The Most Boring Way to Get Rich with Rentals

0:00This is the most boring way to get rich with rentals. It is not flashy. It's not sexy. But it really works. And it actually doesn't even take that long. In fact, this might be one of the quickest episodes we've done just because of how easy this strategy is to explain. And the good thing is that it works for people who have never owned a property. And it works for those who own entire portfolios. The reality is that anyone, yes, even you watching or listening to this right now, can copy the same steps I'm going to outline to build wealth through real estate. I'll walk through each step and I'll show you the math behind how this under-the-radar boring investing strategy turns average Americans into millionaires.

0:47I know, it does sound almost too good to be true, but savvy investors have been using this strategy for decades. This is the most boring way to get rich with rentals.

1:03Hey everyone, welcome to the BiggerPockets podcast. I'm Dave Meyer, Chief Investment Officer at BiggerPockets. And today we're talking about one of my favorite strategies and one of my fundamental beliefs about investing in real estate, which is that boring is better. I'm going to lay it out for you and stay with me because before you decide that it's overly simple or this is not something that you can achieve, I'm also gonna share with you and I'm actually gonna walk you through steps and examples about how most average people, average Americans can actually pull this off. So here it is. Buy a house every two to three years, move into it, fix it up a little bit, move out and repeat that four to five times.

1:46I know it might not sound that impressive compared to these influencers claiming that they own thousands of units. Most of them don't, by the way, but that actually doesn't even matter because you don't need to own that many. This simple, boring approach can make you a millionaire. And yes, this is true even if you don't know where you're gonna get money for four or five different properties, because stick with me, I'm going to explain how all you really need to do is save up three and a half percent for your first property, and the process will take over from there. I have had the privilege of interviewing hundreds of investors, and I promise you, this is the most common path to success in real estate investing.

2:30You don't need fancy financing. You don't need giant deals. You don't need to take on big risks. This strategy generates cash flow, builds equity, and has massive tax benefits, all for low money down. So let's just talk then about this. Why does this boring strategy work? Well, moving into an investment property, because that's the key thing we're talking about here, not just going out and buying rental properties, you're buying one at a time and actually moving into them. Moving into an investment property is commonly known as house hacking. And the reason it's so powerful and so different from other approaches is that it unlocks the power of owner-occupied financing.

3:11This allows you to put less money down. It allows you to get better interest rates. It allows you to even finance some of your repairs. And this gives you the dual benefits of big upside that you get with normal rental property investing, but it also lowers your risks and can increase your cashflow. Now, of course, you can't live in multiple homes at once, which is why you will need to move every two, three years, which some people might think that is burdensome. And maybe if you're not really interested in building long-term wealth, this isn't for you. But I will show you in a minute that it is very well worth moving every two or three years when you see the numbers and how doing this over and over again can compound into literally millions of dollars.

3:57If you do this four to five times over the course of 10 years, my modeling of an average deal shows that you will be cash flowing tens of thousands of dollars a year, maybe up to$100 ,000 a year, and you will have millions of dollars in equity at your disposal. Let's start by talking about buying something about the average price in the United States right now. We're going to call it$400 ,000, and we're going to put as little down as possible. Now, if you have more money saved up, you can put more money down. That is often beneficial. But if you're starting from scratch, you can put as little as 3.5 % down on your first mortgage.

4:37Now, that is where this benefit of owner-occupied financing comes in. If you were to go out and just buy a traditional rental property, you'd have to put probably 25 % down. That's normal for an investor loan. But if you go and live in the property, you can put as little as three and a half percent down. Now, hopefully you can see that this is a really powerful tool here, because instead of having to save up$100 ,000 for a down payment on this$400 ,000 rental, you can actually save up$14 ,000. That's 3.5 % of$400 ,000. So this is really going to accelerate how quickly you can go out and get that deal.

5:19But again, you got to move into this property. Now, you're going to need more money than just$14 ,000. You're actually going to need some closing costs. I've estimated that at about $5 ,000 per deal. It's going to depend on what state you're in, what lender you use. But I think 5 ,000 is actually a good round number that will work. And then you're also going to need some cash reserves. Depending on the condition of the property, you might want one month of rent, two months of rent. If the property is not in great shape, you might want$5 ,000 or$10 ,000. I'm going to estimate it here at$3 ,000.

5:51So that just shows that for about$22 ,000, and I'm just using round numbers here as an example, but this is a very realistic example. For$22 ,000, you can get into a$400 ,000 property. I think you probably need 10 grand, probably minimum for renovations, and you're going to need to do a renovation. That's a key part of building equity. Don't worry. You don't have to do a crazy renovation. We're talking paints, floors, simple things that you might be able to DIY or can easily pay someone to do for not that much money. But we're talking about$35 ,000 here, right? I'm just going to estimate it. We said 22 plus 10 grand, that's 32 ,000.

6:26For our example, I'm just going to round up to 13 ,000 and say that to get into this$400 ,000 property I'm suggesting you buy, you need$35 ,000. Now, that's not chump change. That's still a lot of money, right? But it is a lot less than you would need if you were to go out and buy a traditional rental property where you needed a hundred grand just for the down payment, nevermind the closing costs, the reserves and the renovations as well. So if you're sitting there, figure out how do I get started in real estate? Think about saving up $35 ,000. You can also borrow some of this money from friends and family.

7:02You can partner with people, but you're going to probably need something like this, 35 grand to get into this first property. Once you have that 35 ,000 though, what should you be looking for? What kind of property. Here's what I would look for. This is personally just me. People have different opinions, but here's what I would look for. I would look for a small multifamily. So this is a two, three, or four unit property that has multiple units. Now you got to stop at four because the way that these loans work, these 3.5 % down loans, you can only go up to four units. If you hit a five unit building or anything bigger, that's going to be a commercial loan.

7:37It's not going to work for this strategy. You can do a single family home if you want, but personally, I think the better way to do it is buy a two unit, live in one and rent out the other, buy a three unit, live in one and rent out the other two, or buy a four unit, live in one and rent out the other three. For me, that's the ideal situation. You're going to command maximum rent and it's a more comfortable living situation. On top of that, I think that what you want to look for is properties that need work, but are in good areas. If you go out and buy a really fancy property that already looks great, you're not going to be able to do that renovation and build equity.

8:13It's going to be easier for you to manage, but it's going to actually slow you down. One of the most reliable, best ways to build wealth as a real estate investor is doing renovations. So I think you target properties that need work in a good area. So this is like buying a C-class property in a B area, right? You're going to take it from C-class, you're going to make it a B-class property in a B-area by doing a renovation. Or maybe depending on what market you're in, you buy a B-building in an A-area if you can afford it. But the key is being able to upgrade the property because that's what's going to allow you to recycle your capital in future years and move on to that next property.

8:51Now, personally, I like units with at least two bedrooms, ideally three bedrooms. That's sort of up to you. But one of the things I would be firm on is no big issues, right? You're just getting into this. Remember, we said boring. We don't want anything exciting going on in these properties. We don't want structural issues. We don't need new roofs. We don't want new HVACs. We don't want anything messy on title. Experienced investors can make money on that, and you might be willing to do that in your third or fourth property once you've done this a few times. First deal, boring. We want boring stuff where you can throw some paint.

9:24You can maybe upgrade a bathroom or a kitchen. You That's the kind of stuff that we want to see in this first renovation. Boring is the name of the game. You don't want to take those additional risks because you just don't have to. You can do this with boring, better condition properties. And yes, you can do this at this price point. Depends on where you live. Obviously, if you're living in California or New York or Seattle, you're not going to be able to buy a two unit for$400 ,000. But I promise you, because I do this, you can do this all over the Midwest. There are areas of the Northeast this is possible.

9:58This is areas of the Southeast that is possible. All over the country, you can find markets where these numbers work. So this is what I would target. A two to four unit property, around$400 ,000. If you can get it for cheaper, even better, but let's just say$400 ,000. You want something that you can renovate, and it has to be in a good area. Don't go buy something just because it's cheap in a not great area. That's not going to work. You want to find a property that needs work in a decent area, and it's a manageable renovation without a lot of issues. Right after this quick break, I'm going to walk you through in a lot of detail how a boring property just like this can actually generate you thousands of dollars of cash flow and hundreds of thousands of dollars in equity in not that long of a time period.

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14:29That's n-r-e-i-g dot com slash bppod. Welcome back to the BiggerPockets podcast. I'm Dave Meyer. Today, we're talking about the boring, proven way to build wealth through real estate investing. Just as a reminder, we're talking about buying a house every two or three years, moving into it, making upgrades, moving out and moving on. Before the break, I talked about what I would target for a deal, but let's talk about the numbers. Let's actually dig into what this would actually mean for you in terms of your finances if you go out and do this. So I put together this calculator actually just to walk you through this.

15:07If you're watching it on YouTube, you can actually look through all the numbers that I'm putting in here. So we're going to buy this property for $400 ,000, right? And we're going to live in it. Now I'm going to call this a three unit. I'm just going to assume that we're getting a three unit. I actually, when I'm buying deals in the Midwest, I target properties at about$125 ,000 per unit. I'm saying I'm going to buy three units for 400K. That's actually be a little more than what I'm targeting, but this is absolutely possible in the Midwest and areas of the Southeast as well. I also see this in the Northeast.

15:38Now here's how these numbers actually work in, right? We're going to buy it for$400 ,000. We have our closing costs at five grand, our reserves at three grand, our renovations at 13 grand. That means that the total cash that we're invested, as we talked about before, is going to be about$35 ,000. Now, in the first year, your plan as an investor is to move in and to make these upgrades. So you maybe move into one unit, maybe it's the nicest unit, and then you do the renovation on the other two units while you're living there and get those renters in as soon as possible. Now, in our example, I'm assuming that each one of these properties, let's call them two bedrooms each, are going to rent out for about 1 ,500 bucks.

16:20Again, these are numbers literally from deals that I own in the Midwest. I'm using pretty similar numbers. These are not made up. These are absolutely feasible deals that you can be doing. So because we're only renting out two of the three units, our rent for this first deal is gonna be about$3 ,000 per month. that's$1 ,500 each. On top of that, we of course have expenses. So our mortgage payment's gonna be about$2 ,300. We have taxes and insurance at$350. We have repairs and capex at$240. I'm just estimating these, but these are normal. You know, I'm doing 8 % there. I'm doing a 5 % vacancy contingency.

16:56And then I just did 5 % for miscellaneous because sometimes when you're a new investor, things just come up. So I'm giving you a 5%,$150 a month budget just to figure stuff out, right? Most experienced investors won't put that in there, but I'm giving you a little benefit of the doubt here. You got to have a little bit of a learning period. So all those things together bring our total expenses for the first year to$3 ,190. If you're tracking, our rental income was$3 ,000, meaning that our monthly cash flow is actually negative. It's negative$190 per month or about negative$2 ,300 per year. Now, you might be thinking, that's not that exciting, and I totally understand that.

17:37But what I want you to realize here is that to rent out an equivalent property, like if you didn't buy this and you were just continued renting instead of doing this house hacking strategy, to live in an equivalent apartment would cost you$1 ,500, right? That's what you're renting out these apartments for. So you have this option. You can either continue renting for$1 ,500 a month, or you could, quote unquote, lose 190 bucks a month in cash flow. Now, if you're doing the math here, what you realize is that you're actually saving$1 ,300 a month in your living expenses by doing the house hacking, even though you're not technically cash flowing.

18:16This strategy is allowing you to save$15 ,600 per year in living expenses over renting an equivalent apartment. That's pretty good, right? I mean, if you put it that way, you can start to see that this is already improving your financial situation in year one. And as I'll show you in just a second, it gets a lot better in year two, and it just keeps getting better and better every year after that. But I just want to call out, even in year one, you're investing$35 ,000 and you're already generating a 40 % return because instead of giving that$15 ,600 in rent away every year, you're saving that and you can either put that to more renovations or towards your next property, you're already earning a great return in that first year.

19:05And that's just on your personal cash flow. In addition to that, you're also increasing the value of the property. Remember, you wanted to invest$13 ,000 into those renovations. And in our assumptions, I'm saying our after repair value, the value of the property once those renovations are done actually goes up to$440 ,000 from$400 ,000. This is absolutely possible. If you find the right property and invest and do some DIY work, you invest$13 ,000, you can definitely increase the value of your property by 10%, and that's what we're showing here. So on top of that$15 ,600 that you saved by not paying rent, you're also making equity, right?

19:45You are earning$40 ,000 in equity. Plus, you paid off a little bit of your mortgage. you're talking about total benefit in the first year, like$48 ,000. That is an incredible start, right? That's even with the negative cashflow. And again, as you'll see, that cashflow is going to really grow over time and so will the equity, but this is an incredible start. Once you've done that renovation, what do you do in year two? You just wait, right? Learn the business. That's what I recommend people do. Just become a great property manager. This is when you start implementing systems where you get the right software, where you build a great team, But basically, just live your life and save up money for the next deal.

20:24And as you'll see, as we go from year one to year two, our cash flow gets a little bit better. It goes from negative 190 to negative 127. And then in year three, it goes to negative 40. Now, again, this is not actually you losing money. The property might not be generating positive cash flow. But you're basically now in year three spending$40 a month on your living expenses, where if you were living in an equivalent apartment and renting it, it would cost you$1 ,500 a month. So that is a net benefit to you of$1 ,460 per month. That is a lot of money. That's like 18 grand a year that you are saving and that you can put towards your future real estate portfolio.

21:06So again, it might take you one year, it might take you two years, it might take you three years, but the goal here is just to save up money for the next deal. Now you might be wondering, what is enough? How long do you have to wait? Well, enough is basically when you've either saved up enough money from your lower living expenses, or you have built up enough equity in the property to refinance, or most commonly, some combination of the both. Now, if you've never heard of refinancing, what it is, is basically restructuring your mortgage so you can tap into some of the equity, some of the value that you have created in this property.

21:41This isn't some risky thing. It's very common for investors and homeowners alike. Millions of people do this every year. So one option, again, is to save up that$15 ,000 a year, and that can get you there. But by refinancing, you can actually speed up your next deal. Let me just explain to you how. First and foremost, you need to refinance into a non-owner-occupied loan. Now, I said at the beginning, one of the powerful things that we're taking advantage of with this boring strategy is using this owner-occupied loan to put as little as 3.5 % down. But you can't live in multiple places. And so what you need to do is refinance this into a conventional investor mortgage so that you can go move into another property and use that 3.5 % mortgage again, right?

22:28That's the goal here. You can't have two primary residents. Because you've built equity in this deal, you're gonna turn it into a traditional rental and then you're gonna move on and house hack. back that's the first goal is to switch it from a owner occupied to a non-owner occupied loan the second goal of your refinance is to pull out capital like i was saying that you can use for your next deal and this part is really important so i want to just i'm going to walk through some of the details here so you can really understand what i'm talking about for an investor loan because you're going to refinance this property one into an investor loan you need to put 25 down when you're asking the question when can i move on to my next property well when you have enough equity to put 25 % down into this property.

23:09Now, I wanna be clear. I'm not saying you need to bring more cash to the deal and put it down, but you build equity, one, by doing the renovation. That's why it's so important to do this renovation. Two, from just normal market appreciation. And three, from loan pay down, right? Every month you're paying your mortgage. You are paying down some of your principal balance and you are building equity. Using our example around year three, year three and a half, I'm just gonna use round numbers, but let's just say our property is worth about 460. Our mortgage balance is about 330 now. So we have like roughly$130 ,000 in equity.

23:43Now you can't take that all out, right? Because you do have to do two things. You're taking out a new mortgage where you're going to put 25 % down. So, right, that's$115 ,000 using these round numbers. So you're going to have to keep 115 grand in there. Then you're going to have to take$330 ,000 of your 460 total and pay off your old mortgage, right? You have to go pay that off. So between the 330 in your original loan payoff and the 115 you need to keep in this deal, that's$445 ,000. And if the property is worth 460, if that's what it appraises for, that means you can pull out$15 ,000. That's awesome, right?

24:20It's not some massive thing, but you can see how this is going to help you for that next deal, right? After three years, you've saved$15 ,500 a year. That's over$46 ,000. Plus you can access this$15 ,000 from a cash out refinance, meaning that you're going to have now$60 ,000 for your next deal while you own a cash flowing rental property that's going to generate you over $1 ,000 a month once you move out. I hope you can see where this is going, right? Yes, that first year, it's not the most exciting thing. Yes, you're saving a lot of money over your living expenses, but just three years later, now you have a cash flowing rental property.

25:02You have over a thousand dollars in cashflow. You have tens of thousands of dollars of equity into this deal. This is incredible, right? This is an amazing thing. And this is just your first deal. We're gonna take a quick break, but when we come back, I'm gonna show you that, how if you just repeat this exact process three or four more times, it can absolutely transform your life, turn you into a millionaire and help you achieve financial freedom. Stick with us. We'll be right back. If my house had a resume, it would probably say great at structure and not much else. I'm the one paying the mortgage.