How Much Do You Need to Invest to Replace Your Income with Rentals?

0:00Henry Washington:Can you really reach financial freedom in five to 10 years with real estate investing? Even if you're starting from scratch without making a million dollars every year, how much do you need to invest and how can you get the biggest return on the money you have to invest? We're answering all that today. Plus, we'll talk about whether you should focus on cash flow or equity when you're buying your first rent.

0:25Henry Washington:Hey, everyone, I'm Dave Meyer, head of real estate investing at BiggerPockets. And today on the show, I'm joined by my friend, Henry Washington. Today, we're going to answer a few questions from real investors on the BiggerPockets forums. First up, we have one from an investor who wants to start working towards a financial freedom goal, but isn't sure exactly where to start. And I think we can help them out. That's right. Our first question comes from Brad Hills. Brad says, I find myself in a situation where I have a bit of extra income and I want to start leveraging it. My admittedly lofty goal is to become financially free in five to 10 years.

1:01Henry Washington:I don't want to stop working. I just want to pivot my time to other ventures that can make some income that I enjoy. I can afford to put$3 ,000 a month, maybe a little more if I get aggressive towards this end. My monthly overhead is very modest. It costs me about 2 ,500 bucks a month to cover my living expenses. And I'm happy with the quality of life that affords me. So if you were in my shoes and wanted to quit the nine to five and five to 10 years to pursue other passion projects, how would you go about it? Consider starting from scratch with no real savings or assets to speak of. Love this question.

1:35Henry Washington:There's so much to unpack here. I think what this investor is probably saying is that they're ready to start and that they can continuously put an extra$3 ,000 a month into their portfolio, which to me is a huge amount. That's like a really significant advantage that this investor is going to have. If I were him and I was owning a home already, I would probably go buy a duplex, live in one of the units, rent the other unit and rent out the unit that I'm living in. So that gives you essentially three rental units off the bat that you can have within the next 90 days if you start shopping for a place right now.

2:09And it helps you by eliminating some of that twenty five hundred dollars a month that you're spending on living expenses. You'll be able to eliminate some of that by house hacking. And so now you bump your$3 ,000 a month up even more because you now have lowered your living expenses. If you want to retire in five to 10 years and you're not going to flip houses, then you're probably going to have to start buying assets sooner than later. Yeah. Because they're probably not going to cash flow very well in the first year or two. And so being able to get a couple of units by house hacking and eliminating your expenses gives you more money to play with.

2:46If you're making$100 to$200 a month in net cash flow in the first couple of years, then with rent growth and with appreciation and debt pay down, five to 10 years, that could look really, really good, especially 10 years. Five years, maybe not as well.

3:00Henry Washington:Yeah. I was going to ask you that. Do you think this is a reasonable timeline and goal? Because as Brad said, it's a lofty, ambitious goal. Do you think five to 10 years with this person's lifestyle is reasonable? I wouldn't say unreasonable. It's definitely doable, but you're going to have to be pretty aggressive. 10 years is very reasonable, I think. Yeah, I agree. Five years is pretty lofty unless, like you said, you're going to flip houses, unless you're starting with a lot of capital. It just takes a little bit longer than that. I've talked about it on the show. I think the average, just buying on-market deals, so not even doing what I would consider aggressive approach Henry's talking about with off-market deals.

3:37Henry Washington:Yeah, I think 10 years is a little bit more realistic. It could even take 12. But I actually built this financial independence calculator. It's on biggerpockets.com for free. You can check it out. And I'm putting in Brad's numbers right now. I'm just showing that he can contribute$36 ,000 per year in his savings. And I'm assuming, I'm making a big assumption here that he has initial savings of$40 ,000. So basically he can start with a property right now. And then I put the average property price at$120 ,000. He lives in Akron where the median home price is 140. But as an investor, I'm assuming you're going to go in and do 110, 120, put a little bit of money into it to rehab this kind of property with appreciation at 3%.

4:24Henry Washington:So really nothing crazy. An average return on equity, similar to cash on cash return of 7%. Just doing that with pretty on-market deals, we get exactly 10 years. Exactly 10 years is a realistic number. Yeah. And you think if you truly are going to wait 10 years, I mean, you could honestly do more than one house hack. You should probably be buying a new house hack every couple of years, right? If that's your goal is to get there in five to 10 years, if you bought one house hack and you lived in it, that gives you a couple of units that offsets your living expenses. You're renting out the house you're currently living, assuming you own your house.

5:03So now you've got three rental properties, right? They're all producing income besides the one that you're living in, but you're not paying to live there, which gives you more cash. Within a year to a year and a half, you start looking and get your next one and do it again. You move out of the one you're living in. Now you've got two more units, assuming we're just doing duplexes. And then within another two years, you do it again. And that's just the house hacking portion. He can still do your method of buying decently cash flowing deals off the MLS because he lives in a market where that's actually possible.

5:34I mean, if you put those two strategies together, I bet he can get there in less than 10 years.

5:38Henry Washington:He lives off of$30 ,000 a year in post-tax income. And for real estate, that's not that hard. Now that I'm thinking about this, and if you were willing to house hack, I bet you could get, reduce your housing expenses to zero, like pretty quick, right? Because that's probably a thousand or$1 ,200 of that$2 ,500 a month that Brad is spending. I think what, two, three house hacks, and you could probably do that? I think it's five years. I think you could probably do this in five years because Brad lives a really frugal lifestyle. And he lives in an affordable market. And he lives in an affordable market.

6:15Henry Washington:That's right. So this is not going to be a strategy or an approach that is available to everyone. But if you are in a situation like this and you are willing to live frugally, go do this. That is house hack three times. I would keep working past that point if I were Brad, because you never know, your lifestyle is going to creep eventually. You want to have some cushion. And so do that. You'll be basically financially free in five years and then work another five years. Get to 10 years, you'll probably buy four or five more rental properties. And by 10 years, then you'll probably be not just replacing your current income.

6:52Henry Washington:You'll probably be one and a half to two times your current income, which is still a modest, you know, that's still 60 grand a year. Like maybe that works in Akron. certainly doesn't work in Seattle. But like, if that works for you, that's great. And then you're five plus in 10 years, which is amazing. Yeah. I mean, I think this guy needs to take advantage of his superpowers when two of his superpowers are one that he's frugal and two that he lives in a market where you can buy cashflow on the market. Like, put that to work now. Absolutely. And I love just the framing of this question, because I think it approaches financial independence and real estate in a very realistic way.

7:29Henry Washington:He's saving a lot of money, the foundational thing to do. I know a lot of people say they want to get into it with no money. It's possible, but it's way easier if you're saving tons of money like Brad is doing. Not everyone can do that, but he's doing that. He's looking to become financially free in five to 10 years. As we've established, that is possible for most people if you're willing to go the routes that we talked about, but for Brad, that might be possible even sooner. And he's saying that he doesn't want to quit his job immediately. So all three of those things together are going to put Brad in a really good position to be able to pursue financial independence somewhat aggressively.

8:06Henry Washington:So I love it. I think it's definitely possible. So one thing we talk about, Henry, is like I often counsel people who are in different kinds of markets to pursue equity building strategies first, whether that's burr or flipping or just doing cosmetic rehabs on a traditional rental property. Because as we talk about a lot, building equity is the pathway to cash flow later in life. But I kind of think differently. You're in this market that offers cash flow that's cheap and you have a frugal lifestyle. I'd probably just go after the best cash flowing deals right away, right? Yeah. I mean, the goal with real estate is to get wealthy over time so that you have income coming in when you're not having to work for it.

8:51And most investors get into flipping because they need to generate cash now so that they can go buy assets that they can live off of in the future. This guy technically doesn't need to do that step because he's saving money and he lives in a place where you can get the cash flow sooner than later. So for this investor, what I'd focus on is go try to make sure that you're buying assets that are going to last you so that you're not having to recycle them after five years into better assets.

9:22Henry Washington:I think that's a really good point. I invest in the Midwest too, and it's hard to find them, but trying to find properties built in the 60s, ideally, or later. I've bought a lot of 1910s, 1920s. I bought some 1890s before, and they're a pain in the butt. Man, did you buy Paul Revere's house? Yes, exactly. No, I mean, unless they're completely renovated, which is rare, and they're going to be more expensive than the price point we're talking about. But yeah, Brad, it seems like you're in an awesome situation, so go out and get it. We have another question coming up about portfolio goals, a topic I love to talk about, but we got to take a quick break.

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13:33Henry Washington:Welcome back to the BiggerPockets podcast. Henry and I are here answering your questions about real estate. This one comes from Jared in California, who says, I'm a rookie investor based in California looking to start building a portfolio in the area. What do you guys think? An ideal portfolio composition that prioritizes modest growth in the next three to five years, Long-term rental in the single-family category seem to be a good base to start cash flow, but what are your suggestions based on experience? Examples start off with two single families, then move to multi, or then focus on short-term rentals.

14:09Henry Washington:I think sort of the question here might be setting Jared up for the wrong answer because he said, what is an ideal portfolio composition? If you wanted me to run the math and tell you the precise best possible portfolio composition, composition could probably do that for you, but you're not going to find the deals. There's an ideal portfolio composition, and then there's a realistic portfolio composition. And I think that's what you need to be thinking about as a real estate investor in 2025. And that's just always true. You need to be thinking about what's your next best step, what is the best deals that you can do to get to your long-term goal.

14:50Henry Washington:I actually, I don't know about you. I don't really think about this question that much. Like, what's the optimal thing? Do I want single families or multifamilies? When do I pivot from one to another? I honestly think a lot of investors spend way too much time thinking about that. I'm just an investor. I look for opportunistic deals that fit my long-term goal. And my long-term goal is 10 years from now, I want to not have to work and I want to replace more than just my regular income, but have some on top of that. And so any deal that I find that fits that criteria, I'm going to go for. I don't care if it's single family or multifamily.

15:30Henry Washington:I'm just trying to do whatever I can opportunistically and move on to the next deal. I would say your focus just needs to be on figuring out how you're going to generate leads for properties that are actually going to make you money. And then as you start to buy some of those properties and you start to figure out what is it that you're good at? What is it that's your superpower? Then you can adjust your portfolio based on what you know now. I just don't know that you know enough to know that your portfolio is going to look exactly like what you're planning it to look like in the beginning. I just don't know that it works like that.

16:06Henry Washington:No, I think it's worth as a rookie investor spending time figuring out what your financial goals are. Like, why are you doing this? Where are you trying to go? Because that will really help you home in on the right kinds of deals. But I honestly think this is an example. I mean, no offense, Jared, a lot of rookie investors do this, spend a lot of time planning what they want to do and not executing. And this is just, this happens in every business. I've started a lot of business. I have definitely done this myself where I dropped this like business plan and what I'm going to do three years from now.

16:43Henry Washington:And literally none of it has ever mattered. Not once in my whole life has that ever been a useful exercise. Long-term goals, figure out where you want to go, and then just focus on short-term execution. Those are really the only two things that have ever mattered to me in my own entrepreneurial career. And I know it's sort of ingrained in this entrepreneurial philosophy that you hear all over the place, in the media, in the news, whatever, is like, you got to have your business plan. You got to plan this all out. No, you don't. You have to have goals and you need to execute on short-term things.

17:14Henry Washington:And the plan will become clear to you. I promise. And the plan can change. The plan will change. It's like 100 % it will change. Like, for example, I like set a goal at the beginning of this year. It's like, I'm looking for purpose-built four units. It's not because I have some ideal portfolio in my mind that I'm trying to get to. It's just like, I've just been looking at a lot of deals. And those are the ones I like the best right now. If I saw a single family that worked, I would just buy that instead. Like I have to create some buy box and limitations about what I'm trying to buy. Otherwise, it's too overwhelming.

17:46Henry Washington:But I also just want to find good deals. And when they come across my desk, I'm going to take them seriously. So I just think as a rookie, execute your first deal. I think for Jared, you're going to need to think hard about whether or not you want to invest in California. Like that's just a hard thing to do, as Henry alluded to. and you could invest out of state or you're gonna have to get good at construction. Like those are probably the two routes for you. And that's just the way it is. And you just kind of have to choose. You can build cashflow in California with the ADU strategy, but that's pretty niche.

18:24And you're gonna have to go figure that out. And you're right, like go do a deal and then reevaluate because I still have my original goals from before I did a deal when my wife and I were planning out what we wanted our real estate portfolio to look like. We wanted to buy one house a year for the next five years. That's what we started out as our goals because we wanted to go slow. Based on what we knew at the time, that seemed aggressive. We did five deals in our first two months once we got going.

18:57Henry Washington:Yeah, exactly. You're like, I can do this. Yes, absolutely. So don't focus on the exit. focus on how are you going to find deals that make sense for the numbers you're trying to hit in the market you're trying to be in. And if you can't figure that out, if that doesn't exist where you are, then maybe you'll need to pivot markets or maybe you'll need to pivot strategies. But I think there's more you need to figure out. All right. Great question, though. We have a couple more questions to answer for you guys, but we have to take another quick break.

19:30We'll

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