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Sounds simple enough. Buy one property a year until your cash flow exceeds your expenses and, voilà, you can afford to retire.

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Dr. Peter Kim takes a close look at this advice and uses some straightforward numbers to make some basic but not unrealistic projections as to what this might look like in practice.

Ten years in, according to the model, you’d be in good shape. After 15 or 20 years, you’re looking like a regular real estate mogul!

Before we get to the post, I want to be the first to let you know that Dr. Kim’s 2nd annual real estate investing conference is going virtual this year and it’s absolutely free to attend! Sign up now and you’ll be able to see 20+ esteemed speakers live or up to 48 hours later during the event that runs from October 9th to 11th.

 

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The following post was originally published on Passive Income MD.

 

Buy-One-Property-a-Year

 

Buy One Property a Year and Retire Early

 

There is a physician that I know, Dr. C., who is well-known to be a very savvy real estate investor. Everyone thinks he lives the good life, and he’s at the age that most doctors start thinking about retirement. In one of our conversations, he let me know that he had technically retired years ago but had continued working simply because he enjoyed it. What doctor wouldn’t want that? So, of course, I asked him, “How did you do it?”

He readily admitted that he’s not particularly savvy or smart when it comes to investing. He just listened to the advice of a mentor:

 

“Buy one real estate investment property a year.”

 

I tried to nail down some specifics (ie. condo, house, apartment building). He simply stated, “Doesn’t really matter, whatever you can reasonably afford, just do it.”

So I went home to see what that might look like and tried to model it out on paper.

Here’s my disclaimer: this is my N=1, my one simplified example.

This might be a good time to quickly address the oft-debated simple vs complex model argument. I think the answer is that no one can definitively state which model truly has a better predictive value. This quote by a well-known British statistician, George Box, sums it up perfectly,

 

“All models are wrong, but some are useful.”

I believe this pertains to both real estate and stock market models. However, what we do know is that simpler models are easier to apply and to take action on, mostly because you feel you can replicate it.

 

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Buy a Rental Property Every Year for 10 Years

 

With that in mind, here is what it might look like if you tried to buy a rental property every year for 10 years. Here are the rules of this model:

  1. Each property purchased is a single family home.
  2. The purchase price stays constant at $100,000 (to keep the numbers round).
  3. Each year requires a 30% initial investment ($30,000 in this case).
  4. The home loan starts at $70,000 (= $100,000 purchase price – $30,000 investment)
  5. The max # of home loans at any one time is four. According to Fannie Mae / Freddie Mac, you can possibly have up to ten residential home loans, but after four it becomes a bit more difficult to get additional loans, so decided to keep it at four.
  6. Cash flow per property is $400 a month. This number was chosen because this is very attainable, as proven by my own rental property.
  7. Cash flow = Income – Expenses. Income = rent. Expenses = Mortgage Principal + Interest + Taxes + Maintenance + Property Management + Vacancy.
  8. All the cash flow throughout the year is saved and goes back into paying down the home loans at the end of the year.
  9. Once a property is paid off, the property cash flows $800/month. That’s because there is no longer mortgage and interest to be paid.
  10. If you have the max 4 properties, the $30,000 initial investment goes towards paying down one of the loans.
  11. Referencing the Case-Shiller index, used 3.4% as the appreciation rate.
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What is not taken into account in this model:

  1. Equity pay-down over time, which works significantly in your favor but can get confusing for the calculation.
  2. Rents increasing over time, which would work in your favor
  3. Increased maintenance over time
  4. Any cash flow changes
  5. Taxes
  6. Depreciation
  7. Purchasing your own home

 

After all that, here it is. If the details become excessive, skip to the bottom for the summary.  (At this point, you might want to have one window with the graph open on one side and one with the explanation on the other if you want to follow along easier.) 

 

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Year 1

  • $30,000 invested and you have your first rental property. Congrats!
  • Cash flow is $400 a month ($4,800/year).
  • At year-end, this $4,800 reduces Home #1’s loan to $65,200 (= $70,000 – $4,800).

 

Year 2

  • $30,000 invested and you have your 2nd rental property.
  • 2 cash-flowing properties at $400/month results in $9,600 for the year.
  • At year-end, this $9,600 reduces Home #1’s loan to $55,600 (= $65,200 – $9,600).

 

Year 3

  • $30,000 invested and you have your 3rd rental property.
  • 3 cash-flowing properties at $400/month results in $14,400 for the year.
  • At year-end, Home #1’s loan is at $41,200 (= $55,600 – $41,200).

 

Year 4

  • $30,000 invested, you now have the max 4 rental properties.
  • Cash flow is $19,200 per year (= $4,800 x 4).
  • At year-end, Home #1’s loan is $22,000, the rest are still $70,000.

 

Year 5

  • Since you have max 4 houses, your $30,000 investment goes to paying of the rest of Home #1, and the remainder reduces Home #2’s loan to $62,000.
  • Cash flow is $24,000 ($800/mo for home #1, $400/mo for homes #2,3,4)
  • At year-end, Home #2’s loan is $38,000.
 
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Year 6

  • $30,000 investment buys Home #5.
  • Cash flow is $28,800 ($800/mo for homes #1-2, $400/mo for homes #3-5).
  • At year-end, Home #2’s loan is down to $9,200.

 

Year 7

  • Since you have the max 4 houses, your $30,000 investment goes to paying of the rest of the home #2, and the remainder reduces Home #3’s loan to $49,200.
  • Cash flow is $33,600 with 2 paid off houses and 4 cash flowing at $400/mo
  • At year-end, home #2’s loan is $15,600.

 

Year 8

  • $30,000 investment buys home #6.
  • Cash flow is $38,400.
  • At year-end, home #3 is paid off and remainder goes to home #4’s loan.

 

Year 9

  • $30,000 Investment buys home #7.
  • Cash flow is $48,000.
  • At year-end, home loan #4 is paid off, and remainder goes to home #5’s loan.

 

Year 10

  • $30,000 Investment buys home #8.
  • Cash flow is $57,600
  • Pays down house #5

 

Summary After 10 Years

 

  1. You own 8 rental properties at this point. You were very close to your goal of purchasing one a year and you didn’t need to violate the max four loans at a time rule.
  2. Four homes are completely paid off, four still have mortgages on them.
  3. Cash flow by end of year 10 is $57,600 a year ($4800 per month). If you had a $2 million portfolio at this point, and started to draw down 3%, you’d have a very similar cash flow.
  4. Again, roughly figuring out the appreciation of each home using a rate of 3.4% yields total equity in the properties around $750,000.
  5. Total investment has been $300,000.

 

My Thoughts

 

  • You can start seeing a snowball effect happening although it seems to just be hitting its stride by year 10.
  • This is something most physicians could replicate.
  • The cash flow is starting to amount to something substantial by Year 10. What would that cash flow by year 10 allow you to do? Would it cover educational expenses for your child? How many shifts would that allow you to give up?

 

Just for fun, I modeled it out to 15 and 20 years. The problem is that the model starts to break down because the cash flow becomes so overwhelming and I wasn’t sure whether to buy several new homes at a time or roll some of the cash back into the loans. But hey we’re just having fun here, so here are the results:

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Year 15

  • You own 12 homes, 10 of which are paid off by year-end.
  • Cash flow is $100,800 a year ($8,400 a month).
  • Equity in the properties is around $1.4 million.

 

Year 20

  • You own 19 homes (very close to one a year!), all 19 of which are paid off by year’s end.
  • Cash flow is $172,800 a year ($14,400 a month).
  • Equity in the properties is around $2.8 million and growing.

 

I think it’s worth mentioning that if you were able to amass a nest egg of $6 million dollars and you withdrew 3% a year, that would put you somewhere in the range of $180,000 your first year.

At this point, I think it’s pretty safe to say that working is relatively optional and total retirement is a possibility. That’s some serious passive income! Imagine starting this when you’re in your early to mid 30’s when you first became an attending physician.

 

So Did I Follow This Advice?

I’ve had to play a little catch up but I’ve been fortunate to be able to get enough rental units to match the number of years I’ve been out an attending. Okay, that’s only five, but I’m right on track to buy one rental property per year. I’ll keep you updated…

 

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Don’t forget your free registration for PIMDCON2020. And what do you think of Dr. Kim’s idea to buy one property a year?

22 thoughts on “Buy One Property a Year and Retire Early”

  1. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  2. Very interesting! I’ve considered real estate investments, but I have zero desire to maintain multiple homes. My husband is also very against the idea (he worked in construction during his college years and would prefer not to do it ever again). A good property manager obviously prevents a lot of the hassle, but how do you find one worth their salt? I’d also prefer not to invest in properties unless they are near enough to be able to check on them easily, which limits the ability to invest in up and coming areas. Alas, I will probably leave this aspect of wealth building to the more RE savvy among us.

    Reply
    • Completely agree.

      This works great if you’re willing to spend the time and energy. A good property management company is likely 10-20% of your profits. Your numbers show 50% profit, good luck with that unless you’re renting to marginal renters. With all the upcoming financial stress your profits will be eaten away by squatters not paying you rent. Going to tenant court or small claims court is not fun. Some states are very pro-tenant rights.

      Not for me either.

      Reply
  3. Alas, doesn’t work for those of us in higher-COL areas, given far higher property values—$100k doesn’t buy a shack within hours of me. So, would need to basically buy remote, which means having a long distance property manager and being unable to do anything with the properties myself—killing any profit margin. But a nice dream to have.

    Reply
  4. Love the model. One of the best articles I’ve seen.
    Question I have is where do you find $100k properties?! I live in CA and one of the most difficult part is finding good properties. I’ve thought of investigating out of state but then you add the 6-10% property manager and out of state costs that the numbers don’t add up.
    How do you select the properties to buy?
    Thanks!!

    Reply
  5. This is considering that you are only investing $30k/year from your day job. If you didn’t invest any money in stock market, and just put all in rental real estate, you would be buying at least one property for cash per year. That is not considering the cash flow. Calculations get tricky fast 😆.
    Nevertheless, there is obviously a hassle factor in real state that makes it a bit challenging: finding property, good agent, paperwork, closing, finding a good management company…etc.
    In MHO consistency is the key, in real estate and state market.
    Always a pleasure reading your posts, Leif. Cheers 🍻

    Reply
  6. The model might have worked in the past but with the recent CDC overreach wrt evictions I would be more cautious. Also state laws are more stringent than the CDC guidelines wrt evicting non paying tenants.

    I did analysis for rentals in my blog post and decided against adding.

    The fact that the government received zero pushback for their overreach leads me to believe that the same playbook will be deployed next recession and this will not be a one time event.

    Reply
  7. I've got my 2 acres of non-leveraged, crop-producing, cashflowing farmland via AcreTrader. Get yours.
  8. Good article PIMD!
    Straightforward way of portraying the debt snowball technique with real estate investing which can be very lucrative.

    I must point out that the cash flow on the properties in this example is very high. Achieving this sort of cash flow in the current real estate and interest rate environment is rare. I am seeing it in certain places such C/D neighbourhoods but not much else. $200 per unit/door is more reasonable these days especially if a PM is involved. This would still be a great investment strategy regardless though… thanks for the fun post

    Reply
  9. I have heard that with any rental property, at least 10% of the value needs to be set aside for maintenance costs, etc. I didn’t see this set aside and I would imagine that after 10 years, at least property 1,2 and maybe 3 would need a significant refresh.

    Reply
  10. Although I agree with the general philosophy, I think you’re being very generous with your own assumptions. For instance, cash flowing $400 per month on a $100,000 property with no other investment than the initial down payment is not achievable in many real estate submarkets in the US.

    Reply
  11. Great post. I can definitely relate to real estate investing. My wife and I have acquired 4 properties but it took us about 10 years. We are very happy with our rental cash flow now. We own in California so that probably doesn’t help. Maybe add another zero to that $100,000 house price. LOL.

    What is your advice on where to buy property?

    Reply

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