It’s one of the most common goals that attracts people to work with us in one of our real estate coaching programs: It’s the thought that one day very soon they will not depend on their job for income. They want to replace their salary with rental income so they can be free – they want to be a full time real estate investor.
Here’s the hard truth we have to tell them:
It’s REALLY hard to replace your salary with revenue from your rentals.
After eleven years of buy and hold investing, most of it very successful and highly profitable, I think most people who say they live off their rentals are actually making their cash some other way and just want to believe they live off their buy and hold property.
Almost all the properties we’ve ever owned have generated positive cash flow on a monthly basis. But here’s the thing most people don’t point out:
Even when you have a positive cash flowing buy and hold property you’ll generally find that over five years, it doesn’t put much cash in your pocket.
Some years you’ll pocket a decent amount of money but then the next year you’ll have to redo the deck or replace the hot water tank along with paint the house. You’ll find yourself pulling a few bucks out of your pocket to cover the extra expenses even when you’ve been good about setting money aside for contingencies.
What buy and hold lacks in cash today it makes up – usually in a massive way – with cash tomorrow. Over time it’s value to you accelerates. The mortgage pays down faster and faster and usually the appreciation grows year over year. 10 years from now that buy and hold property will be a beautiful bounty of cash if you need it. And if you hold onto it and pay down the mortgage it then becomes an amazing source of income for you that you can start to live on.
I believe VERY strongly that buy and hold rental property is a critical component to every real estate portfolio because it’s the wealth creator, but if you want to live off your real estate without waiting to pay off the mortgages or working your butt off to buy 100 houses, then you’ll need to find a way to bring in some additional cash today.
This is a big topic – and I’m writing a 5 part series for Canadian Real Estate Wealth on it so you can get more details on it in their October 2012 – February 2013 issues. For now, let me get you started.
The First 3 Critical Steps to Take to Become a Full Time Real Estate Investor
1. Get clear on the money you’re spending now
First, you will need to take a good honest look at where you are financially. If you don’t know exactly what you’re spending each month then figure that out. Track it for at least 3 months.
I also recommend you reduce your expenses as much as possible to prepare. It’s stressful enough stepping out on your own. You don’t need thousands in debt payments each month to make it worse.
I don’t recommend you calculate how to replace your income – besides paralyzing you this exercise doesn’t actually help most people because the value of a dollar made from real estate is higher than a dollar of job income. Instead, I recommend you take a look at your expenses each month and figure out what you need to make each month.
You’ll also find that you require less income when you’re not working.
I easily saved $300-$400 per month when I left my job because I stopped buying breakfast or lunch on the run. I also saved a lot of money because I no longer wear suits that need dry cleaning. I don’t pay for parking or transit passes.
If you have your kids in day care full time right now you will probably find you can cut that time back, saving you a lot of money too.
So figuring out how to replace the $85,000 per year you’re making now isn’t really the way to look at it because the value of a dollar is different when it’s income from a job versus money made through real estate. But knowing what you need to make each month to live is critical.
2. Create a cash today / cash tomorrow plan
You have cash tomorrow figured out with buy and hold but what about cash today?
There are a lot of ways to tackle this when you no longer have a job to cover cash today. What we did is add rent to own to our portfolio. It satisfied cash today because we would get the option fee (usually a $7,500 to $10,000) payment upfront plus we make better cash flow each month. Most of our rent to owns make us $600-$800/month. The combination of the cash flow plus a deposit fee every time we completed another rent to own deal boosted our income quickly to the point where we could comfortably live financially.
Other investors I know find deals and assign them to other investors for a fee. These are more transactional strategies and require you to keep digging for deals – which is hard to do when you’re working but is much more feasible when you’re time is free. You could also get into flipping houses. Ian Szabo has a great book out called From Renos to Riches if you want to learn how to tackle renovations for profit.
Of course many other investors end up getting their realtors license to make money on their deals and other people’s deals.
All of these strategies require much more ongoing labour but can give you more cash today to work with.
3. Get Support – Lots of Support
I am assuming, at this point, that you already understand the fundamentals of real estate investing. You know how to do market research, you understand the real estate cycles, and you are comfortable finding and doing deals.
If you are unsure about any of that you MUST get a foundation in those areas first.
Once you have that, I believe the most important thing you can do is build a massive support system around you.
The single greatest factor in our success in the four years since I left my job has been the fact that we have hired great coaches to help us at each stage as we grew, we invested in our own personal growth, and we traveled the country to meet the best people to know. We invested a lot of time and money to escalate, grow and improve the people we were surrounding ourselves with.
At a time when we were cutting back our expenses and trying to spend less it seemed counter intuitive to spend $16,000 on masterminds and coaching. It seemed risky to invest $5,000 to fly to San Diego for business conferences on marketing but those investments paid us back more than any investment we’ve ever made in real estate has.
We met people from all over North America who supported us when we were struggling emotionally to get through a tough spot. We hired coaches that guided us through obstacles and opportunities. We’ll never know what they saved us in mistakes but we can tell you that we tripled the number of deals we could do and raised more money in a year than we had in 5 years once we had good coaches and a strong network behind us.
The bottom line is that the journey to become a full time real estate investor isn’t short. It’s full of challenges. And it’s going to take an ability to take some punches and still keep fighting. And there’s a lot more I have to say about this … but it’s summer … and we all should get some Vitamin D while we can. 🙂