses. Is it like a cash cow that I’ll hold onto forever? Probably not. I will probably sell it. I’m moving towards selling it maybe even in the next couple of months, which I can get into. But I think it’s worked for me in so many ways from tax benefits to appreciation for cashflow and holding it over the next couple months. It really has kind of checked every box.

Henry:
Absolutely. I think you should get into it because my next question for you was going to be, what’s the plan? Are we keeping this or are you going to sell it? And if you’re going to sell it, what are you going to do with the proceeds?

Dave:
Yeah, so this is the way I’ve been thinking about it is that I still owe 230 on the loan. I’ve just been paying it off. So if I went to sell it, which I think I could sell it on the low end for 720, that’s pretty conservative because after I bought here, I wound up buying another house down the road because I really just liked the neighborhood and saw it was happening. But I sold that other one. It was almost an identical comp. I sold it for 810, but that was in 2022. And Denver market has definitely come down. So I’m just conservatively saying 720, it’s probably somewhere maybe closer to 750, hopefully. So I mean, that’s a lot of equity. That’s like 300 grand in equity. And yeah, it’s making cash flow like 10, 15K, but that’s not a good cash on cash return.
And I would consider holding onto it or paying it down if I thought there was any juice left, but there just isn’t. The neighborhood has done what it’s going to do, which has been fantastic. There’s not really room for value add. The layout is kind of weird. I can’t add another unit. There’s just no way to really get more out of it. And so I think I’m going to sell it because the cashflow’s not amazing. It’s run its course. I’ve done the long game on it. But I think a lot of times with these kinds of plays, seven to 10 years, you kind of peak out and the performance peaks. And so I will likely 1031 into something else. That is sort of what I’m thinking right now, but I’m still getting some quotes on what it’s going to cost me to get it sales ready and kind of make the final decisions, but that’s where I’m leaning right now.

Henry:
Yeah, I mean that makes sense. And that’s absolutely true. If you feel like you’re just going to get your normal modest appreciation bumps from this point forward, then it’s just either you hold it because that fits your investment strategy or you find something else where you feel like you can get a better cash on cash return with that money. I don’t think there’s a wrong decision with a property like this. And I don’t want people to listen to this to think that you have to sell your properties after the seven-year period. Dave’s doing what he feels like best fits his investment strategy going forward, and that strategy fits the lifestyle that he wants. You need to do the same thing for you. So for me and my property, I can’t add a ton of value to it either. It’s just going to appreciate because of the location, but that asset paid off would be a great one to leave to my kids, and that fits my investment strategy better.

Dave:
Exactly.

Henry:
The goal is to get in, force value, ride the appreciation, and then make the determination on is it better to sell or keep based on what you want to do with your portfolio? It’s what’s the right call for your investment strategy.

Dave:
All right. So you’ve heard each of our deals, but we have more analysis and to discuss on today’s episode right after this quick break. Welcome back to the BiggerPockets Podcast. Henry and I are sharing stories about the long-term performance of two deals that we picked out. Let’s jump back in.

Henry:
I think as investors, we have to be very educated on the types of loans that are out there for us to finance these deals and pick the ones that make the most sense for the asset you’re buying. Because like I said, if I would’ve bought my property with a higher interest loan, hard money, something that was a whole lot more holding costs, I probably wouldn’t own that asset today. I don’t know that I

Dave:
Would’ve

Henry:
Been able to sustain through the delays in the underestimating of the renovations. And if you used a different type of loan product, it may be a different story that we’re telling now. So if you can buy a property that’s a good asset in the path of progress, and it takes a little longer to get to your profitability that you’re looking for, you don’t want to put yourself in a position where you’re limited on your ability to hold onto that property.

Dave:
Because

Henry:
That’s how you lose in real estate. You don’t just lose by buying a bad deal. You can buy a great deal with the wrong financing, and then you’re stuck in a position where you either can’t refinance, can’t carry the note, and so you have to sell the property. And if you’re forced out too early, I mean, that’s when you take losses and that’s when you don’t build the wealth. The wealth comes through equity and appreciation. The wealth doesn’t come through cashflow. Cashflow is a measure and it’s a good measure and you want to shoot for it, but that’s not what builds the wealth. And you don’t get to the wealth building if you’re forced to sell because you used the wrong type of loan or because you didn’t have cash reserves. Real estate is about your ability to hold onto your assets for the long haul.
The more you can do that, the more wealth you’ll build.

Dave:
That’s absolutely right. I think what you said before is spot on where you said it’s sort of an educated guess. Because I think a lot of people might listen to my story in particular and say, “That’s speculation.” Or yours even because you were buying it at what, three, $500 rents and you had to tell yourself a story that I can get a thousand plus in rent for this. That’s not speculation, it’s a business plan. I think that’s sort of the key here is I do hear people say like, “Oh, I’m thinking about buying in this neighborhood because it’s just an up and coming area and I just think the prices are going to go up.” Maybe, but I think you need a business plan to really back that up. And I acknowledge that what I did on that deal might come close to speculation, but I had a plan and I knew that at the very least, I was basically net neutral on my own living expenses.
I limited the risk. I had, to Henry’s point, owner occupant financing, very advantage financing. That made that possible. Would I have bought that as a flip or a burr? Probably not. The whole plan, the business plan was to live in it through the inconvenience and through the transitionary period. And that’s why it worked. Just going out and saying, “I’m going to buy on the street because everything goes up,” that is speculation. Holding on for a long time is the goal, but you have to still have a business and an idea of how you’re going to take it from where it is today to where you want it to be in six, 10, 15 years. Otherwise, you’re just guessing and waiting. And it’s not like you have to do that much, but implement a plan and wait is really what we’re saying, not just go buy anything and wait.
So I like these stories because it’s so funny. In retrospect, everything looks like it was easy and genius. But the whole point I think of both of these stories is like mine didn’t look great for the first three years. I overpaid. Or people would’ve said I overpaid. Henry’s didn’t look good in the right way, but we were both following a plan. We both had a business plan and the plan was never, how do I get out of this in nine months? For rentals that you are trying to acquire, the plan can take shape over two years, over three years, over five years, over seven years. It not only doesn’t have to be quick, but often as these stories show, it works better for it not to be quick. Being slow can be a deliberate strategy. It is not necessarily some consolation prize that you’re taking.

Henry:
Very, very Very true. And don’t forget, it could and very well may for other investors who are getting started now, it may take even longer than the time horizon that Dave and I are talking about because we did get a 2021, 2022 bump in equity that none of us were expecting. So buy the best asset you can, try to add as much value as you can, and then make sure you’re in a position to be able to sustain that property if and when it doesn’t perform like you want it to.

Dave:
You’re right that it might take longer, but I want to caveat that with two things. First and foremost, no one knows when these bumps are coming, but they come. And they’ve come throughout history and they’ll come again. No one knows. So that’s kind of the whole point of holding on. No one knew it was going to be 2020 to 2022. That’s when it happened. And the people who held onto things were rewarded for that. The second thing though is that better assets are on sale. It is easier now to buy something that you want to hold onto than it was in 2021 or 2022, at least in my experience. And so I think that’s why we always talk about, you take what the market’s giving you, and that means the bump might not be next year. It probably won’t, right? It’s probably not coming for the next couple of years.
But that’s why you buy good assets now. I bought mine in 2016, it took four years. I bought other assets in 2010, took 12 years, whatever. But you find things that work in the short term that are good, and then the upside comes and that’s what turns them great. That’s what we talk about all the time on this show, and it absolutely can happen and can work right now. All right. Well, this was fun. I liked going through the show. Let us know if you like these shows. We could do more of these, just Henry and I, or we can bring on other investors to share examples of great or bad stories that if going into these kinds of things and showing sort of the life cycle of a deal is useful for us, let us know. Drop it in the comments. Let us know on Instagram.
We would really appreciate it because I learned from you about your deal. I think it’s just a super helpful format.

Henry:
Yeah. If you enjoy talks like this, we’d love to be able to do more. So let us know if it’s helpful to you.

Dave:
All right, that’s our show for today. Thank you all so much for watching this episode of the BiggerPockets Podcast. He’s Henry. I’m Dave. We’ll see you next time.

Tony:
The average salary in the United States is around $65,000. That means there are millions of Americans who are working for the man, punching in and out, and depending on someone else for financial security when they could be living off of a cash flowing rental portfolio instead.

Ashley:
If you do it right, real estate investing can give you the freedom, flexibility, and yes, the actual income you need to create the lifestyle you want. So fewer hours behind a desk, no more missed soccer games, and the ability to finally take that dream vacation.

Tony:
But look, this doesn’t happen overnight or by accident. The decisions you make today determine where you’ll end up five, 10, 20 years from now, which is why you need to be intentional about buying rental properties that can gradually replace your income.

Ashley:
Today, we’re showing you how to do just that with a clear, proven formula that will give you more than enough cashflow to live on. Follow these simple steps and you could have the option to leave your W-2 job in a decade or less. This is The Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:
And I’m Tony J. Robinson. And with that, let’s get into the plan. So I think first, Ash, let’s just start with a little bit of our own quick backstory on how we used real estate to get to the point where we are. I’ll jump in first, but a lot of you guys know my story. I was a high income earning W-2 employee working for Tesla. 2020, lost my job. And we had a small portfolio at that time. We had a few, I think four long-term rentals. Two of them were still being renovated. We had two active short-term rentals. And my wife and I said, “Hey, instead of going back to work, what if we try and build our real estate portfolio instead?” And in the 12 months after losing my job, we went from three short-term rentals to 15. We scale up to over 30 at our peak.
And now today we’ve got 26 active short-term rentals and a small 13 room motel as well that we run. But it was really that 12 month period of just grinding where the portfolio grew exponentially that kind of gave us the runway that we needed to go into real estate full-time. So that was me. That was the process that we followed.

Ashley:
Yeah, mine was a lot longer period of time. At first, I started as an accountant. I could not stand it sitting at a desk, so I knew I couldn’t do desk work. So I quit after six months after I went through all of my schooling and I found a job as a property manager. And so that was kind of my insight into real estate. And from learning and watching this investor, I realized what real estate could do for you. So after working for him for a little less than a year, I bought my first property and slowly from there I built a long-term buy and hold rental portfolio. And so I didn’t quit my W-2 job until 2019. And I gave all my properties to a property management company and the properties I’d been managing, they all went to the property management company too. And so yeah, that was kind of my first experience without a W-2 is when COVID hit.
So it was definitely a benefit to have the property management company in place because they took care of a lot of the things that came along with COVID and being a landlord and tenants and things like that. But yeah, so from 2013 to 2019, it was December 2019, I still had a W-2 job working as a property manager and kind of an assistant to this investor.

Tony:
So different paths, right? But we both kind of ended up in the same situation where we ended up doing this full time. But let’s talk a little bit about replacing the average salary. Now again, obviously different parts of the country, this is going to be wildly different. In some parts of the country, this is a great income. Other parts of the country, you might be struggling to make ends meet, but the average salary is $66,000 and the median salary is $61,000, about $62,000. But we’re just going to round to 65,000 or roughly $5,500 per month. That’s the number that we’re going to use for the context of today’s conversation. And the goal is how can we reverse engineer $5,500 per month using rental income? So just like some quick example math, 5,500 bucks per month in cashflow, that could be 11 properties at 500 bucks per month in cashflow.
And if you’re doing one property per year, that’s 11 years. If you’re doing two properties per year, that’s five and a half years, which is way faster than retirement at 65. Or you could just have one killer property that’s like a short-term rental or like a self-storage facility or a sober living home that’s doing 5,500 bucks per month. So there’s a lot of different ways to skin the cap, but 65,000 per year is the number that we’re going to be working towards.

Ashley:
Now, obviously the cashflow depends on several factors like your market, your strategy, how much you’re putting down. You could go ahead and hit that 5,500 per month cashflow if you buy a million dollar property in cash and rent it out, you could have that cashflow because you don’t have a mortgage payment. So make sure when you’re comparing yourself to others and looking at how they’ve gained financial freedom through rental properties, you understand the exact factors that went into them actually doing that. For me, it took me a really long time because I was literally buying properties with none of my own money. I used a partner, used their capital. I borrowed a line of credit. I’d buy properties with the line of credit and then I would refinance them and pay the line of credit off. But that was very little cash flow because I was basically doing a full burr on the property where I’d go and refinance, pay myself back, and I wasn’t putting money to sit into the property.
So my cashflow was a lot smaller, like 200 to $300 per property to kind of get my start. So I had to get to those 18 properties before I actually could cover my expenses.

Tony:
Ashley, let me ask, you talk about this often, right? Because I remember when I first started on the podcast, so this is what, almost six years ago now, and one of our first episodes together you’re like, “Oh yeah, I bought a house for like $25,000.” Knowing what you know now, would you have still started that way?

Ashley:
No. So I definitely wouldn’t have bought those dumpy duplexes as I like to call them. I was just in acquisition mode and I was buying these properties that were fine. They were rented out, some of them when I bought them. It wasn’t like they were in complete disrepair. But what I did find is they had zero appreciation because they weren’t in gray areas. There was long-term problems to actually fix some of these long-term problems. For example, redoing all of the electric in the property, that would’ve cost a lot of money. And because of the market, it wasn’t a great market, that I wouldn’t have been able to increase rents enough to actually cover the cost of the rehab or make the rehab worth it. Because in some of those smaller markets I was investing in, there was a cap as to what people paid. Even if you put granite countertops in, even if it was the nicest unit in the whole town, people just couldn’t afford to actually pay more.
So it wasn’t worth it for me to go in and do these extensive rehabs because I couldn’t even get the rent back that I would need to actually make the deal worth it. So I’ve actually sold off a lot of those. I think I have three left. One I’m trying to sell right now. And then two I’ll probably keep for a while. They’re not that bad. But yeah, I definitely want to do that. What I would do to start again is actually be more diligent and buy less houses, but buy better quality houses. So if that meant if I had my line of credit and instead of buying five $20,000 duplexes, I would’ve just used that money to buy one property instead. So yes, I would do that differently going forward. And plus now I think it’s definitely harder to find $20,000 duplexes too that are actually rentable in good condition because that was back when I bought the five of the $20,000 ones.
That in 2017. So very different times.

Tony:
And I asked that question knowing the answer because I think it’s important for Ricky’s to also understand that how you start isn’t necessarily how you’re always going to invest. And as you do more deals, you start to get a better sense of what is it that I actually do like to do and what do I want to do more of? And what do I never want to do again? And what lessons have I learned? But sometimes it’s just more important sometimes to get started, even if it’s not necessarily under the right circumstances because deal number one is what helps you get into deal number two and beyond. But let’s keep moving though with this example. So I think the first thing, Ash, that folks have to focus on is once they’ve identified this goal, I want to get to 5,500 bucks per month. We need to focus on picking a market.
I think a big mistake that I see a lot of new investors make is that they start with this shotgun approach where they’re just trying to look at deals all across the country. They’re in the northeast, the southwest, the Midwest, the Pacific Northwest, Southeast, in between. And they’re analyzing deals in all these different places. But I think you’ll be able to analyze deals more quickly and with more confidence if you first narrow down and you become an expert in a small subset of markets. And for me, the sweet spot is usually like three-ish markets. If you can have three markets where you’re really, really dialed in on, that usually gives you enough kind of breadth of options, but without getting too wide that you’re diluting your knowledge of those markets. So for me, I’d say narrow that list down to three to five markets first before you do anything else.

Ashley:
And then here are some things that you want to look at when you’re analyzing the markets is what is going to be your main driver here? Is your goal out of this? Is it going to be cash flow? Is it going to be appreciation? Is it going to be a mix of these? And here’s some things you need to think about when you’re considering what your end goal of this property is. So if you’re a peer cashflow play is like you want to replace your W-2 income as soon as possible. So you’re going to look at properties that have a solid rent to price ratio. You’re going to want to buy in an affordable market where you’re going to get a great rent price and also a great price for the purchase of the property. And then something else to watch when you’re comparing markets is insurance costs because your insurance will be baked into your mortgage payment and you want to keep your expenses as low as possible.
If you’re looking into coastal markets, you might get hit with flood insurance, which is going to drive your monthly expenses up. So that’s going to definitely decrease your cash flow. Then we can look at appreciation. So this is what I learned is I like markets now that have better appreciation even if the cash flow isn’t as great. So you’re not going to see an immediate return of getting that cash flow every single month. But say you have a five-year plan or a 10-year plan where you want to be able to quit your W-2 job. Well, maybe you don’t, you just take a little bit of cash flow now and you just bank on that appreciation. Yes, there is the risk of the property not appreciating in 10 years, but there’s also the risk of you doing an eviction like in New York State and it taking a year to actually get the tenant out and you had no cash flow that whole year anyways.
So there are risk and pros and cons to both, but make sure you understand what your main driver goal is. And maybe appreciation is actually a better play for you than even cash flow is. So maybe you should kind of tailor how you’re looking at markets based on whatever one you’re going to go after or a mix of them. If you’re looking for appreciation and maybe a mix of cash flow, some of the Southeast markets are actually good for that like Georgia, Tennessee and the Carolinas.

Tony:
I think for me, if I were in this situation where I’m rushing to try and replace my income, which is the situation that I was in, for me, I’m focused on cashflow first because I want to replace the income. I want to keep the lights on. I want to make sure that I can pay my mortgage and feed my family. So for me, it’s like, man, where can I go get the best cash flow? Let’s get to the number I need to get to. And then I was able to kind of turn my attention to other things and different projects and different goals, but I’m leaning a little bit more so toward the cash flow. But agree, every market has a different benefit. And people use it for different reasons. But once you’ve got your market, I think you then need to layer on your strategy.
And really it could go either way. Maybe you pick your strategy first. I might even say that. Maybe we pick strategy first and then we say, go pick your market. Because depending on what you want to do, some markets are really great for one strategy and not great for others and vice versa. So I might actually flip that around where let’s pick your strategy first. But either way, the different strategies that you have in front of you, you’ve got traditional long-term rentals, you’ve got short-term, you’ve got midterm, you’ve got flipping. Those are probably the most well-known strategies that kind of exist. And then you kind of have co-living where you’re renting by the room. That’s gained a lot of traction over the last couple of years. And then there are the strategies that are businesses more than they are real estate investing, but they just kind of layer real estate in there.
So you have things like assisted living facilities, sober living. Gosh, what are some other ones that we’ve seen people do here on the podcast? The options are limitless. Self-storage is probably another big one there. Hotels. But picking the strategy that you feel makes the most sense for you and for that market that you focused on. And again, I think each one has its own merits. Short-term rentals, midterm rentals, typically you can produce more cashflow per square foot. I can buy the same house. And again, depending on the market, maybe generate 2X, 3X, 4X, 5X, what I would generate if that property were a long-term rental. My five bedroom cabin in the Smoky Mountains, it would make no sense as a long-term rental. I don’t even know if it would cover the mortgage as a long-term rental, but as a short-term, it does incredibly well. So depending on the strategy and depending on the market, I think you got to align those two things together.

Ashley:
Now you also have to figure out how much capital you have, and this could actually factor into what market you’re able to select. So maybe you select LA, you want to invest there and do a short-term rental, but you only have $50,000 for a down payment. You’re most likely not going to be able to purchase a property in that market with only $50,000 as a down payment. So you have to understand where your money, where the funding is coming from for this property. So what do you want to put down as a down payment? How much do you have for reserves? You want to have at least at very minimum three months and at best six months of reserves in place for this property. So you’re not going to take your whole life savings and put it as a down payment and have nothing left afterwards.
So typically on an investment property, 20% is down. There’s some second homes if you’re going to purchase a property that’s going to be a short-term rental, but you’ll also use it. Tony, what’s the rule? I know it’s a very gray area, but for second homes, you have to at least use it X amount of time or something.

Tony:
Yeah. There’s no hard and fast rule from the actual housing authority, but generally lenders say you’ve got to use it personally for maybe seven to 14 days out of the year. You got to have some level of personal use.

Ashley:
And what’s the down payment right now for those 10%?

Tony:
10% typically. Now rates are a little bit higher than what they used to be. It used to be you can get them in lockstep at the primary, but now they’re a little bit higher than a primary residence would be.

Ashley:
And then also if it’s going to be your primary residence, you can use an FHA loan for three and a half to 5% down. There’s even conventional loans that will do 5% down if it’s going to be your primary. And then VA loans, 0% down. And also USDA loans. So there’s tons of different loans options out there for you, especially if it’s going to be your primary residence. There’s also a DSCR loan. So this is where they actually look at the performance of the investment property to make sure that you’re going to collect enough rent to actually cover the expenses and the mortgage payment on the property. And they don’t look at you as much. So if you have a high debt to income from other things, then this is a great option for you is to look at the DSCR loan. But those are typically 20 to 25% down.
And then if it’s a commercial property, you could be seeing even higher, like up to 30% down on the property too.

Tony:
The only other loan I’d add, Ash, is the, this is my favorite one to talk about, but it’s the NACA loan. If you haven’t heard of the NACA loan, I’m going to blow your mind right now, but basically if you’re owner occupying a house, now you can’t have any other open mortgages. So this truly is for true rookies. But if you have any other mortgages under your personal name, you won’t qualify for this loan. But if you’re buying a property, you can go up to four units. It’s 0% down, zero closing costs. 0% down, zero closing costs. And the interest rate is typically about a point lower than whatever the prevailing interest rates are for the day. So you can literally go to their website, naka.com, and they always have their interest rate posted. Right now on a 30-year fix is 5.75%. If you go check any other website, it’s probably like 6.7, somewhere in that ballpark.
So you get a point lower typically on the interest rate, no down payment, no closing costs. Now it is an absolute terrible application process and there’s a lot of restrictions on refinancing. I think you have to hold the property for I think five years or so before you can refinance. So there are some restrictions. But if you want to get into a four unit with the least amount of capital possible and start building your net worth and building cash flow, it’s one of the best loan products out there.

Ashley:
And what’s harder? Finding a property, saving more for a down payment or having to do extra hoops to jump through to get an actual loan. Just because you hear something is hard doesn’t mean you shouldn’t try for it because it actually could be easier than you trying to save up a ton more cash to actually get into a property. So just kind of think about that. Sometimes those hurdles are all just the mindset thing. It’s actually going to be easier for you than if you go the long way around. Okay. So you’ve got your market, you’ve got your strategy. Now it’s time to buy your very first rental property and create some cashflow. We’ll show you how to do just that right after a word from our show sponsors. Okay. Welcome back. Now let’s work on replacing your salary with cashflow, starting with property number one.
Okay. Step one, you’re going to buy your first rental property. Okay, we’re actually going to buy a sample property here, a $200,000 duplex in Cleveland, Ohio as your first example here as your first property you’re going to buy. So this property tends to be a C-class area, but you could actually turn it into a B class with a little paint and sprucing to get this property up because it is in a decent area. So obviously not every market has $200,000 duplexes, but we’re just using this one as an example. So for another example, Tony still finds cash flowing properties in higher priced markets using short-term rental strategy. I, as we talked about, have found $20,000 duplexes even more affordable than this one as a long-term rental. But this one, we’re just going to use Cleveland, Ohio as our example today.

Tony:
Now guys, as we go through this, having the right tools helps a ton as well. So if you go to biggerpockets.com/calculators, you’ll find the BP calculators. And Ash and I have talked about this before, but the first real estate deal I ever purchased, I ran through the BP calculator. So these are tools that actual real estate investors are using. But let’s just get some assumptions here on this 200K duplex. But we’re going to go with long-term rental strategy on this property. We’ll make some assumptions around expenses and income. So for example, 3% average rent growth for this market, 5% average insurance increases, 3% average property tax increases, 5% increases on maintenance. So those are just some of the ballpark assumptions we’ll make going into this deal. So let’s go over some of the options on how we can actually take this deal down. And the first option, which I think is one of my favorite options, especially for Rickies who maybe don’t have a ton of capital saved up, is to house hack.
And again, for rookies that aren’t familiar with that phrase, house hacking is simply buying an investment property, but also living in it. And it can take a lot of different shapes and forms. But for this example, let’s say that you get three and a half percent down. That’s a $7,000 down payment for this deal. So when we look at your, again, ballpark principal interest, taxes, insurance, maybe even some PMI, we’re just at about 1,800 bucks per month that you’d be spending to own this property. And then we’ve got repairs, maintenance, vacancy, and then we’ve got rental income of about 1,200. So what that does is that if we take the mortgage payments, your principal interest, accident insurance at 1,800, we add on expenses of about another, I don’t know, what is that? 350. Yeah, right? So we’re somewhere in that ballpark. And then your rental income for those other units is 1,200.
Your net housing cost is only 861.
So some people say, “Well, man, it’s not covering everything to live in that house. Is this even a good house hack?” Well, look what you’re getting. You’re getting a place to live subsidized by the other people that are living there. And it’s like, could you go control an asset for that amount that’s going to appreciate over time for 800 bucks a month? You’d probably be sending that on rent somewhere else anyway. So even if your living costs are the same, at least you’re putting it into an asset that you own. And then once you move out, once you actually move out, well then what happens to the cashflow? So feels like a solid first option.

Ashley:
So now for option two, we’re going to look at another property that’s going to be a 20% down payment. So we’re going to do $40,000 down. And this is going to be a conventional loan with a 7% rate. Okay. So that’s going to be if it’s your primary residence. But if you are actually purchasing this property as an investment property, not going to live in it, we’re going to do a conventional loan, 7% interest with a 20% down payment, which would be about $40,000 down. Your mortgage payment now is going to be 1,447. It’s going to be a little bit lower because you put way more money down on the property. You’re not going to have PMI because you put 20% down. You’re still going to have insurance, maintenance, a vacancy. Rental income will be about 2,400 because now you’re renting out both units instead of one.
So your cash flow is going to be $477 per month. And we even did it with just like if you hired a property management company and just to see what it would be, and it would be $285 based on what the average cost per month is for a property management company. So just based on the year one numbers alone, you would need around 11 to 19 of these properties to replace your 5,500 per month salary. But the numbers also tend to get better over time. So I have a perfect example of this. I bought a property for 143,000 in 2017. That property cash flowed very little. I put 20% down on the property gain and was only cash flowing about $300 a month. Now that property cash flows about $1,200 a month. I haven’t done a major rehab or anything like that. I fixed the bathroom.
We replaced a shower. I think it was maybe like a $2,500 job, but it’s not like I went and did a big, huge change and it’s worth more money now. This property just over time, rents have increased in that area. So the same thing can go with these properties. As you hold onto them over time, a lot of your expenses will stay fixed except for probably taxes and insurance, but you’ll be able to increase rent over time and your cashflow actually gets better and better as time goes on. So that’s also something not to bank on that. Don’t take negative cashflow now to hope that in two or three years you’re going to have positive cash flow from increasing your rents. But it’s just something that can actually help your cashflow grow and grow is just from doing rental increases every single year.

Tony:
And Ash, one thing I’ll add too, right? If we go back to the house hacking option one, again, they were paying about just over 800 bucks per month to live there and assume that their rent would’ve been 1200 bucks somewhere else. They’re saving about four grand a year in rental income or paying out rent to someone else. So even if they did nothing, but save that four grand and then just set that aside into a different account. Within two years, they’d have enough saved up again to go buy another duplex. And it’s like every two years basically with doing nothing else but saving the money that they’re not paying into rent, they can go buy another property. So even if you did nothing but that, over the course of a decade, you basically have enough to replace this average income. And that’s assuming no increases in rent.
Assume that you never get a raise at your job so you can’t save anything else. If everything was just static and you did nothing else but save four grand a year, within a decade, you could replace the 65K that we’re talking about. And guys, obviously a decade isn’t a short period of time, but think about how simple that process is. Think about how uncomplicated and unsexy and easy that entire process is. Buy a property, live in one piece, rent out the other piece, save the money you’re not paying a rent, do it again. And now you never have to work again for the rest of your life. It feels like a fair trade-off.

Ashley:
And I think that’s the thing is a lot of people over complicate it. And really it can be that simple, but you also have to be very diligent. So after you’ve bought that first property, step two is really to reevaluate and buy more if this is working for you or pivot. So here are some questions to kind of ask yourself after you purchase that first property. Are you breaking even and are you cashflow positive? How long does your property stay vacant if you’ve had any turns? Is rent keeping pace with your expenses? So are you increasing every single year? Are you keeping up with what market rents are you in area? Did all of a sudden your insurance skyrocket on this property? And then how many hours per week, what is your time that you’re putting into this property? Is it way more involvement than you thought it would be?
And then even on the short-term rental side, is it making the cash flow that you thought? Would it be better to pivot to maybe an MTR or a long-term rental? Does your property stay booked? What’s your occupancy? What’s your demand seasonally looking at all of these different things? And the same with midterm rentals. Is it properly occupied? Are you seeing a lot of vacancy in between? Maybe you should adjust to short-term rentals. So really evaluating where that first property has gotten you and what it looks like before you actually make the next purchase. I think I made that mistake because I was just in acquisition mode and I didn’t focus on operations or the performance of my properties. I just wanted to get as many properties as possible as fast as I could. And so step number three is stabilize and increase cash flow. So really put intention into making sure your property is stabilized.
It is operating properly. You’re not just rushing into the next deal. So there are several strategies you can use to boost your cashflow. And of course, obviously buying more properties per year, raising rents to keep up with market demand of what rents are in your area. Or you can offer renovations to your tenants and say, “Hey, these carpets are pretty worn in the property. I’m not sure. I just bought it, so I’m not sure how long they’ve actually been in there, but if you would like, we’re willing to replace all the carpets for you in the area and increase your rent by $50 per month or something like that.” And I have done that before. And most of the time people say yes. If they say no, okay, that’s fine. You wait and do it at the turnover, but kind of gives you some options to increase the rent and cover the cost of actually making those updates.
And then you can also create additional income dreams from the property, if there’s storage space, if there’s parking, charging extra for those, putting coin operated washer and dryer on the property. Other things are, instead of buying another property, you can take all of your cash that you’re saving and actually pay down your property. If a rate start to drop, you could refinance the property. And then one big thing don’t forget to do is when you actually have a lot of equity built up in the property and you put down maybe three and a half or 5% and you’re paying PMI, make sure you go back to your bank and request to get that taken off when you have that 20% equity built up in your house. So sometimes it doesn’t even mean that you’ve paid down all of that extra, like say you put 5% down and you’ve paid off the rest of the 15%.
Sometimes your property will just appreciate enough to give you that little extra boost you need where they’ll come in and probably do a book appraisal on it and make sure that you hit that amount and go ahead and remove it. I mean, sometimes that can be like a hundred to a couple hundred bucks a month that you’re saving. That’s a pretty nice increase to your cash flow.

Tony:
After all this, how close are you to actually handing in your two week notice or retiring early? After the break, we’ll crunch these numbers. We’ll be right back. All right guys, welcome back. Now let’s help you quit your job. So we talked about the strategy, the markets, building the cash flow and what that looks like, but now it’s time to repeat and retire. So that’s the fourth step here. So again, if we go back to option one, I talked about this a little bit before, but it’s like if you’re house hacking and you just move out of that property and say you’d stay there for 12 months, you move out, you rent out the other unit, that makes more cashflow plus the rent growth, and you house hack again. So in year number two, property one looks a little bit like this. And again, these are ballpark numbers, but your principal interest taxes and insurance is about 1,700.
That also includes your PMI. You’ve got landlord insurance of about 120 bucks, maintenance about 175, vacancy at 8%, call it 200 bucks. Management fee, another 200 bucks. Rental income is now just over 2,400 bucks, almost $2,500. So your cashflow after everything with now even a property manager in place is about 924 per year. If you’re not using a PM and you’re self-managing is about 3,300 bucks per year. Now again, if we scale that out by year 10, again, if you just keep doing the same thing, you’ve been able to increase your cashflow to call it almost six grand a year if you’re using a PM and about almost nine grand a year if you’re not using a PM. So guys, again, very simple process to kind of keep this moving along by just reinvesting those profits back into the next deal.

Ashley:
Now, if you were going to do the second option of using this as an investment property and not your primary residence, let’s look at what this property would look like in year two. So this would be your mortgage stayed the same at 1,400. Your rental income is 2,472, and your cashflow without a property manager would be increased to $518 per month. But now let’s skip to year 10. So your mortgage is same, 1,563. Your rental income has increased to $3,131. So that now leaves you with cashflow without a property manager of $877. And when we say without a property manager, I always think you should run your numbers with a property management fee in place. So in this case, you’re at year 10, you’re close to retirement here with all your properties. You may want to just hand it over to a PM, so your cashflow would be $627 with that.
So if you’re buying and holding these properties for 10 years, you really only need six to 11 of them to replace a $65,000 salary with rental cash flow in that time. That means you could buy one to two rentals every year over a decade and reach your goal. And this is just if you’re scaling the slow, boring way, taking it simple, small multifamily properties and renting them out to long-term tenants. And I think a big thing that can really help you with this is you look at the $65,000 salary and to some of you, you may say, “That’s not enough. My salary is way higher than that. I couldn’t live off of that.” One thing you really have to take into account is the tax advantages of this. Amanda Hahn, a CPA who works with a lot of real estate investors, she posts a lot about this on her social media about one person in a relationship quitting.
So one spouse quitting their job and becoming full-time real estate professional status to be able to write off the properties, do a cost segregation, increase how much you’re able to depreciate in that first year. And you’re going to be able to offset what you would have paid if you were a W-2 employee. So let’s do an example. Say I made 100,000 as a W-2 employee. I pay taxes out of that $100,000 that maybe my net anyways is around 65,000 is what I’m actually getting anyways. Well, with real estate, you could actually offset that cashflow that you’re getting with depreciation where you’re not paying any taxes. So just something else to think about. Maybe talk about this with the person you do tax planning with or your CPA as to what you pay in taxes now and what’s actually your take home pay and what would that need to translate?
So maybe it’s not actually converting your salary, your gross that you’re making, but what’s the after tax dollar amount that you need to make to actually get the cashflow for these properties?

Tony:
And I think the last thing I’d add before we wrap here guys is that as you start to do more deals, you start to build your confidence to do other things. So even if you’re doing, hey, I’m house hacking a new deal once a year, maybe you layer on house flipping. And now you’re flipping a house a year and you’re bringing in an extra 20 to 30K per year just flipping one house a year. Maybe you take on managing for other owners in your market. And now you’ve got consistent cashflow coming in from a management business. There’s so many different ways and strategies and things that you can leverage as you start to build your portfolio because you start to see what’s really possible in the world of real estate investing. So guys, our hope is that it’s walking through this model. Obviously it’s an example.
Don’t beat us up in the comments on YouTube because they’re like, “Hey, you can’t find a duplex and know how for 200K.” The goal here is just to lay out a path, a roadmap of what this could look like and to give you realistic expectations of if you just follow a very simple, straightforward process, the goal of you replacing your income or at least getting close to that is pretty reasonable.

Ashley:
Now, if you guys are interested in getting your first deal, make sure you head to biggerpockets.com and check out all of the resources and tools that we have available for you to use, such as the BiggerPockets calculators. We also have resources such as downloadables that are checklists, templates, guides to help you get your first deal. I’m Ashley, he’s Tony, and we’ll see you guys on the next episode.