Today, I have a great article to share with you from Kyle Kroeger on how to invest in real estate. He has a goal of reaching $5,000,000 in rental property value, and is sharing his plan today.
The prospect of retiring early on real estate is highly intriguing to me. It should be for a number of people and I’ll highlight a bit more below.
For millennials, like me, we don’t have it easy. Despite the mainstream media’s thoughts, millennials have faced a Great Recession, massive student loans and a global pandemic already at a young age.
We’ve seen a lot but that can be used to our advantage for financial planning and life goals.
That’s okay if things are a bit harder for millennials financially. It’s a bit more fun when things are hard.
Here I’m ready to show you why real estate investing can be a great asset class.
I’m the prototype millennial that loves buying expensive coffee, avocado toast, iPhone apps, blah blah.
So what? Life is short, so enjoy what you love.
I went to a large public university for undergrad and come from a very much middle of the road family in the Midwest. I knew I wanted to study finance in undergrad as I had more of an analytical mindset and liked numbers.
When I graduated from college, I had a decent amount of student loans. The total amount was somewhere over $60,000 worth of student loans. While I was at school, I really didn’t realize how much student debt I had and how that would impact my financial future.
My family has always had a hardworking mentality, so I worked part-time while attending undergrad (each year).
The problem was that money went to keeping the lights on and paying bills. Not tuition.
Upon graduating, I landed a job in investment banking in Chicago. It was tough to crack into, but the pay was intriguing and the opportunity to get some great experience was invaluable. Even if it meant dealing with unique personalities and long hours.
If I could slug it out for 3 years, I knew I could focus on working, saving and paying off my student loans. I followed a disciplined approach of prepaying my loans as much as possible.
After 5 years of working in finance, I was able to successfully extinguish my $60,000 of student loans. Following my student loan repayment, I quickly saved to purchase my first house. That became my first foray into my comforts of using real estate to build wealth.
Why Invest in Real Estate?
Working long hours and being chained to my desk made me realize quickly that there is so much more to life than work and making a ton of money. After my first house purchase, I realized that investing in real estate is very straightforward and manageable.
I believe the minor fixes, capital costs for repairs, etc. are generally overblown.
If you do it right, you can manage through those costs and use low cost of capital (mortgages) to build wealth over the long-term. The key thought here is long-term.
Real estate investing is a marathon, not a sprint. Multi-generational wealth can be built through real estate. There are plenty of case studies to back it up. The fact that real estate is illiquid actually works to your benefit.
If a macroeconomic event occurs, you simply can’t panic sell. You’ll have to stick it out and work through the issues firsthand. The best part is you are in control, so you can control your destiny in a way.
When you invest in index funds or stocks, you have no control. You can analyze and make decisions that may improve your odds of generating an attractive return, but you are not making the day to day decisions.
To me, the pros outweigh the cons on whether or not you should invest in real estate.
Here are some pros of real estate investing:
- You maintain full control of your holdings.
- There are multiple types of real estate (single-family, multi-family, apartment).
- There are income-oriented markets like providing options for low-income, suburban and urban communities.
- You can invest in specific markets. So specific that you can invest on a particular street that piques your interest.
- Real estate is simple. We aren’t investing in the next Facebook or Instagram.
Here are some cons of real estate investing:
- It can be time-consuming.
- The debate is out there whether real estate outperforms alternatives.
- It requires a learning curve. Even the most experienced investors are still learning.
Finally, there is no one-size-fits all approach to real estate investing. In fact, there are plenty of strategies out there that can tailor to your risk tolerance.
Related content: Renting or Buying? What’s the better decision?
Real Estate Investment Strategies
Here are some general investment strategies to help you understand the risk profile (in order of least risky to most risky). Generally, higher risk can lead to higher expected returns.
1. Core Real Estate
Think of core real estate as purchasing a property for cash flow. The property is in great shape, needs limited repairs and is fully leased. This is one of the most common forms of passive real estate investing. Core investing will end up being the least risky and lower returns.
2. Core Plus
Core plus has a little more risk. Think of core real estate as a base, but it requires you to provide some additional value to the property. For example, you are looking at a property that has 50% of the units in a 4-plex that are renovated. The other units need to be renovated and leased out at higher rates.
You can come in and provide additional value by renovating and finding new tenants. This is the in-between on the risk scale. There is an opportunity for improvement albeit at not too much risk.
3. Opportunistic / Distressed
For simplicity, I’ll group opportunistic and distressed together. This is usually the higher risk and higher return investing within real estate. You’ll likely need some significant expertise in real estate and some sort of angle. A common example is a fix and flip strategy. You seek out properties that are dormant and attractively priced. You already know plenty of contractors and resources to fix the property for an eventual sale.
There are plenty of other strategies and subsets of these but the above should give you a general feel for high-level strategies.
For me, I like core plus because it’s straightforward enough and offers attractive risk/reward. You don’t need to know how to fix a water heater or know every nut and bolt of a house. You simply look for cash flow improvement opportunities in high-demand markets.
Journey to $5 Million in Real Estate Value
The main goal with direct real estate investing is to make cash flow passive while still maintaining as much control as possible. You can do things like real estate crowdfunding or invest in REITs, but you’ll lose control and have less flexibility if you are trying to create generational wealth for your family.
If you own a ton of stock and want to pass it down to your family, what’s stopping them from selling? If you do real estate investing right, you can pass a full-fledged business down to your family that also provides consistent cash flow.
Why $5 Million in Value
$5 million isn’t a hard number but rather a goal. This number also seems like a lot on it’s face and it is. But this is a total aggregate value of property. Not equity.
It doesn’t happen over the course of a year or two. It’s a multi-year process that takes time and patience. This amount of property value presents a great opportunity for income and scale without too much hassle.
You can remain a “small business” in the real estate space and not overload your life with stress.
The math of real estate investing for beginners
The math to why $5 million in rental property value is pretty straightforward. I’d like a six-figure ($100,000) income into perpetuity as a baseline. This would allow me to live comfortably from real estate only while also holding a substantial equity position.
So, the math is as follows:
Targeted Income divided by Cash Yield = Equity Value in Real Estate
Targeted Income = $100,000
Cash Yield = 8%
Cash yield represents the annual cash flow from rental properties relative to your equity position. For example, a rental property earning $8,000 per year of income to you on a $100,000 downpayment would equity to a cash yield of 8%.
This would equate to an equity value of $1.25 million in a real estate portfolio ($100,000/8%). So, if you can meet that bogey of a cash yield you are in good shape. If you exceed it (8+%), you can potentially reach your income goal faster.
So how do I get from $1,250,000 of equity in real estate to $5,000,000?
Well, for investment properties you should have a downpayment of 25% to purchase the property. So, $1.25 million of equity implies $5 million of real estate value ($1.25M/25%).
I built a rental property spreadsheet to help me stay accountable when pricing out real estate transactions. The model serves a number of purposes. Most importantly, I use it to:
- ensure I’m putting an offer on a property that meets the above criteria (realistically), and
- use it as a budget to track my forecast to what was actually received. The model can become a glorified 5-year forecast for each investment.
I walk through how I use the rental property spreadsheet here while walking you through an exact case study.
I hope you find the complete walkthrough helpful.
How to Get There / How Long It Takes
$1.25 million of equity is a lot of money. Absolutely, but you can get there over time. People do it everyday with their 401(k) and Roth IRA contributions.
It will absolutely take time.
Like your retirement contributions, you should have a full roadmap of how you plan to get there. I have 3 real estate properties right now so I’ve already gotten started on the plan.
With much more work to go, however.
Here is a plan for 8 years to get to the desired income goals and a $5 million rental property value. The assumptions include:
- Starting income of $120,000 with a 5% income increase each year.
- Focus on saving 35% of your pre-tax salary each year for real estate investing.
- Reinvest any cash flow earned from existing rental properties.
Financial Wolves’s Retire on Rental Income Plan:
These are not my exact income and checking account balances but they are a somewhat close representation.
So, as a 31 year old millennial it should take me about 8 years of hard work to eventually retire on real estate. That would put me in a position to earn a steady living from real estate before I’m 40 years old.
There are a few interesting things that stand out from this plan:
- Income is very important: Increasing your income is crucial with real estate investing. Without a continuous flow of reinvestable cash, it becomes harder to acquire more real estate.
- Compound interest is no joke: Compound interest from the cash flow of your properties is a huge value driver. When you are in property acquisition mode, you should harvest as much cash as possible to continually make acquisitions. The sooner the better as the cash flow snowball benefits are massive. Finally, you can see at the tail end of the investing cycle you can start investing in larger properties. Once you start dealing in larger dollar amounts, you are in the big leagues.
- Rental properties cash flow can be substantial: If you can do real estate investing as a side hustle to your ordinary income, the cash flow benefits can be exponential. Look at the cash balance build up during the back end years (years 5-8). You simply can’t acquire enough property.
Once you achieve scale, you’ll have a ton of financial flexibility. Plus, the above assumes no amortization on the loans so your equity balance will likely be compounding along the way. This will give you extraordinary residual value to work with.
Tips for Getting Started In Real Estate Investing
Here are some tips for getting started with real estate investing.
1. Just Start
One of the best pieces of advice I received was from a savvy real estate investor. They said you simply just need to give it a go. It’s true.
If all goes wrong or you don’t like it, at least you can cross it off your bucket list… Hey, I was a real estate investor once.
Not only should you just start. You should start by trying to manage your real estate properties without an asset management firm helping you. This will help you understand your properties. You’ll get used to the ins and outs of repairs, requests and leasing.
With technology now, you should be able to efficiently manage everything. As you scale, start thinking about how an asset management firm can help you. Yeah, back to the reduce time without sacrificing too much income point.
2. Use Technology
Technology continues to be a very underrated component of real estate investing. Back in the day people would have to manually account for everything.
Some old-time real estate investors still think that you need to take 2 am calls about a leaky pipe… Or, you need to manually collect checks from tenants to bring them to your bank. Reduce your time by using resources like Landlord Studio to do all the required bookkeeping.
Or, a tool like Cozy to manage rent payment with multiple tenants in one unit. You’ll get paid instantly and Cozy even sends out rent payment reminders. What’s not to love?
3. If You Struggle That’s Okay
If you struggle with your property and it requires capital contributions from you right away, that’s okay. Let’s be honest. No one invests to lose money. A property can require a ton of work one year but then nothing for the next 5 years.
Just because something bad happens in the short-term doesn’t mean you completely messed up the long-term. At the end of the day, things can get resolved. When I sold my first property, I realized that anxieties and the stress that I had about the property at the onset were definitely not worth it.
Conclusion – Is Real Estate Investing Worth It?
At the end of the day, real estate is not for everyone. However, you can use this as a baseline for whatever asset class you are interested in. To me, real estate provides the optimal solution for building long-term wealth that requires limited time.
You can build a fully operating business out of your real estate holdings that will give you the flexibility to do the things that you enjoy in life. Here are a few tips that I will try to follow along the my real estate investing journey:
- Stay disciplined with your investing. Stick to one strategy and be excellent at it.
- Focus on the long-term.
- Scale your time and don’t be afraid to outsource.
- Build a team of people you trust.
- Retire early and enjoy life.
It’s not that simple and will take a ton of work to get there, but my early estimations is that it will be totally worth it. Between blogging income and a small real estate business, I should be able to work where I want and when I want.
Have you or will you try real estate investing? Let me know in the comments below. I’d love to answer any questions.
Author Bio: Kyle Kroeger is the owner of FinancialWolves.com. Financial Wolves is a blog focused on helping you make more money to achieve financial freedom. After repaying student loans, I’ve shifted my focus to make more money from side hustles, real estate, freelancing, and the online economy. Follow us on Pinterest, YouTube, Twitter, and Facebook.
How To Start A Blog FREE Email Course
In this free course, I show you how to create a blog easily, from the technical side (it's easy - trust me!) all the way to earning your first income and attracting readers. Join now!
Subscribe to our newsletter to receive regular updates and get access to the free course.