How to Buy 4 Rental Properties by 40 Years Old

0:00Henry Washington:Four rentals by 40 years old. That's all you need to cement a comfortable retirement or even retire early. If you can achieve this, you'll be significantly wealthier, and I'm talking millions of dollars wealthier than the average American. Plus, you'll have passive income to support yourself in retirement instead of just a Social Security check. Getting to four rentals is a huge deal. And today I'm going to share the four-step plan anyone can use to build a small but powerful rental portfolio that accelerates their timeline to retirement, or at least makes them a heck of a lot richer. In the example I'm sharing today, buying only four rental properties, even if you stop there and do nothing else, would increase your net worth by$3.3 million by the time you're ready to retire.

0:47Henry Washington:And if you're already 40 or you're over 40, don't worry. you can follow the same steps and map out your own retirement timeline using the walkthrough I'm going to share with you today. So you don't need a dozen properties. All you need is four. This is how you get there.

1:06Henry Washington:What's up, everyone? I'm Dave Meyer, Chief Investment Officer at BiggerPockets. Today on the show, I'm showing you how acquiring only four rental properties by age 40 can completely transform your financial trajectory. We're going to dive right in with an example of how this works step by step. And this is a plan almost anyone can follow. And actually, it's pretty similar to the types of properties and the timeline I personally followed on my own journey to financial freedom. And I'm sure there are some people out there listening to this who want to scale all the way up to dozens or even hundreds of properties, which is cool if you want to do that.

1:45Henry Washington:But I think four properties gets most people where they want to go by retirement. So we're just going to talk through the first four steps. And if you want to keep growing from there, great. But these four steps will set you up for a successful career, whether you want to go big or not. All right, let's jump into our first property. My recommendation for almost everyone out there is to buy an owner-occupied property for your first deal. The idea behind this first deal is not to hit a home run or to get a huge amount of cashflow, the idea here is to set yourself up so that you're saving additional money and you're starting to build equity in your home.

2:23Henry Washington:And you're gonna use those two things, your increased savings and the equity that you build in this first deal to go buy your second deal, your third deal, and your fourth deal. So don't think that you're gonna have to save up a new down payment for each of these four properties. Each deal that you do should help your next deal become easier. So again, for this first deal, you're going to want to do owner-occupied. This is going to give you access to better financing, loans where you can put as little as 3.5 % down, you're going to get better interest rates, and it's just the easiest way to get into the game.

2:56Henry Washington:Now, there are generally two different types of owner-occupied deals that you can consider. The first and largely the most popular is known as house hacking. This is where you buy either a single family home, live in one bedroom, and rent out the other bedrooms to roommates. That's an option for people. Some people don't wanna live with roommates. So the other option is to buy a small multifamily. This is either a two unit, a three unit, or a four unit property. You live in one and then you rent out the others. And the key is here, you gotta stop at four because if you buy something bigger than four, you lose that owner-occupied financing, which is what you really need on this first deal.

3:34Henry Washington:So I recommend to most people, if you can find them, and if they're available in your area, look for a duplex or a triplex and invest in that, live in one unit and then rent out the others. The benefit of doing this, again, is that you don't necessarily need to cashflow. If you can find a cashflow in a house hack, that's great, but your key here is to save money. If you buy a house hack, you live in it, and for example, you spend$500 less per month on housing, that's a win. Even if you're coming out of pocket a couple hundred bucks a month for your housing, as long as it's less and significantly less than what you were paying in rent, that's still a win.

4:13Henry Washington:You're gonna use that saved up money for your next property. It also is going to help you learn the business of being a landlord and a real estate investor. And if you're doing it right and you're buying the right kind of deals, you'll be building equity as the value of your property increases over time. That equity is something you can tap for your second, your third, or your fourth deals. So those are the basics of house hacking, But I also want you to remember a house hack doesn't have to be this two to four unit. It doesn't even have to be a single family home with roommates. You can do it by adding an ADU or a mother-in-law suite.

4:50Henry Washington:Where I live, a really popular thing to do is people buy split level homes. They do a lock off into the basement and they turn their single family into two units. That's not available to everyone. But the point here is get creative. There are ways to make house hacking work that might not appear immediately obvious. on Zillow, and often those are the best deals. So that's it for step one. Save up your money, invest in an owner-occupied strategy so you get that owner-occupied financing, find a deal that's going to allow you to save money and build equity that you can invest in your next deal. And being on site is a great opportunity to get good at being a real estate investor, get good at working with tenants, get good at property management.

5:32Henry Washington:Those are the three goals of step one. So let's walk through an example here. Let's just imagine that you're 30 years old. You're going to do this house hacking strategy and you find a home for$400 ,000. In some markets, it will be cheaper. Some will be more, but that's the median price home in the US today. Now, if you get this owner occupied financing that I've been talking about using 3.5 % down, your down payment is only going to be$14 ,000. That is enough. Like I said, if you save$20 ,000 up for this first deal, you'll still have some money for closing costs and for cash reserves. So this is a realistic deal.

6:08Henry Washington:Now, I look at deals all the time. And for deals like this, depending on the market you're in, it is realistic to believe that you could save$500, maybe more,$700,$800 in some examples off of what you would be paying in rent. So now, as opposed to renting, you are saving$500 per month in cash. On top of that, you're also getting amortization. You're getting tax benefits. You're getting appreciation. But just the cash savings alone is$6 ,000 per year. So if you save that after three years, you're going to have close to$20 ,000 saved. That's enough to just do this deal again. So as you can see, buying the first deal and doing that right leads to the second deal and the second deal will lead to the third and the third will lead to the fourth.

6:53Henry Washington:But the key is to find a good deal that's going to build you that equity and help you save that money. So that's the first deal. But the second property is where things really start to ramp up and take you from a home owner to a real investor, which has huge impacts on your net worth and retirement timeline. We're going to talk about the second deal that you should be looking for and how that's different from your first one. But we do have to take a quick break. We'll be right back. What if I told you you could forget everything you know about investment property loans? Because Host Financial is rewriting the rulebook, tossing out those pesky DTI restrictions.

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10:24Henry Washington:Welcome back to the BiggerPockets podcast. I'm Dave Meyer, giving you my step-by-step plan for getting four rentals by 40 years old. Before the break, we talked about your first deal being an owner-occupied house hack that allows you to save money and build equity so that you have enough money to go out and do this again. Now, property two is going to be a little bit different. Now that you have some experience and hopefully some money from house hacking, we're gonna look for a deal that has a little bit more meat on the bones, got a little bit more juice because we want to build equity. That's the thing that's going to build our net worth and really secure our retirement in the long run.

11:04Henry Washington:Now, the way you do this is by finding what is known as a value add property. So this is finding a property that's not in the best condition and doing some sort of renovation. It doesn't need to be a full burr. You don't need to tear out all of the walls. This could be anything from a light cosmetic deal, or if you want to, you can do one of my personal favorite strategies. I call the slow burr. You could do a full gut rehab. That's where there's a lot of equity to be gained. But the point here is property two is going to be a value add project where you actually do a renovation on a property to build lots of equity.

11:40Henry Washington:Now, depending on who you are, you should decide how intense of a renovation that you want. So if you don't have any experience with renovations, I would look for something that's more of a light cosmetic or a light rehab. That's something like renovating kitchens, painting, putting in new floors, but you're not doing anything structural. You're not moving walls. You're not popping the top. You're not doing anything like that, unless you have experience with renovations. If you have experience or work in construction or know someone who could help you with that process, you could do a bigger project.

12:11Henry Washington:But for deal two, I would recommend most people stay on the lighter side of the renovation. It will reduce your risk and there's still significant upside in these kinds of deals. The next thing that you need to look for in your deals are one, in today's market, you should be looking for deals that have been sitting on the market for 60 days or more. We are in a buyer's market right now, which means that buyers have leverage. And if any seller has a property that's been sitting on the market for 60 days or more, they're gonna probably be pretty motivated to negotiate with you. So look for those deals because that's where you're gonna be able to buy below current comps, and that's going to give you even more equity throughout the course of your deal.

12:53Henry Washington:On top of just looking for things sitting on the market 60 days, I think two key things that you want to look for in your deals are areas where you think there is going to be rent growth. So where there's going to be a lot of demand for renters, that is always helpful as a real estate investor. And the second is a place that's in the path of progress. You don't want to invest in a place where properties aren't going to appreciate or there's not going to be demand if you want to sell it. So look for places where people want to live, where the government is investing. Those are great ways to take your deals from a single or a double to a home run over the lifetime of your investment.

13:28Henry Washington:So those are the things to look for in the deal. And just as a reminder, the goal of this deal is to build equity as much as you can and to get a cash flowing rental. All right, so let me just give you an example of how this works. You go out and buy a property worth$300 ,000. Then you're going to need to put money into it, right? Let's say you have a rehab budget of 50 grand, which is a generous budget, right? Like that's enough to make significant improvements to a property. So your total all-in costs are going to be$350 ,000 for this deal. And what a lot of people do for a BRRR property is take out what's known as a hard money loan.

14:04Henry Washington:These are loans that are designed specifically for these types of projects where you don't just borrow the money to buy the property. you also borrow the money that you need to do the renovation. And oftentimes with a hard money loan, you can put as little as 10 % down. So because your total costs are$350 ,000, you're going to need$35 ,000 to get into this deal, which after a couple of years of saving up your money from your first deal, plus building equity, you should be able to do this within two, three, or maybe four years. You should have that much capital. Now you go into this deal, you buy it for 300 grand.

14:41Henry Washington:you add value to it after putting in 50 grand. Hopefully this property is now worth, let's just call it 450 ,000. So you put in 350, now it's worth 450 ,000. And then no, that might sound like magic, but it's not. You can absolutely put 50 grand in and build$100 ,000 of equity. That happens all the time. That is a relatively normal type of return that you can expect on a good bird deal. So you build that equity, which is great. Obviously your net worth just went up, But the real magic of the BRRRR property is that you can take some of the equity that you built out and apply it to property number three.

15:20Henry Washington:So you're going to take out a new mortgage. You're going to have to put 25 % down, which is about$112 ,000. You're going to need to pay off your old mortgage, right? You still owe the hard money lender$315 ,000. But after those two things, you can take$20 ,000 out of this deal. So you only put 35 in, right? Remember? and now you're pulling$20 ,000 out of this deal for your next deal. Now, some people wanna do a perfect BRRRR where they can pull out 35 ,000, that might be possible, but even in this example, you're pulling out 20 ,000 that you can go use for your next deal. You're more than halfway to your next deal.

15:59Henry Washington:That's what's so powerful about the BRRRR strategy. And on top of that, you should also have a cash-flowing rental property at this time, right? Because the key is, even after that refinance, you need to make sure that this deal is going to cash flow at least modestly. It doesn't need to be tons of cash flow. It doesn't have to be the highest cash on cash return. Remember, the main goal of this deal was to build equity, which you have done, and to get at least break even. I would recommend 3%, 4 % cash on cash return minimum for this kind of deal. Now, once you've done that, you have$20 ,000 already.

16:34Henry Washington:you're saving six grand a year from your house hack. Now you're making, let's call it$3 ,000 a year in cashflow from deal number two. And so in two years, you should be able to get deal number three, right? You have 20 grand in equity, plus you're saving nine grand a year in cashflow. That will get you$38 ,000 in just two years. And this deal we just did only cost us$35 ,000. So in two years, you can get to deal number three. So that brings us to property number three. And the goal of this property is to generate as much cashflow as you can. You still wanna buy a great property. You don't wanna be buying something that's never going to grow, but you wanna prioritize cashflow and cash on cash return here over equity appreciation.

17:23Henry Washington:So we're not necessarily doing a burr or a house hack here. we are trying to find a cash cow. So the way that we're going to finance this is through the equity from our first two deals. Presuming both of those properties continue to appreciate at a modest rate of 3 % per year, that's about average. And you add that to the equity that you built in the Burr deal, that was a significant amount of money. Plus you're saving$800 a month. If you waited, let's just say two years between your second deal and your third deal, you're now 35 years old. in our example, you should have, just from doing those first two deals, another 60 to$70 ,000 to invest, which is more than enough to invest in this third property.

18:08Henry Washington:Now, I know for some people, or if you watch a lot of social media, real estate content, you might think waiting two years for your next deal is a long time, or waiting five years from your first to your third deal. I don't actually think so. It took me six years to get to my third deal, and three properties. I had eight units at that point, but it took me three years and that has been totally fine. By 15 years of doing this, I have become financially independent. And so I promise you, you can follow this timeline. It can absolutely work. Your goal, remember, is to get to four properties by 40 and you're already at three by 35 on this timeline.

18:47Henry Washington:Now, there's sometimes a trade-off between cashflow and appreciation, not always. And you honestly want to find a little bit with both. I personally never look for deals that just maximize cash flow. Like you can buy something, maybe it's in a D class neighborhood or a market that's never going to grow. Maybe you can get a 12 or 15 % cash on cash return in those markets. I don't personally like those kinds of deals. For me, I need to at least be able to believe that these deals are going to grow at least on average appreciation and that they're still going to be good assets sometime in the future.

19:21Henry Washington:They're still in a desirable place where there's going to be demand, but I am willing to give up buying in the best possible neighborhood in order to get my cash on cash return up to eight, ideally closer to 10 % on this kind of deal. Now, if you have 70 grand to invest, which you should by this point of your investing journey, you should be able to buy something for about 300 grand. Now that's not going to buy cash flow in every single market in the United States. But I think this deal is an example of a good time to go out of your current market unless you live in Western New York or the Northeast, parts of the Northeast, or in the Midwest.

20:00Henry Washington:If you live in some of those areas or even Tennessee, some areas in the South, you can buy a cash flowing duplex for like 250 grand or 300 grand. But if you don't live in these markets, you can just invest in those markets. I know it sounds intimidating to invest long distance, But if you've done two deals at this point, you've already done a BRRRR, you've already done a house hack, I promise you, you can invest long distance. I have done it. It is not that much harder. And in a lot of ways, it forces you to develop some of the skills and systems that are going to make you a better investor over the long run.

20:35Henry Washington:So I would personally not shy away from that. Once you've found a market where you can actually do this realistically, again, lots of places in the Midwest, in the Southeast, some places in New York or in New Hampshire, places like that, this is definitely possible. The things I would personally target on this deal is an 8 % cash on cash return or better after stabilization. Now we're not going to prioritize a big equity bump on this. We're not going to do a big BRRRR project, but sometimes, and honestly, oftentimes in today's day and age, you got to fix up the house a little bit. You got to throw some paint on there, put in some new floors, make a couple of improvements.

21:14Henry Washington:And then once you have gotten rents up to fair market value, that's when you need the 8 % cash on cash return. So even if the rents today and the Zillow price don't give you that 8 % cash on cash return, that's actually fine. That's quite normal. What you need to do, the job you have as an investor is to project out what's my cash on cash return going to be when I'm done fixing up this property. And if it's 8 % or better, that's what I'd look for. Then I would look for at least two to three upsides on these deal because 8 % cash flow is great, but you obviously want the deal to perform better and better over time.

21:49Henry Washington:And so I like looking for areas where there's likely to be rent growth if it's in the path of progress, or I also love places with zoning upside. Now, I just want to say one more thing before we go back to our example that there are a lot of markets in the Midwest that you can buy these kinds of deals, but I recommend looking for ones that still have good appreciation. I said it before, but I want to reiterate here that as a real estate investor, you do not want to see your property values going down. So look for places like Milwaukee or Indianapolis or Grand Rapids or even Detroit over the last couple of years.

22:21Henry Washington:These are markets that are growing and they have good, strong fundamentals, but they're still really inexpensive. That's what you want to look for. You don't just want to find deals that are cheap because they're cheap. A lot of times if they're in a mediocre market and they're cheap, it means that they're probably not going appreciate. You're going to miss out on a lot of the benefits that you should be getting from holding onto this property long-term. So presuming that you find this, you get a$300 ,000 deal with an 8 % cash on cash return. If we return back to our example, now we're getting$750 a month from property number one, because rents have been growing at 3 % a year,$350 a month from property number two, and$420 per month from property number three.

23:02Henry Washington:That is over$1 ,500 a month in tax advantage cash flow, which is closer to earning$2 ,000 per month, like in a job that's going to get fully taxed. Now you're only five years into this, but hopefully you're starting to see that these things start to compound. What is not a lot of cash flow in the beginning gets a little bit more and a little bit more and a little bit more. And it's not just when you acquire new deals, just by owning these properties, you've already gone from modest cash flow and deal number one to$750 a month on property number one. Now you're up to$350 a month on a BRRRR deal that was prioritizing equity growth over cash flow, but you're still getting cash flow.

23:42Henry Washington:And as you'll see in our next property, the longer you hold this, every deal continues to get better. It's not just about acquiring new properties. It's about allowing every deal that you own to mature over time. And just like wine or many other things, most deals continue to get better and better the longer you hold them. So now that we've done property number three, let's move on to our fourth property that you should be targeting before the time you turn 40. We're going to get to that, but first we have to take one quick break. We'll be right back.