How to Replace a $65,000 Salary with Rental Property Cash Flow (Step by Step)

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1:17Tony Robinson:A lot of short-term rental investors don't realize their standard policy may leave gaps when it comes to short-term rental activity. That's why investors use Steadily. They offer landlord insurance built for real estate investors, including short-term rentals. And if you're a BiggerPockets Pro member, you'll also get 5 % off your landlord insurance premiums. Visit biggerpockets.com slash landlord insurance to learn more. Do you ever notice how every passive investment somehow turns into a very active lifestyle? Active spreadsheets, active phone calls, active stress. Here's a better question. What if you could buy brand new construction homes, 10 % below market value, in the best markets across the country, without making real estate your second job?

1:58Tony Robinson:That's exactly what Rent to Retirement does. They're a full-service, turnkey investment company handling everything for you. In some cases, investors get 50 % to 75 % of their down payment back at closing, plus interest rates as low as 3.75%. They've partnered with BiggerPockets for over a decade, helping thousands invest smarter. If you want to do the same, visit biggerpockets.com slash retirement to learn more. The average salary in the United States is around$65 ,000. That means there are millions of Americans who are working for the man, punching in and out, and depending on someone else for financial security, when they could be living off of a cash flowing rental portfolio instead.

2:38Ashley Kehr:If you do it right, real estate investing can give you the freedom, flexibility, and yes, the actual income. you need to create the lifestyle you want. So fewer hours behind a desk, no more missed soccer games, and the ability to finally take that dream vacation.

2:55Tony Robinson:But look, this doesn't happen overnight or by accident. The decisions you make today determine where you'll end up 5, 10, 20 years from now, which is why you need to be intentional about buying rental properties that can gradually replace your income.

3:08Ashley Kehr:Today, we're showing you how to do just that with a clear, proven formula that will give you more than enough cash flow to live on. Follow these simple steps and you could have the option to leave your W-2 job in a decade or less.

3:26Ashley Kehr:This is the Real Estate Rookie Podcast. I'm Ashley Kerr.

3:30Tony Robinson:And I'm Tony J. Robinson. And with that, let's get into the plan. So I think first, Ash, let's just start with a little bit of our own quick backstory, right? And like how we used real estate to get to the point where we are. I'll jump in first, but a lot of you guys know my story. I was a high income earning W2 employee working for Tesla. 2020, lost my job. And we had a small portfolio at that time. We had a few, I think four long-term rentals. Two of them were still being renovated. We had two active short-term rentals. And my wife and I said, hey, instead of going back to work, what if we try and build our real estate portfolio instead?

4:06Tony Robinson:And in the 12 months after losing my job, we went from three short-term rentals to 15. We scaled up to over 30 at our peak. And now today we've got 26 active short-term rentals and a small 13-room motel as well that we run. But it was really that 12-month period of just like grinding where the portfolio grew exponentially that kind of gave us the runway that we needed to go into real estate full time. So that was me. That was the process that we followed.

4:31Ashley Kehr:Yeah, mine was a lot longer period of time. Mine was, at first I started as an accountant. I could not stand it sitting at a desk. So I knew I couldn't do desk work. So I quit after six months after I went through all my schooling and I found a job as a property manager. And so that was kind of my insight into real estate. And from learning and watching this investor, I realized what real estate could do for you. So after working for him for a little less than a year, I bought my first property. And slowly from there, I built a long-term buy and hold rental portfolio. And so I didn't quit my W-2 job until 2019.

5:15Ashley Kehr:And I gave all my properties to a property management company and the properties I'd been managing, they all went to the property management company too. And so, yeah, that was kind of my first experience without a W-2 is when COVID hit. So it was definitely a benefit to have the property management company in place because they took care of a lot of the things that came along with COVID and being a landlord and tenants and things like that. But yeah, so from 2013 to 2019, like it was December 2019, I still had a W-2 job working as a property manager and kind of an assistant to this investor.

5:54Tony Robinson:So different paths, right? But we both kind of ended up in the same situation where we ended up doing this full time. But let's talk a little bit about replacing the average salary. Now, again, obviously different parts of the country, this is going to be wildly different. In some parts of the country, this is a great income. other parts of the country, you might be struggling to make ends meet. But the average salary is$66 ,000. And the median salary is$61 ,000, about$62 ,000. But we're just going to round to$65 ,000 or roughly$5 ,500 per month. That's the number that we're going to use for the context of today's conversation.

6:27Tony Robinson:And the goal is, how can we reverse engineer$5 ,500 per month using rental income, right? So just like some quick example math, 5 ,500 bucks per month in cashflow, that could be 11 properties at 500 bucks per month in cashflow. And if you're doing one property per year, that's 11 years. If you're doing two properties per year, it's five and a half years, right? Which is way faster than retiring to, you know, retiring at 65. Or you could just have one killer property that's like a short-term rental or like a self-storage facility or a sober living home that's doing$5 ,500 per month. So there's a lot of different ways to skin the cap, but$65 ,000 per year is number that we're going to be working towards.

7:11Ashley Kehr:Now, obviously, the cash flow depends on several factors, like your market, your strategy, how much you're putting down. You could go ahead and hit that$5 ,500 per month cash flow if you buy a million-dollar property in cash and rent it out. You could have that cash flow because you don't have a mortgage payment. So make sure when you're comparing yourself to others and looking at how they've gained financial freedom through rental properties, you understand the exact factors that went into them actually doing that. For me, it took me a really long time because I was literally buying properties with none of my own money.

7:46Ashley Kehr:I used a partner, used their capital. I borrowed a line of credit. I'd buy properties with the line of credit and then I would refinance them and pay the line of credit off. But that was very little cash flow because I was basically, you know, doing a full burr on the property where I'd go and refinance, pay myself back. And I wasn't putting money to sit into the property. So my cashflow was a lot smaller, like 200 to$300 per property, um, to kind of get my start. So I had to get to those 18 properties before I actually could cover my expenses.

8:25Tony Robinson:Ash, let me ask, like you, you talk about this often, right? Because, um, you know, like I remember when I first started on the podcast, so this is what, you know, almost six years ago now. Um, and like our, one of our first episodes together, like, Oh yeah, I bought a house for like$25 ,000. Um, knowing what you know now, would you have still started that way?

8:43Ashley Kehr:No. So I definitely wouldn't have bought those dumpy duplexes as I like to call them. Um, I was just in acquisition mode and I was buying these properties that were fine. They were, they were rented out. Some of them, when I bought them, it wasn't like they were in, you know, complete disrepair. Um, but what I did find is they had zero appreciation because they weren't in great areas. Um, there was a long-term problems, um, to actually fix some of these long-term problems. Like for example, you know, redoing all of the electric in the property that would have cost a lot of money. And because of the market, it wasn't a great market that I wouldn't have been able to increase rents enough to actually cover the cost of the rehab or make the rehab worth it.

9:33Ashley Kehr:Because in some of those smaller markets I was investing in, there was a cap as to what people paid. Even if you put granite countertops in, even if it was the nicest unit in the whole town, people just couldn't afford to actually pay more. So it wasn't worth it for me to go in and do these extensive rehabs because I couldn't even get the rent you know, back that I would need to actually make the deal worth it. So I've actually sold off a lot of those. Um, I think I have three left one I'm trying to sell right now. Um, and then two, I'll probably keep for a while. They're not that bad. And, um, but yeah, I definitely want to do that.

10:09Ashley Kehr:What I would do to start again is actually be more diligent and buy less houses, but buy better quality houses. So if that meant I, you know, if I had my line of credit and instead of buying five$20 ,000 duplexes, you know, I would have just used that money to buy one property instead. So yes, I would do that differently going forward. And plus now I think it's definitely harder to find$20 ,000 duplexes too, that are actually rentable and like good condition. Cause that was back when I bought the like five of the$20 ,000 ones that was like in 2017. So very different times.

10:51Tony Robinson:And I asked that question knowing the answer, right? Because I think it's important for rookies to also understand that how you start isn't necessarily how you're always going to invest. And as you do more deals, you start to get a better sense of what is it that I actually do like to do? And what do I want to do more of? And what do I never want to do again? And what lessons have I learned? But sometimes it's just more important sometimes to get started, even if it's not necessarily under the right circumstances, because deal number one is what helps you get into deal number two and beyond. But let's keep moving though with this example.

11:23Tony Robinson:So I think the first thing, Ash, that folks have to focus on is once they've identified this goal, right? Like, I want to get to 5 ,500 bucks per month. We need to focus on picking a market. I think a big mistake that I see a lot of new investors make is that they start with this like shotgun approach where they're just trying to like look at deals all across the country. They're in the Northeast, the Southwest, the Midwest, you know, the Pacific Northwest, West, Southeast, in between, right? And they're like analyzing deals in all these different places. But I think you'll be able to analyze deals more quickly and with more confidence if you first narrow down and you become an expert in a small subset of markets.

12:05Tony Robinson:And for me, the sweet spot is usually like three-ish markets. Like if you can have three markets where you're really, really dialed in on, that usually gives you enough kind of breadth of options, but without getting too wide that you're diluting kind of your knowledge of those markets. So for me, I'd say narrow that list down like three to five markets first before you do anything else.

12:27Ashley Kehr:And then here are some things that you want to look at when you're analyzing the markets is what is going to be your main driver here? Is your goal out of this? Is it going to be cash flow? Is it going to be appreciation? Is it going to be a mix of these? And here's some things you need to think about when you're considering what your end goal of this property is. So like if you're a pure cash flow play is like you want to replace your W-2 income as soon as possible. So you're going to look at, you know, properties that have a solid rent to price ratio. You're going to want to buy an affordable in an affordable market where you're going to get a great rent price and also a great price for the purchase of the property.

13:10Ashley Kehr:And then something else to watch when you're comparing markets is insurance costs because your insurance will be baked into your mortgage payment. You want to keep your expenses as low as possible. Like if you're looking into coastal markets, you might get hit with flood insurance, which is going to drive your monthly expenses up. So that's going to definitely decrease your cash flow. Then we can look at appreciation. So this is what I learned is to like, I like markets now that have better appreciation, even if the cash flow isn't as great. So you're not going to see an immediate return of like getting that cash flow every single month.

13:49Ashley Kehr:But like, say you have a five year plan or a 10 year plan where you want to be able to quit your W2 job. Well, maybe you don't. You just take a little bit of cash flow now and you just bank on that appreciation. Like, yes, there is the risk of the property not appreciating in 10 years, but there's also the risk of you doing an eviction like in New York State and it taking a year to actually get the tenant out and you had no cash flow that whole year anyways. So there are risks and pros and cons to both, but make sure you understand what your main driver goal is. And maybe appreciation is actually a better play for you than even cash flow is.

14:30Ashley Kehr:So maybe you should kind of tailor how you're looking at markets based on whatever one you're going to go after or a mix of them. Like, you know, if you're looking for appreciation and maybe a mix of cash flow, some of the Southeast markets are actually good for that, like Georgia, Tennessee, and the Carolinas.

14:47Tony Robinson:I think for me, it's like if I were in the situation where I'm like rushing to try and replace my income, which is the situation that I was in. For me, I'm like focused on cash flow first because I just want to I want to replace the income. I want to keep the lights on. I want to make sure that like I can pay my mortgage and feed, you know, feed my family. So for me, it's like, man, where can I go get the best cash flow? Let's get to the number I need to get to. And then I and then I was able to kind of turn my attention to other things and different projects and different goals. But I'm leaning a little bit more so toward the cash flow.

15:17Tony Robinson:But agree, every market has a different benefit, right? And people use it for different reasons. But once you've got your market, I think you then need to layer on your strategy. And really, it could go either way. Like maybe you pick your strategy first. I might even say that. Maybe we pick strategy first. And then we say, go pick your market. Because depending on what you want to do, some markets are really great for one strategy and not great for others and vice versa. So I might actually flip that around. Let's pick your strategy first. But either way, the different strategies you have in front of you, you've got traditional long-term rentals.

15:53Tony Robinson:You've got short-term, you've got mid-term, you've got flipping, right? Those are probably like the most well-known strategies that kind of exists. And then you kind of have, you know, like co-living, right? Where you're like renting by the room. That's gained a lot of traction over the last couple of years. And then there are the strategies that are businesses more than they are real estate investing, but they just kind of like layer real estate in there. So you have things like assisted living facilities, sober living. Gosh, what are some other ones that we've seen people do here on the podcast?

16:26Tony Robinson:I mean, the options are limitless. Self-storage is probably another big one there. Hotels. But picking the strategy that you feel makes the most sense for you and for that market that you focused on. And again, I think each one has its own merits. Short-term rentals, mid-term rentals, typically you can produce more cash flow per square foot, right? Like I can buy the same house. And again, depending on the market, maybe generate 2X, 3X, 4X, 5X, what I would generate if that property were a long-term rental. like you know my my five bedroom cabin in the smoky mountains it would make no sense as a long-term rental like it i don't even know if it would cover the mortgage as a long-term rental but as a short term it does incredibly well right so depending on the strategy um and depending on the market i think you gotta line those two things together now you also have to figure out how much

17:16Ashley Kehr:capital you have and this could actually factor into what market you're able to select so maybe you select LA, you want to invest there and do a short-term rental, but you only have$50 ,000 for a down payment, you're most likely not going to be able to purchase a property in that market with only$50 ,000 as a down payment. So you have to understand where your money, where the funding is coming from for this property. So what do you want to put down as a down payment? How much do you have four reserves. You want to have at least at very minimum three months and at best six months of reserves in place for this property.

17:57Ashley Kehr:So you're not going to take your whole life savings and put it as a down payment and have nothing left afterwards. So typically on an investment property, 20 % is down. There's some second homes if you're going to purchase a property that's going to be a short-term rental, but you'll also use it. Tony, what's the rule? I know it's a very gray area about for second homes, you have to at least use it X amount of time or something.

18:22Tony Robinson:Yeah. There's no hard and fast rule from the actual housing authority, but generally lenders say you've got to use it personally for maybe seven to 14 days out of the year. You got to have some level of personal.

18:35Ashley Kehr:And what's the down payment right now for those 10 %?

18:38Tony Robinson:10 % typically. Now rates are a little bit higher than what they used to be. It used to be you can get them like in lockstep with the primary, but now they're a little bit higher than a primary residence would be.

18:47Ashley Kehr:And then also if it's going to be your primary residence, you can use an FHA loan for three and a half to 5 % down. There's even conventional loans that will do 5 % down if it's going to be your primary. And then VA loans, 0 % down. And also USDA loans. So there's tons of different loans options out there for you, especially if it's going to be your primary residence. There's also a DSCR loan. So this is where they actually look at the performance of the investment property to make sure that you're going to collect enough rent to actually cover the expenses and the mortgage payment on the property.

19:23Ashley Kehr:And they don't look at you as much. So if you have a high debt to income from other things, then this is a great option for you is to look at the DSCR loan. But those are typically 20 to 25 percent down. And then if it's a commercial property, you could be seeing even higher, like up to 30 % down on the property too.

19:44Tony Robinson:The only other loan I'd add, Ash, is my favorite one to talk about, but it's the NACA loan. If you haven't heard of the NACA loan, I'm going to blow your mind right now. But basically, if you're an owner occupying a house, now you can't have any other open mortgages, right? So this truly is for true rookies. But if you have any other mortgages under your personal name, you won't qualify for this loan. But if you're buying a property, you can go up to four units. it's 0 % down, zero closing costs. 0 % down, zero closing costs. And the interest rate is typically about a point lower than whatever the prevailing interest rates are for the day.

20:20Tony Robinson:It's like you can literally go to their website, NACA.com, and they always have their interest rate posted. Right now on a 30-year fix is 5.75%. If you go check any other website, it's probably like 6.7, right? Somewhere in that ballpark. So you get a point lower typically on the interest rate, no down payment, no closing costs. Now it is an absolute, uh, terrible, uh, like application process. And there's, there's a lot of restrictions on, uh, like refinancing. I think you have to hold the property for I think five years or so before you can refinance. Um, so, so there are some restrictions, but if you want to get into a four unit with the least amount of capital possible and start building net, uh, your net worth, uh, and building cashflow, it's one of the best loan products out there.