How Long Does It Really Take to Get To $100K Passive With Real Estate?
There are tons of videos floating around about getting rich quickly with real estate. But let's be real, real estate is a long game. In this episode, we use a model from the Roofstock Academy Playbook to project exactly how long it would take you to get to $100K per year in passive income based on 3 different sets of assumptions. This episode shows how you can set realistic, time-bound goals for your financial freedom. --- Transcript Tom: Greetings, and welcome to the Remote Real Estate Investor. My name is Tom Schneider. And I'm joined today by Emil: Emil Shour Michael: and Michael Albaum. Tom: And today we've got a fun episode. So there's lots of content out there that talks about how to become a millionaire and you know how to become rich with real estate and in today's episode, we're going to go through some specifics year by year to meeting some specific goals. So both Emil, Michael and myself, I guess all three of us are going to come up with some scenarios. And we're going to use this tool from Roofstock Academy to see how long it takes to meet our goals. All right, let's do it. Emil and Michael, what is going on? Emil: Hey guys, Michael: Not too much. I'm just getting ready to take off in my van again, we had some solar issues around the road for a week so we came back to home base to get those squared away. So got brand new solar installed brand new batteries, did some plumbing customisations and ready to rip and roar in the next couple days. So we're stoked. Tom: Very cool, Emil What's going on? Emil: You know following Michael really sucks because I'm just a guy living in his home just doing normal boring stuff every week. So Michael I'm just gonna vicariously live through you in your van now everything's good. Nothing crazy going on. Yeah, just happy. It's it's summer the waters warming up. So it's been it's been more fun to go surfing in the morning. Don't have to wear booties, feet don't get cold. So that's been nice. Tom: Nice. Nice. Nice. Michael: What about you Tom, how comes the construction on the house and the refinances? Tom: It's coming. Oh, closing on the refi is on Thursday, which is exciting. Michael: Awesome. Emil: Nooice! Tom: Some ammunition for some acquisitions. But yeah, yeah. And the construction is cruising along, almost done. It's like stop and go, you know, like there's like certain dependencies on certain parts of the project and takes a while to get done. And then a bunch of stuff gets done. And then it kind of goes back to a little bit of a halt. But Fingers crossed, we're moving some things back into the kitchen. over the holiday weekend that is coming up. So fingers crossed. Awesome, guys. So we got a fun episode. This is also going to be on YouTube,I encourage you to check our YouTube station out, just search Roofstock. What we have here is we have this tool that was built within Roofstock Academy, it's not an over complicated model that just goes year by year. And what it does is, you take some baseline assumptions of your investment, kind of by box right on what type of returns you're getting, what is the cost, and then you extrapolate that over years. And what the model does is it assumes that you're reinvesting all of the cash flow that you're collecting into your acquisitions into the following year. So that way, you know, when you're buying into year two, you're using the income from year one, when you're into year three, using the income from year 2. The model accounts for a little bit of rental appreciation. What the model does not account for which is a benefit in real life, and perhaps we'll work this into the model at some point is doing 1031 exchanges or cash out refi. So, you know, there is ability to move a little bit faster when you're having some appreciation. Emil, Michael, before we get into the specific examples, go ahead. Michael: I was gonna say I just wanted to take a moment to pause here and highlight and talk about one of the benefits of real estate that totally took me, I had an aha moment when I realized it. So you just said that the income from year one is going to go into acquisitions from year two. So what that actually means is that you're getting paid every single year for the work that you did previously. So if you have a W two job or self employed, are you going to get paid next year for the work you do this year? Probably not. Real Estate totally doesn't work that way. So all the work and hard, you know, grit that you're putting in right now is going to pay you year after year after year. And you should actually increase over time. So you get to give yourself raises, hopefully every single year for work that you did today or yesterday, or you're going to do this year. So stop and let that sink in for a minute. It totally blew my mind when it it kind of slapped me upside the head. Tom: Yeah. And your cost basis is like pretty much effectively flat. I mean, there might be some increases in property taxes. Alright guys. So before we jump into our specific examples that we're going to come up with, to determine how long it takes to reach our goals. I'd love to hear both you guys just a little bit of input on the model and thoughts, all that good stuff. So Michael, why don't you go ahead and go first? Michael: Yeah, so I think it's really important to model out and forecast what your portfolio might look like going down the road based on your current day assumptions and goals. And working backwards is so important, I think in real estate because it dictates and helps us to find what makes an ideal investment for you or for me or for for yourself as an individual investor, so the three of us might have very different investing end goals. And so that is then going to determine that we are likely going to be purchasing different types of properties along the way to our end goal. So this is a tool that allows you to do that. And really reverse engineer Okay, what types of returns should I be targeting? Where should my cash flow assumptions and targets be such so that I can get to my goal at a desired timeframe. And again, putting a goal that's timed bound I think is really important. We talk a lot about in the academy, using the acronym smart, and the T and smart stands for timely or time bound. And so being able to measure that and see how you're doing against your goal, and from a time perspective, I think is really, really critical. Tom: Love it. Emil? Emil: Totally agree with what Michael said, I will be blatantly honest, I have actually never gone through this exercise. But I love it. I think it's a good way to kind of just see like, what are you in for right is your goal, let's say I know so many real estate investors who are looking for cash flow, a lot of the goalpost is how do we get to 100k per year basically, like, how does your your passive income, replace your job, take care of all your expenses, things like that. So it's, it's, I think it's cool to at least have a goalpost and be like, Alright, if I invest this amount per year, it'll take me 12 years. Well, what if I accelerate that? What if I go earn more? What if I am able to save more generate more cash flow? What if instead of a 7% return, what if I can generate a 10% return on all the properties I buy? How does that change all these assumptions? So I've never done this, but I think it is such an insanely valuable exercise to do. I'm hoping that us just doing a right here is gonna give me a much better picture of what my goalpost will look like. Tom: Awesome. Michael: Goal posts! Tom: Alright, so let's jump into it. So I'm going to go ahead and go first. And since I'm going first, I'll define the rules for myself. So my goal in this little game, this little model is to get to $100,000 of passive income, the rules are, in the first five years, I cannot exceed adding an additional $25,000 a year. And practically speaking, that means basically, throughout the year, I can save roughly 25,000 bucks a year to go to, to buying real estate. And in this model, I'm also going to use the cash from my rental from previous year to do and add new acquisitions. What I'm going to do to increase my buying power is in year five, I'm going to increase that to not exceed $50,000 a year. It's it's a bigger jump. But I am just kind of curious to model that out. So okay, so I'm looking at the sheet right now, which on YouTube, you can see it here. I have my acquisitions that I cannot exceed 25, the first year. So I'm starting with 15 was, you know, let's Yeah, well, let's make it 25. We'll start with 25, just to be consistent with this exercise in year five. So that's five single acquisitions at with a down five of them 25% down of $100,000 for the first five years, first five years. That's one house each year for five years. And that gets me to a cash flow of $15,000. So still quite a bit of way to get there. Starting in year five, I'm going to increase my cash that I can put in, which is this red number here, up to $50,000. So this example, I'm going to move this up to two, two, by year six. I'm up to 31,000 exceeded it. Emil: Tom, can you highlight where you're looking at your cash flow yearly number? Tom: Yep. So my cash flow year not yearly number is down here, which is portfolio levered income. And my new acquisitions for that year is this row, row 22. That's going across. And my acquisition cost is this row 23. But the down payment is this row 24 is this red number and this red numbers is taking off taking out your cash flow from the previous year to be applied to your new acquisitions. So year five I'm bought now buying two houses a year with a cash flow of 18,000. Let's see in by year seven. But not quite yet. A year seven I thought I could move up to three houses a year or three units. This also could be used for multifamily. But it actually be year eight I can move up to three houses per year and by year 10. I'm at 60,000, just just below 60,000 of passive income at three houses, three houses or three units, and then year 11. That takes me to four. Emil: So the red Tom, just to clarify, that is the amount out of pocket you're putting. So you're using some cash flow, and then the red amount is how much am I coming out of additional savings from work or whatever to be able to buy the number of additional homes you have there? Tom: Exactly. And so here we are, based on these constraints in year 14, is where I hit that my magic number of $100,000 of passive income a year based on these assumptions up here. So that's 37 total units. That is a total sum of assets owned a little bit under $4 million. And that would make for $113,000 a year. So those are my assumptions. My I ended up in year 14. So who wants to go next. Michael: I'll go next. Emil: Tom, a couple more questions. For you For you take over Michael, couple questions here. What, uh, what is your assumption for a cash flow? Can you fill in our viewers on that one? Tom: Yep, you got it. So cash flow, you know, there's a lot of cash flow is, is basically you know, what you're walking away of profit at the end of the day after you collect rent and pay all your expenses. And we use just a blanket number for cash flow, a $250 per month, at the end of the day, so you know, there's a lot of variables that are not implicit within the model, like, what the rent is, what the repairs and maintenance are, what the property management costs. But within this model, what it does is it just, it just comes out on the other side of what that number that a heart that actual number is, it's sort of peanut, peanut butter spreads your portfolio. So if I wanted to be, you know, more conservative, I could take this down to $200 a year. And you know, and that takes for just below a 10% yield of cash on cash, which I feel comfortable in being able to achieve. So yeah, it's just a straight number that you're plugging in at a monthly basis on what that cash flow is going to be. Emil; Can you go back to 200? I'm curious how the how your model changes, if you do a 10%, just under 10% cash on cash return assumption versus the 12. So it only takes pushes it out a year, an additional year? Tom: Yeah. Yeah. Emil: Yep. So I'm just good to see. Tom: Well, actually, no, I think it pushes it out and might push it up two years. So you're 16. Now is, is that year, so pushes it out two years, by changing that assumption, I think it's better and generally speaking to be more conservative with those assumptions. But what I did there is, since I changed the, these, you know, key assumptions at the top, it changed all the cash flow that runs through each year. So each year, there's less, you know, income. And what when I moved it down, there wasn't enough income from the previous year, or one of the years I had to, I missed an acquisition. And that kind of cascaded down year, year year, which pushed me out, I think, to two additional years to get that $100,000 goal to year 16 here. Emil: Nice. It's, it's at least interesting to see, like a two and a half percent swing in cash on cash. Like it doesn't have an insanely dramatic change on getting to your 100k mark. Tom: Yeah. Yeah. And, you know, as we said, like this model, like, you know, it doesn't include cash out refinance, it doesn't include, like 1031 exchanges, it also doesn't include the the tax benefits that you're having here. So there's anything it's really helpful and kind of directionally and thinking about acquisitions that you need to make based on some return assumptions on where you want to go. But it is, there are some benefits that this doesn't even necessarily account for. Michael: Yeah, great point. So Tom, why don't we walk through a scenario where maybe somebody is starting from a stronger position with a bit more capital, and they're actually able to make all cash purchases. So let's just assume that somebody's got a, you know, a very high paying job or is able to start from a really strong capital position, and they're gonna make one purchase a year. Let's just say one purchase a year, how many years does it take to hit your cash flow goal of $100,000. So if we change this model, we wonder out the first couple of years, and let's just see for $100,000 purchases at a 7.8% return from a cash on cash perspective. How many Here's his take the hit $100,000. So it looks like in your five, we're almost at 40,000. No, let's actually let's one it out, let's just say if you made one purchase every single year independent of cash flow from the years prior, yeah. How long does it take you… Tom: On it. Michael: And so it looks like we crossed the $100,000 threshold that year 13 with 13 properties, which is? Tom: Yeah, I mean, that makes sense. And then the following year, that single purchase is, is being made on its own by the $100,000. That is in place. Yeah. So 13 years, Michael: 13 years, 13 houses to $100,000 at an average purchase price of 100 grand at an average return of 7.8%. So another way to piece this together. Tom: That's cool. I yeah, I've never done them this model this this way. And I'm 13 years kind of goes back on a quick I mean that that's that's a tremendous amount to pay each year, you know, in buying an all cash. But.. Emil: Let's do one more scenario then here. Let's do I like Michael’s, you have a little bit more cash to work with, right? You have a high paying job, maybe you have a side business, or you have a full time business, whatever you're able to just generate, basically 100k out of pocket every year. But what if instead of you're doing all cash, what if we go back to the 25% down model, but you have more money here? Let's see how quickly we can get there. Tom: Alright, so I'm going to change this to 250. And the cash down 25, Cash on cash of 12%. Emil: Let's, let's go 200. Let's go a little more conservative than 12% cash on cash. Tom: I like it Emil just under 10%. Okay, so how much money do we have each year to spend? Emil: We have 100k to spend out of pocket. Tom: Love it. Michael: Cuz maybe someone right is thinking about selling off some equities because they've done really well in this in this run up market. And now they're wanting to transition it over to real estate. Tom: Yep. So by year five, you're already at 53,000 in your first three years, or at four houses or units and an extra five, and then it gets to a point where every year you're adding Yeah, we hit it. Or a year six, you can just start adding. Yeah, it's just 7,8,9. Emil: Yes, you hit it by basically by year 8 you're at 99,914. Okay, what about what Let's do this again, but you only have 50k. Right? So you're you're in the middle of our first example, and the most recent example, you can put 50k out of pocket. How long will that take? Tom: So we're in year five we're at? We're still doing two acquisitions per year. I'm gonna give us a little bit of your six an extra 700 bucks. Yeah, there you go. Yeah. Yeah. So you're eight, you're still at? Let's see, by year 10, you're up to four acquisitions per year. And then your 13. Five. Emil: At year 12. You could squeeze in another? Tom: Yeah. Oh, year 12? Emil: We'll try your 12. Yeah, year 13 year 14? Tom: That's kind of a magic number and doing this exercise, it's hit your 13 twice now. Emil: Interesting, Why would it be the same amount of time is your first? Is it because I took a lower cash flow per House of 200 verse 250. Tom: Possibly, I mean, you're putting a lot less money forward. Right. So like, you're no, it's like in this example. You know, they're both are your 13. But this one, you're only spending $50,000 a year? Michael: Yeah, I think your total your total Emil: In yourexample you were doing 25k or less? Michael: Yeah. So like in the in the all cash model. At this point in time, we had spent 1.3 million in cash to generate $100,000 in income and a meal in this example, you spent 533 533,000. And you're generating $100,000 until I don't remember Tom, what was what was your years must have been less because you're getting a better return. Tom: Right? Yeah. Michael: So I mean… Emil: I think it's what I was wondering, why was Tom able to hit the same amount in year 13? I guess it was because that extra 50 bucks, 12% cash on cash versus a 9.6. Right, exactly. Michael: And so this is like a perfect example of how this model works based on all the different assumptions and inputs. And I think it's so cool that we are finding, you know, fairly similar conclusions based on the different ways to get there. And so building this out for yourself or, you know, checking out the Roofstock Academy and using this model, exactly. We'll give you an idea of, Okay, how do I get there, what's the most efficient way to get there, and what's going to work for me, because again, depending on where you're starting from and where you're trying to go, You're gonna have a very different path. And then somebody else who's maybe has the same end goal, but starting from a different point. Tom: Definitely. Yeah, it's, it's, it's flexible. I mean, everyone's path is unique. And it could be a bumper year for whatever reason, you have some extra money. And instead of having that limitation of 20,000, or 10,000, or whatever that number of how much extra cash you put in, perhaps that year, you could have 100,000. And like, if you do that, it plays a major difference of being able to hit that goal, your earlier. Emil: Plus every year that you're gaining, you're acquiring more properties, you have more deductions, you have more depreciation, you can take meaning more money in your pocket at the end of the year, a couple years ago, the switch finally happened where instead of paying taxes in the year, I started getting refunds because of all the awesome depreciation we were taking. So that also puts more money in your pocket that you can keep steamroll and into acquisitions. Michael: Yeah, that's a great point. I mean, this model only takes into account the appreciation side of things in terms of value. And then also the cash flow side of things. When in reality, real estate generates wealth in four different capacities. One is the cash flow. One is the appreciation. The other is via loan pay down or leverage because you're actually buying equity every single month in the property, or rather, your tenants are buying equity in the property every single month. And the last is tax benefits. And tax benefits are just really squirrely to nail down because based on what tax bracket you're in, and where you live, and how much income you earned versus Active Passive mean, all these things can change how the tax benefits are going to likely help your tax situation. So definitely check with a tax professional about looking to nail that number down to get an idea of how they might help you as an individual. But also keep in mind that Hey there, the return goes beyond the cash flow and the expected appreciation. There are all these other things that to add on and incorporate into that return as you're calculating it. So you're in you know, 9.6% cash on cash is likely going to be a whole lot better when you factor in those other those other factors. Factor those other factors. Don't use the word in the definition. But then also, I think this is a great depiction of real estate is not a get rich quick scheme. Tom: Sorry, guys, I need to step out for a minute. Michael; Yeah. Real estate is not a get rich quick scheme. It's not an overnight success scheme. This is a 13 year plan to generating $100,000 in passive income. And so a lot of people might be hearing that or seeing this and thinking all 13 years, that's way too long. But do you have a 13 year plan? Do you have a plan that'll make you $100,000 passively in sooner than that? If so awesome, like run with that. But also make sure that it's a legitimate plan. I think real estate is one of those things, it's a slow burn. And then as you go further and further down in time, you see those returns start to take off semi exponentially. And so just be thinking about that and be long term greedy like Tom always says, Emil: That's right. Get Rich, slow! Michael: Get Rich, slow! Thanks, everybody for listening for watching. If you're on YouTube, hope this was helpful. Again, this is available at the RooFstock Academy. For those members that are enrolling, come check us out at Roofstock Academy comm if that's not a good fit for you, definitely I'd recommend either looking up a model that exists or making your own model because again, these are really really powerful tools to help you forecast and reverse engineer what type of properties you need to be purchasing or looking to purchase. So with that, let's get out of here. And we look forward to seeing you on the next one. Happy investing. Emil: Happy investing