How to Make $5,000/Month with Rentals (Starting from Zero)

0:00Would an extra$5 ,000 per month in passive income change your life? Of course it would. That covers car payments, it covers tuition payments, it could pay for really nice vacations. But if it was obvious how to make five grand a month in passive income, you'd probably already be doing it. But the good news is, it's actually much easier to achieve this than you might think. And today, I'm going to break down exactly how you can reach$5 ,000 a month in passive income from rental properties starting almost anywhere.

0:37Hey everyone, welcome to the BiggerPockets podcast. I'm Dave Meyer, head of real estate investing at BiggerPockets and an investor for over 15 years. When you first get started in this business in real estate investing or even just hear about the idea of real estate investing, it can be really exciting, but it's also kind of daunting. How do you go from wanting to build a portfolio to bringing in significant amounts of passive income every month? What are the actual steps that you have to take. Today, I'm going to show you because even though it may sound complicated, earning$2 ,000 or$3 ,000 or even$5 ,000 or more in passive income isn't magic.

1:20It's simple math and execution. I happen to pick a number$5 ,000 a month that I think would be pretty life-changing for anyone. An extra$60 ,000 of income per year that is typically taxed at a lower rate, that's a huge win for any investor. And today we are going to reverse engineer how you can do it too. So how do you actually do this? How do you get$5 ,000 in passive income from rental properties? This concept just requires two numbers. That's all you need to know. Number one, the amount of equity that you have invested in your overall portfolio. and number two, your average rate of return. If you know just those two simple things, you can reverse engineer$5 ,000 in monthly cash flow.

2:10So we're going to start with our first number here, which was total equity invested. So all you need to do, this is actually a really simple equation, is if you want to figure out your total equity invested, all you need to do is subtract your liabilities from your total number of assets. So assets is basically the total amount that your properties are worth. And I know that if you're just getting started in real estate, you don't have any properties and that's okay. Remember, we're reverse engineering this. And so I'm trying to just explain to you the math equation that will help you figure out how many properties you're going to need to buy eventually.

2:48So assets equal basically your total property value. And then liabilities is super easy. That's your total debt. And so for the context of this conversation, what we're talking about is how many mortgages you have. So this is how you get your total equity. Say you have five properties, you add them all up, they're worth$2 million, right? I'm just going to estimate that they're worth$2 million at the end of your portfolio. Again, I know that sounds like a big number, but if you follow the steps we're going to talk about today, over a period of time, if you're patient and you're diligent, you can achieve this.

3:19So$2 million of total property value. But let's just say that you have mortgages. Most people use mortgages to buy properties and say that your total liabilities are a million dollars. And that would leave you with total equity of$1 million, right? $2 million of property value. Those are your assets minus$1 million in debt. That is your total equity value. And remember, that is the first number that we need to reverse engineer. So I'm just going to number this number one. That was easy, right? If you own a portfolio of properties, you should be able to do this very simply. You can get estimates of your property value from an agent, from Zillow, from all sorts of places.

4:01And you'll know exactly what your debt is because every month on your mortgage statement, they'll make sure to tell you how much debt you still owe them. So that's pretty easy to add up as well. Now, the second number that we need to figure out is something called our rate of return. For me and for the purposes of this conversation, I'm going to use one of my personal favorite metrics. And I know I'm a giant nerd because I have favorite metrics, but I do. And one of my favorite metrics is return on equity. This is the one we're going to use today. And I might just be calling it ROE. That's what it stands for, return on equity.

4:36And so return on equity, I think it's a really nice metric because it measures how efficiently your portfolio is generating passive income for you. And like we said, the goal of this whole conversation, the examples that I'm giving you today are how to generate$5 ,000 in passive income. And so we need a way to measure how efficiently we are getting$5 ,000 a month. So we're gonna use return on equity as our rate of return. And this one is, it's super easy to calculate. All you need to do is understand your total amount of cashflow and you divide that by your total equity. And we just showed you how you can calculate total equity.

5:16So all you would need to know in this situation is what your cash flow is. So if you had$5 ,000 a month, you need to annualize that. So that equals 60K a year, right? So if you have 60K a year, you divide that by 500 ,000. That equals 12%. That's your return on equity. That is a very strong, good return on equity. It's probably a target that you might want to be aiming for. Maybe we'll use that as our example for the rest of this episode here. But this is all you need to do. In fact, I actually just now sort of inadvertently reverse engineered how you can generate$5 ,000 a month in passive income.

5:51If you can generate$500 ,000 in total equity and you can achieve performance of a 12 % ROE, that's going to get you that$5 ,000 a month in passive income. And I know you probably have a lot of questions about how can I get$500 ,000 in equity? That's a great question. We're going to get to that. You probably want to know how do I generate 12 % return on equity? Another great question. We're definitely going to get to that. But I just want to show you at the simplest level, this is how you generate passive income. You need money to invest in your portfolio. I don't care how many people on social media or YouTube say that you could do this with no money down.

6:32You could do it with nothing. That's not true. You can absolutely get started with a little bit of money down. But to actually generate long-term, truly passive income, you need to build up equity in your portfolio and you need to efficiently generate cashflow with that equity. That's the whole game. So that was just one example. But let's just imagine that you had, instead of$500 ,000, you had$600 ,000 in equity, right? So that means you only need a 10 % return on equity. So I want you to see that the more equity that you have in your portfolio, the easier it is to actually generate cash flow from it.

7:09I know that doesn't sound intuitive because a lot of people say you have to pick either cash flow or equity, but that is not how this works. The more equity you have, the easier it is to generate. Because if you have 500 grand in equity, you needed to achieve a 12 % ROE. It's not super easy to find deals like that on the market today. But if you had$600 ,000 in equity, now you only need a 10 % ROE, which means deals are going to be easier to find. It means you're going to have to take less risk and your portfolio is just going to require less overall work. You're not going to have to do as many renovations or renovations with as big of a scope as if you have less equity.

7:46And so your job as an investor and as you develop your strategy for how to go about this, you need to sort of figure out what your targets are going to be. Again, there is no right answer here. It really depends on how you want to do it. But I would say just given some of the numbers that we're talking about here, you should target generating somewhere between$500 ,000 in equity, up to$1 million in equity in your properties, and generating somewhere between a 6 % and 12 % return on equity. Okay, so this is the simple formula you need to follow to reverse engineer cash flow. But of course, we need to figure out how do we get those great deals that produce ROE, and bigger question probably for most people, how do you get that much equity to invest in your portfolio?

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12:48Welcome back to the BiggerPockets podcast. I'm Dave Meyer talking today how you can reverse engineer$5 ,000 a month in passive income using a very simple formula that I outlined before the break. Just as a quick reminder, basically you need to figure out how much equity you need to invest in your portfolio and the rate of return or your return on equity that you can realistically accomplish. We talked about that. Hopefully that math is pretty simple, makes sense to everyone. but you're probably all wondering, how do you actually go about and do that? Dave recommended getting$500 ,000 to a million dollars in equity.

13:22That is a ton of money that almost no one has lying around. So let's just talk about how you're going to go about getting that. So you're going to need to develop a strategy to get there because there are trade-offs, right? You can't go out. It's not very easy, I should say, to go out and buy a property that both builds a lot of equity and throws off cashflow at the same time. And that's why for the vast majority of people out there, I recommend a strategy where you focused almost entirely on building equity at first. Now, I don't believe that you should buy deals that don't cash flow, so I want to caveat that.

13:57But I think if I were starting out right now today and was trying to reverse engineer this and I didn't have just hundreds of thousands of dollars lying around, I would focus almost entirely on the types of deals that could help me build that equity as quickly as possible. Because that side of the equation to me is a lot harder, figuring out how to get that equity. Once you have$500 ,000 or$750 ,000 in equity value in your portfolio, finding deals that can throw off a 10 % return on equity, I think is relatively easier than the equity building part. So I would focus almost all of your attention on that.

14:36So let's just game this out a bit and talk about starting with$10 ,000 as your original savings. If you took a different strategy, right, and just went and pursued the highest return on equity, the second part of the equation first, it's going to slow you down. And I'm actually going to show you this math. So we'll call this one scenario one, and I'll call this the ROE first approach, right? So let's just say you do this, you have$10 ,000 and you're starting and you manage to find something with a 20 % ROE. These deals do exist, but the ones that cash flow like this are usually not in the best areas and they're usually not going to appreciate.

15:15So this is sort of the trade-off that I was talking about earlier, where you can find this deal that throws off good cash flow, but it's not going to build your equity at the same rate. And even if you found this amazing deal that is really unique, sort of uncommonly great cash flow in today's day and age, you're still only making like$2 ,000 a year, right? Because let's go back to our equation. If you take$10 ,000, the equity you have invested, times your 20 % ROE, that equals$2 ,000 a year or$160 a month. That's good. It definitely helps. But you're not really even close to your goal at that point.

15:56And how do you go from this one to your next deal, right? If you only had$10 ,000 saved up, you just invested all of it into this one deal and you're generating only$160 a month. If you do it that way, again, you can, that's your choice, but it's going to take you years to save up to buy a similar property. Maybe it takes you four years. Maybe it takes you five years. Then you buy another similar deal and then you're earning four grand a year. So if you did this times two, right, then you're equal to$4 ,000 a year, which is great, but it's still a far cry from the$60 ,000 a year or$5 ,000 a month that we are trying to do it.

16:36And for me, honestly, I don't know if that's worth it. You just spent five years investing all of your money to earn an extra four grand a year. I mean, honestly, you can do a side hustle. You can do DoorDash. You can do consulting online businesses that will probably make you more money than just doing what I'm suggesting here. But what about if we go after equity first. If we go into scenario two, which I'm going to call equity building, then look how this can actually change. If you focus on deals that build equity, these are deals like flipping houses, which is not for everyone, but is a great way to build equity, or just doing heavy value add types of projects where you are doing the BRRRR strategy, for example, these types of deals can build equity very quickly and allow you to reuse your capital to continue growing equity over time.

17:32So let's just imagine that we can find a deal that builds our equity at 30%. And this isn't easy, right? This is going to take work. It's going to take time. If you're going to flip a house, if you're going to do a BRRRR that earns this type of return, it is definitely possible. Even in today's day and age, even in 2025, you can find deals that do this if you're willing to do the work. But let me just show you why I think this approach is actually worth it. So just to be clear, what I'm talking about here is let's say you buy a house that's$250 ,000 and you renovate it, you put some work into it.

18:04And then after that, it's worth $400 ,000. And after all of your expenses, you were able to grow the equity that you put into that property by 30 % or more. So you put in$10 ,000. And I understand that with 10 grand to buy a house for$250 ,000. You could do that if you use an FHA loan, but you might need to partner. This still works with partnering, by the way. You don't have to buy the entire asset. What you need is your$10 ,000 of equity that you put into that deal to grow to just$13 ,000 in equity. That is a 30 % return on your investment. And when you think about it that way, it's not as complicated, right?

18:40You need to take 10 grand and turn it into 13 grand on your first deal. And again, you can do that if you buy a property outright. You can do that if you are partnering. But to get that kind of return in a short period of time, you're going to have to do a renovation. That's how you build equity as fast as possible in the real estate game. So again, all you need to do is take that$10 ,000 and turn it into$13 ,000 by getting that 30 % return on equity. And the reason this is so great is because you can do this in a relatively short period of time. If you are flipping a house, you can hopefully do this in six months.

19:17If you're doing a BRRRR six months to nine months, you should be able to do this. And just as an example, let's just say that you can do this two times per year. This is realistic for flippers. Most flippers I know try to flip a house in nine weeks, 10 weeks, 12 weeks, maybe 16 weeks. Then you obviously have to sell it. That can take some time. So six months, if you get good at this, is absolutely realistic. That is what most experienced flippers look for. So these aren't just made up numbers, pie in the sky. These are real things that you can do. Now, let's just imagine that you do this two times per year for five years.

19:52Remember, that's the example I gave using scenario one. Remember, I said, if you did this for five years, you would wind up with about$4 ,000 per year. But if you do the equity first option and you do two of these deals for a year for five years, you would have, I know this sounds crazy, but you would have$138 ,000 in equity. That is a crazy difference, right? You go from having$10 ,000 in equity and making four grand a month in cashflow to$138 ,000 in equity. That's incredible. Just as an example, if you decided to take all that equity, let's just say you liquidate everything and you have$138 ,000 sitting in your bank account.

20:35Then you go out and find a deal with just a 10 % return on equity. Remember, that's half of what I said in scenario one. We were using a 20 % equity number in scenario one. But in scenario two, if you flipped houses or did BERS for five years, then went out and repositioned your portfolio to get a 10 % ROE, you'd be earning$14 ,000 per year. So just as an example, after five years, if you go after return on equity and get an absurdly great deal, after five years, you're making four grand a year in cash flow. It's not bad, but it's certainly not $14 ,000 a year that you would be earning in equity.

21:12And this is why I highly recommend to people going after equity first. I'm of course just using simple examples here, but hopefully you can see the idea of focusing on that first half of the equation, building up your equity, then it's much easier to get cash flow in the long run, which is why I recommend you consider this. So let's turn now to talk about how long this will take. Because if you agree with me and you think this strategy might work for you, you're probably wondering, that sounds great. I want my $5 ,000 a month in passive income right now. Let's talk about how long it will realistically take for you to achieve something like this.

21:50I'm going to again pick some numbers here. This might not apply of you, but I can at least talk you through how you can do the math for yourself. So I'm going to do another example here. And we are going to talk about someone who makes$60 ,000 a year. That's below the national average for household income. And we have 10K per year in savings. If you focus on the equity side, what you're going to need to do is 18 deals at a 25 % ROI. So basically, if you can flip 18 houses and you do this, you know, every six months, you flip one house 18 times, you're going to have enough equity built up that you're going to be able to reverse engineer that cashflow that I was talking about.

22:32But, you know, realistically flipping burrs is a little bit risky. So I always think that you should pad these numbers a little bit. You're going to miss even the best flippers in the world miss on some flips. So I'm going to say rather than doing it 18 times, I'm going to add a little bit of cushion. Let's just say you have like a 10, 20, let's just call it a 20 % miss rate. Let's say that you need to actually do 22 deals because some of them not going to earn you that 25 % ROI. But what you need is over that 22 deals, if you average 25%, some of them, you might get a 50 % return. Some of you might get a 70 % return.

23:07But if you average that 25 % ROI on those 22 deals, you are going to have enough money to then reposition your portfolio into cash flowing assets, and that's going to get you the five grand a month. So how long is that going to take? I think conservatively, it would take you 11 years, right? If you're going to do two of these a year, basically one at a time, because it takes six months. If you do one at a time, it's going to take you 11 years to generate enough capital and to reposition it and go and get that passive income that you're looking for. Now, I know that's not as sexy as what some of the people on social media say and say that you can go out and start with no money and you can retire next year.

23:48I'm sorry, but that's just not true. It's just unrealistic. What I'm trying to share with you today is a realistic, actionable timeline that most Americans can do. Remember, we're talking about people who are making below the national house income here of 60 grand and with only 10K of savings, that's nothing to sneeze at, but the average in America is about 40K. So we're starting about talking at a below average financial starting point and realistically being able to get five grand a month in passive income in 11 years. You know, most people work for 45 years to be able to retire. And I'm saying you can make 60 grand a year in passive tax advantaged income in just 11 years.

24:29And that's only doing two of these a year. If you're willing to do four of them a year, start one every quarter, you're probably going to have two of them going at a time. So that does take more work. It does take more time. But if you want to be aggressive about this, you could probably do this in five to six years if you're willing to do four of them a year. And that's not absurd. I was talking to a flipper the other day at a meetup, and she had done nine flips last year just by herself. She doesn't have a team. She has children. She has other obligations. And she did nine flips last year. Now, that's not for everyone.

25:01I'm personally never going to do nine flips in a year. But if you want to be aggressive about it, that just shows she might be able to accomplish this in two to three years. So that is really up to you. But I just kind of want to give you some general guidelines of how long, you know, on the super aggressive two to three years, but even at a conservative rate, if you get good at this, you could probably do this in about 10 or 11 years. So that's my rant about how to build up equity and why I think you should focus on that first. But of course, at a certain point, we have to shift strategies. We can't just keep focusing on building equity.