7 Steps to Replacing Your W2 Job with Rentals

16:37Ashley Kehr:And if you run into questions, Sidekick, their built-in AI assistant, helps you troubleshoot and keep moving without spending hours searching online. Plus, Shopify checkout makes buying simple, so customers are more likely to complete their purchases and you get that little cha-ching feeling when a sale comes through. If you're thinking about starting something, my advice is don't wait until everything is perfect. You just need the right tools and the willingness to begin. All you need is the idea. Shopify handles the rest. If you're serious about hearing your first cha-ching, start your free trial at shopify.com slash Ricky today.

17:14Ashley Kehr:You heard that right. Start your free trial today at shopify.com slash Ricky. That's shopify.com slash Ricky.

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18:44Ashley Kehr:So the next thing is to choose your strategy and you wanna do this before you actually figure out how much you need from each door and decide on what kind of door you're actually buying. So there's many different real estate investing strategies out there. There's long-term rentals, rent by the room, mid-term rentals. So you have to figure out, in my opinion, where do you have the most opportunity? So I know some people say like, oh, you wanna leave your nine to five, like find something you enjoy. Like, well, you love designing homes and you should flip houses. I think it's actually the opposite.

19:21Ashley Kehr:I think you should do, even if it's boring, You should do what is going to be the best opportunity and where you have an advantage. So for example, for me, I knew investor that had long-term rentals. I was working as a property manager. So I already had knowledge of how to manage a long-term rental, what rents were in that market. I knew a lot. And that was an advantage to me. And that's where I built my foundation with long-term rentals. So to choose your strategy, I would look at, do you have any opportunities or any advantages, whether that be in a market, because maybe you lived there before, so you know neighborhood to neighborhood, you went to college there.

20:01Ashley Kehr:Maybe you have somebody that lives in a market that you've analyzed and it's pretty good and you know you have that boots on the ground person to actually walk properties for you or things like that. And then for your strategy, do you have an advantage as to, you have an uncle that does midterm rentals and he's willing to mentor you and help you through it? Or do you live in a market that there really is a need for rent by the room and co-living because housing has just got so expensive that people can't afford to rent to their own place? So take a look at what those opportunities and advantages might be that you already have.

20:36Tony J. Robinson:Yeah, couldn't agree more. I think the opportunities you have are a great kind of filter. I think some other things to assess are how much capital do you have? Because different strategies require different amounts of capital. Buying a short-term rental in a popular vacation destination market is probably more expensive than buying a long-term rental in Davenport, Iowa. Different purchase prices, different costs to get those properties, quote unquote, rent ready, different down payment options, like everything kind of shifts depending on how much, you know, what market you're in, what strategy you're taking.

21:15Tony J. Robinson:So ask yourself, what access to capital do you have? And I guess not even just capital, but what is your overall purchasing power? So how much capital do you have to cover down payments and closing costs and set up or rehab? And then also what kind of loan can you get approved for? You know, can you get approved for a million dollar loan, which opens you up to virtually every market in the United States? Or can you get approved for a$100 ,000 loan, which maybe limits your options a little bit. So available capital, purchasing power, I think, are the first thing to consider. The second decision filter on which strategy you should choose is your available time and energy.

21:51Again, different strategies require different amounts of time,

21:57Tony J. Robinson:but depending on the person, they also require different amounts of energy. I would be a terrible traditional long-term rental manager, right? Like it just doesn't give me the excitement in a way that launching a new short-term rental does. So for me, the energy required to be a good long-term rental landlord is a lot more than what it takes for me to be a good short-term rental landlord. And that's just me personally, right? Flipping, actually, I don't mind flipping as much. For someone else, flipping might be the biggest energy drain they could think of. So as you go through these different strategies, how much available time do you have to commit to them?

22:36Tony J. Robinson:And then from an energy perspective, does it drain you, right? Does the idea of doing it make you want to roll over and die? Or does it create energy, right, and make you want to do more of those things?

22:48Ashley Kehr:Along those lines is you should also completely understand what your role and responsibilities are for that strategy. What will you actually be doing? So for short-term rental hosts, you're in the hospitality biz, baby. It is way different than a long-term rental. And so having an understanding of, like Tony said, your time commitment that you're going to be putting in and what actual job description that is going to be. And if there is the option to outsource the things that you don't like or don't want to do and looking at that and seeing if the numbers still work with hiring the help that you would need to actually do the job.

23:30Ashley Kehr:So that time piece and what you're actually going to be doing, is it something that you could actually handle? I could never be a wholesaler because that involves a lot of talking on the phone or talking to people face-to-face and a lot of personal interaction to get these deals done. And I am, you know, I'm terrified of just answering the phone if I don't know who it is having a awkward silence or awkward conversation. So like, I could never wholesale because of that piece that I am just like not comfortable or good at even as small talk with people to kind of build that rapport, that relationship.

24:08Tony J. Robinson:So those are the first two decision filters. And there's two more that I want to cover. So we already talked about capital. We talked about time and energy as the second point. The third, and this kind of ties into what Ashley said, but it's just desire and skill. So like, do you think you'll actually be good at this or do you have the capacity to get good at this? And if you can honestly answer no to both of those questions, it doesn't matter how much capital that strategy will produce. If you don't have the actual skill set or the capacity to build the skill set to get good at it, you'll never do well in that situation anyway.

24:41Tony J. Robinson:I think we saw a lot of that in the short-term rental industry where a lot of folks saw the potential, didn't necessarily have the skill set or the ability to develop the skill set to do it well. And they ended up buying deals that were mismanaged. They bought deals they shouldn't have purchased. And it didn't work out the way they wanted it to. So you've got to ask yourself desire and skill. Do you have it?

25:04Ashley Kehr:And I think, too, like understanding that strategies, markets, laws and regulations can shift. Because when I started in 2018, my first little rinky dink Airbnb arbitrage, it was a very different time to be an Airbnb host. It was very, very low expectations. We didn't have to fluff the pillows, offer every kind of coffee flavor available, do all these little unique touches. We do one property now, we have fresh flowers upon arrival. These little things, you could basically respond short little yes or no's. We didn't have automated messages set up with a guidebook and all these things. And as time has shifted, like the expectations of being an Airbnb host has drastically changed.

25:57Ashley Kehr:So think about that as you go into a strategy. Are there things that could change that you would not have time for or be able to conform to? And I know it's hard to predict, but like look at other strategies and things that have changed over the years, like just tenant landlord laws, being able to understand, like, do you have the capabilities to pivot and change if your state were to change laws and things like that? But a lot of those go with short term rentals, midterm rentals as rules, laws and regulations change, too.

26:33Tony J. Robinson:And I think that's a great segue into the fourth decision filter, which is your individual risk tolerance. Different strategies carry different levels of risk. And which risk are you willing to accept? Like Ashley said, if you buy a 100-unit apartment complex, you've got 100 different tenants that you've signed leases with, you're subject to all the local landlord-tenant laws. And depending on what location you're buying in, maybe those laws are swinging in your favor as a landlord. Maybe those laws are swinging out of your favor as a landlord. If you choose to flip, if you're flipping in a high cost of living area, there's a lot of capital you have to put out to be able to get the return you're looking for.

27:17Tony J. Robinson:And are you willing to accept that risk? Obviously, with short terms, there's a regulatory risk. So every strategy carries some form of risk. Like if there was no risk, there'd be no reward in real estate investing. So no strategy is risk-free, but which strategy gives you risk that you're willing to accept? So those are the four things to consider. Again, capital, time and energy, desire and skill, and your overall risk tolerance. And as you go through each of those, apply them against those filters to see which one actually aligns best with your specific profile. I think the last thing I'll say, Ash, and we've seen this a lot with guests on this podcast.

27:56Tony J. Robinson:don't be afraid to mix and match or combine these strategies as well. You can house hack. Say you've got limited capital. You can house hack, call it a triplex. You live in one unit. You do the second unit where you rent by the room. And maybe the third unit, you do a midterm rental. And now you've got a mix of all these different strategies. You got them for a very low cost because it's your primary residence. You're reducing your expenses. Now Now you're able to save more money for your next deal. And it all just kind of starts to snowball together. And we've seen lots of folks combine the strategy.

28:30Ashley Kehr:And you renovate it as a live and flip too, and then sell it for regain into here.

28:37Tony J. Robinson:So there's so many different ways you can go about it. So don't feel like you've got to choose just one. If you find a deal that allows you to tackle multiple, that's a good next step. All right, step number five is to pick a cash flow target per property. Now, the reason step five comes after step four, right? the reason you have to pick your cash flow target per property after you choose your strategy is because the strategy you choose will help dictate your cash flow target per deal. So I don't know. Let's say that you have a traditional long-term rental. In today's environment, maybe you should be happy with$200 in net cash flow per door.

29:14Tony J. Robinson:If you're doing rents by the room, maybe your goal is$200 in cash flow per room, right? So if you've got a three-bedroom, maybe it's 600 bucks. If you've got a midterm or a short-term rental, maybe your goal is$1 ,000 per door. So different strategies and different markets will give different targets you should shoot for, but you've got to identify, okay, what is my kind of buy box? What is the baseline that I'm looking for on a per deal basis? So then we can back into the other parts of this equation. But again, let's go back to our example of 4750 is your freedom number. And let's say that your goal is, or the strategy that you choose is traditional long-term rentals.

29:58Tony J. Robinson:And let's assume that for your specific market, you can get 275 a door. So 275 per door is your target for your strategy in your market. Your freedom number is 4750. 4750 divided by 275 gives us 18 doors. So now you know, all I need to do is get 18 doors that at minimum meet my cashflow target. And I've been able to achieve my freedom number. So you guys can see how it all comes together to really back you into a singular number that you need to focus on.

30:31Ashley Kehr:And so when you're finding this number, this 275 per door, make sure you're being conservative with it, that you're not maxing out. So if you're going to try and say like, well, I want less doors, I'm going to aim for maybe$500 per door, then I need less doors. If that is very, very, very hard to achieve in your market, where you're not going to be putting any more cash down to have a lower mortgage payment every month because you put more cash into the deal, that is just going to stall your acquisitions. So make sure that the cash flow number is reasonable and you can actually find a deal. Because yes, I'd love to say I'm only going to buy properties that have$1 ,000 cash flow with putting 20 % down.

31:20Ashley Kehr:In my market right now, that actually would be pretty difficult to do, to find that. And I probably will, it will take me so much longer to actually reach my goal because it is harder to actually find a deal that does that.

31:34Tony J. Robinson:That's a great point, Ash. You definitely want to make sure that these numbers are rooted in reality. And I think you'll be able to understand what a good cash flow target per door is once you start analyzing deals that meet your strategy within your specific market. And maybe if you do that analysis and to Ashley's point, you're like, man, I actually can't get that number here, or maybe instead of it being 18 doors, it's got to be 30 doors, right? You've got to double that number. Then you've got options. Either go back and pick a different strategy within that market, or maybe go to a different market where you can get better margins.

32:05Tony J. Robinson:That's why the whole plan all kind of works together as you do this. But that's step number five, is to pick your cashflow target per property. Step number six is to set your acquisition pace, So how quickly do you want to do this? And maybe a more aggressive timeframe is five years. Maybe a more balanced approach is, let's call it 10 years. And maybe a more lifestyle approach is 15. I feel like we've met a lot of folks in the podcast, Ashley, who within that 10-year timeframe have been able to replace their W-2 income. We just interviewed Matt Kruger. And I think he said it took him seven years to be able to replace his income.

32:49Tony J. Robinson:We interviewed Laura Sides, who I think within three years between flipping and her rentals, she was able to replace her income as a teacher. So we've interviewed folks who have done it quickly. We've interviewed folks who have done it longer. Dion McNeely, another prime example, someone who did it within like a decade. Coach Carson did it within a decade. So there are lots of folks who, if you just kind of consistently plug away, doing it within 10 years is actually a very reasonable goal to have. But your ability to scale really comes down to three skills. And Ash and I will break down each of these one by one.

33:23Tony J. Robinson:But skill number one, and we talked about this earlier, but it's your personal savings rate. The wider the gap between your income and your lifestyle spending, the quicker you can reload money for down payments and rehabs and acquiring that next deal. But if all of your income is going towards just sustaining your lifestyle, where are you going to get the money to buy your next deal? So you've got to be able to increase the amount of money you're saving. And again, like I said earlier, that comes from either playing better offense, making more at your job, getting a side hustle, or playing better defense, decreasing your expenses.

34:00Ashley Kehr:One thing with this too is to how you're going to acquire the properties is you need to be comfortable with your loan to value. So if you do find that you're able to get low money down on these deals, things like that, make sure that you're still going to be able to sleep at night and not be stressed because all of a sudden you have all this debt or you have these high mortgage payments, things like that. Make sure that it's still within how comfortable you are. So maybe part of your plan is going to be to save more to put 20 % down, even if you could get the deal for 10 % with using private money or whatever it may be.

34:41Ashley Kehr:So make sure you are comfortable on whatever level you decide to how you're going to acquire these properties. Because you can acquire properties really, really fast by using low money. But are you going to be comfortable with that, that you have no equity in these properties, even though they're cash flowing. But what if you have a vacancy or you have a bunch of vacancies and all of a sudden you can't make these mortgage payments because you are so leveraged and you don't have any equity to tap into? You can't sell them because you would actually have to bring money to closing. So as you're putting together your acquisition plan, make sure you take that into an account, what your comfortable level is.

35:24Tony J. Robinson:All right, your second option is your portfolio cash flow. So the goal here is that you reinvest every dollar of net cash flow from your existing doors and use that as fuel for your next acquisition, not money that you get to spend. And again, this is a very consistent theme. We've heard from our own lives, from folks we've interviewed on the podcast, that those early days of your portfolio are not for discretionary spending. It's for helping you buy that next deal. And the cool part is that this starts to snowball. all, you're going to use a lot of energy to try and get that first deal. It's almost like sending a rocket into space.

36:03Tony J. Robinson:I'm going to make up a number here, but it's directionally correct, but rockets use like 80 % of their fuel just to get out of Earth's atmosphere. That's where they burn the majority of their fuel. Once they've made it out of the atmosphere, then there's no gravity, you're flowing, you're going, everything's moving smoothly. And real estate investing is much the same way. That first deal, it's going to use 80 % of your energy, of your reserves, of everything you have. Once you get that first deal, now things start to snowball. The second deal becomes easier. So using the proceeds, the net cash flow from your first deal to help buy your second deal, and then your deals number one and two, those proceeds to buy your third deal.

36:40Tony J. Robinson:You're saving more money. You're compounding all these things together. You start to acquire properties faster. So number two, using your portfolio's cash flow. And number three, and this is a skill that Ash and I both leveraged to build our portfolios, but it's using other people's money. This is where you create the ability to raise capital, private lenders, JV deals, whatever it may be. That way you're no longer capped by your own wallet, but you're able to tap into the resources of folks that you know who know, like, and trust you to make it a win-win where they're getting a good return on their investment.

37:12Tony J. Robinson:you were able to continue to build your portfolio and get you close to your freedom number. Now, one thing I will say, if you are raising money from other folks, if you're doing it as like private money where they're just kind of like funding your rehabs and you're paying it back off when it's done, that doesn't really change the math. But say you're doing equity deals where say me and Ashley buy a deal together, we're 50-50 partners. Now I need to, that 275 number I had on my cashflow target per door, well, that number gets cut in half. So instead of me needing 18, Now I need an extra deal, right, to get to that same number.

37:45Tony J. Robinson:So just be cognizant of how partnerships and equity sharing impacts that freedom number that we talked about earlier.

37:53Ashley Kehr:Okay, then step seven is to make sure you account for vacancy. And really, there should be several things that you're accounting for that isn't a fixed number. These things can vary. So we call them your variable expenses over time. So having that vacancy buffer of 10 % is kind of a rule of thumb. And then your CapEx expenses. So these are capital expenditures for like big ticket items that actually add value, most often are depreciated on your tax return. And these are not repairs and maintenance, but things that kind of add value to the property or increase the longevity of your property, like putting on a new roof, siding, and replacing your HVAC system.

38:37Ashley Kehr:So these expenses hopefully do not come up every year for you, but you need to save for them when the time comes. So you want to make sure it's accounted for. So you could use 5 % to 10 % each month to actually, that's your number that you know that in the future you will have to use. And you're just going to take that out of your capital every month. I think that when you're trying to determine your percentage for CapEx, you should look at how old the property is, how old are different things in the property. If it's a very old property and it's had, you know, a septic that's been there for 20 years, it's had an HVAC system that's 10 years, hot water tanks, my God, what do they last these days?

39:23Ashley Kehr:five years. So looking at how old the things are in your property, you want to have a higher percentage that you're accounting for in your numbers. If you're getting a brand new property or maybe recently had all new mechanics put into it, then you could do this lower. So you want to make sure that that's per door that you're accounting for these percentages.

39:47Tony J. Robinson:So those are the seven steps to actually use your real estate portfolio to help you get to your freedom number. What we're going to cover next are the different exit strategies as you start to build your portfolio and how they impact you getting to your freedom number faster or slower. But first, we'll take a final break to hear a word from today's show sponsors. A couple of weeks ago, I traveled to the East Coast for my dad's wedding. It was quite the trip. I had the honor of walking my 71-year-old father down the aisle, which is something I never imagined I would get to do. I spent time with family and friends I hadn't seen in years, soaked in the East Coast charm, and of course, enjoyed a lobster roll, which always makes a trip out there even better.

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44:16Tony J. Robinson:That's Toyota affordability. Buy smart, drive for less, and trade for more. Shop toyota.com or your local dealer for deals and details. Vehicle projected resale value is specific to the 2026 model here. For more information, visit kellybluebookskbb.com. Toyota brand average resale value is 53 % versus the average vehicle at 45%. Toyota, let's go places. So what we're going to cover are seven steps you need to follow to figure out the exact number of units you need to help you get to your freedom number. So just really quickly, a few ways you can leverage the equity that's in your portfolio. There's the cash out refinance, where you're keeping the door.

44:55Tony J. Robinson:You get a tax-free chunk of cash, but you're swapping out whatever your original mortgage was for this new mortgage. Maybe that's great if you locked in an 8 % mortgage and you're refinancing down to a 6. Maybe not as great if you locked in a 3 and you're refinancing up to an 8, right? So depending on where you started, cash out refinances could be good.

45:13Ashley Kehr:Tony, I actually looked at this in one of my properties that I have a lot of equity in that I bought in 2018, I think it was. and I had purchased it at X amount or whatever and amortized it over 15 years and the mortgage has been paid down slowly. I looked at it though, if I went and refinance and pulled out a cash out refinance, I could pull out a good chunk of money, restart my amortization over another 15 years and my mortgage payment would stay exactly the same. Yes, I'd be paying it, longer, but that would give me the valability to not affect what my cash flow is right now. And I could pull out, I think it was like another$50 ,000 I could pull out right now and my mortgage payment would stay the same.

46:04Ashley Kehr:It was just resetting that amortization. And that's like, I feel like a car salesman now, they say like, oh, your payment will only go up $1 if you add this warranty in. But yet you're like having to add on five more payments. But I'm just saying, as a real estate investor, you're pulling that cash out. You can use that$50 ,000 for another investment or something like that. It's not affecting the cash flow that's coming in from that property, and it will still be paid off over time. You're just extending. So it depends on what you would rather. Would you rather the property be paid off sooner or tap into the equity and use it now?

46:38Tony J. Robinson:And that's a benefit of the cash out refinance, right? It gives you the ability to use some of that equity today. The second option to tap into your equity is a 1031 exchange. So a 1031 exchange, for folks that aren't familiar with it, is basically the IRS tax code allows you to sell a piece of real estate and defer any capital gains tax if you use all of those proceeds to buy another piece of real estate. So you could do a 1031 exchange where in Ashley's situation, maybe she sells and she gets, you know, call it 75K that she uses as a down payment on a bigger property that maybe cash flows even more than the property she has right now, then that's another way to tap into your equity.

47:18Tony J. Robinson:A third way is just to straight up sell the property. Whatever money you have, just sell it. You get a check. Typically, you do have to pay taxes on that. So I think that's maybe the downside there. And then the fourth option would be maybe a HELOC or some sort of portfolio line of credit if you've got multiple deals with equity as well. And this works almost like a a big credit card, right? Where your properties are the collateral and you use it, then you pay it down, use it, you pay it down. So those are all the different levers you can start to look at as your portfolio grows to free up equity to then buy more deals, which then gets you to your freedom number faster.

47:57Tony J. Robinson:Now, going back to the debate that we kind of started earlier of, is that the right choice? Does it make more sense for me to deleverage and live debt-free or does it make more sense for me to leverage and accelerate my growth? Truth is, I don't know. It's a very personal choice and it's a personal decision based on your philosophy, based on your risk profile, based on where you're at in your life and what do you value more. If you're a younger single person, then yeah, maybe scaling faster and taking on a little bit more leverage makes more sense. If you're someone who's closer to retirement than they are to college graduation, then maybe deleveraging and paying off these deals makes more sense.

48:43Tony J. Robinson:But just know those are the two different paths you can take to help you get to your freedom number is either, hey, let me just pay everything off. And I've got eight paid off rentals that give me the$47.50 a month. I'm solid. Or maybe I've got 40 rentals, right, that are leveraged at, you know, 90%. But, hey, I'm at my freedom number there as well. Either path works fine.

49:02Ashley Kehr:I actually had somebody reach out to me the other day that was an investor in the area and he's looking to sell his portfolio or whatever. But like he is very, very conscious of like how he's going to do it because he wants to like keep some of them for a little bit. And, you know, he's going to do a 1031 exchange and things like that. But he and offer some seller financing because he has had them all paid off and he chose to have a smaller portfolio and work to pay those ones off. and then just continue to have that cash flow that's coming in. I think I'm like a mix of it. Like I've always made sure I have a couple properties that are paid off, but I'm not opposed of doing a cash out refinance.

49:47Ashley Kehr:I have three rental properties that have lines of credit on them to tap into that equity that I used to acquire a lot of deals or to pay for the rehabs and things. So you can also mix it where it's not set in stone to either you're working towards paying off your property or you're just gonna continue to re-leverage, re-leverage to grow your property and expand. And I think it also depends on really the numbers. If you're going to do a cash out refinance, is that cash more valuable in another deal where it's going to make you more money in the long run?

50:20Tony J. Robinson:Well, Rickies, those are the steps that we'd encourage you to follow to find your freedom number. Now, I know Ash and I, it's been 40 minutes. We kind of blew through a lot of these topics, But the goal here was to give you the overview. We've got a lot of other content on the podcast, YouTube, or if you want to listen, that goes in depth on some of the strategies that we talked about. But at a high level, I think the goal and purpose of today's episode is to force you to think a little bit more strategically about your plan as a real estate investor. And if you can start with the end in mind, it becomes easier to create a plan that works and actually gets you closer towards that goal.

50:55Tony J. Robinson:because we've seen a lot of investors who spin their wheels, a lot of activity, but they're not actually close to the goal that they have. So start with the end in mind, then work backwards. And we hope this episode helps get you there.

51:05Ashley Kehr:Thank you guys so much for joining us today. I'm Ashley and he is Tony. And make sure you're following us at BiggerPocketsRookie on Instagram. Thanks so much for watching. We'll see you guys next time.