Archive | September, 2013

BiggerPockets.com Article: Earn $1,000,000 in 13.3 Years with Investment Property

10 Sep

I wanted to share the article, “How to Create a Million Dollars of Wealth in 13.3 Years,” which was originally published on BiggerPockets.com.

The initial premise assumes you have $365k in liquid capital to invest, a message for investors who already have a nest egg but are frustrated with their returns in the stock market. Even if this doesn’t apply to your situation, bear with me – I’ll show you why the math is still relevant for smaller investors.

(photo by PT Money)


The $1,350,000 in 13.3 Years Plan

Imagine 9 properties valued at $150k each are purchased at 25% down using 15-year loans. At the end of the 15 years, you would have $1,350,000 in property ($985,500 gain). The author takes it a step further and applies the positive cash flow to the mortgage debt, decreasing the timeline to 13.3 years. By this logic, $364,500 is turned into $1,350,000 (3.7x initial investment) in 13.3 years – returning 20% per year on the initial investment.

Too Good to Be True?
I decided to test our actual numbers against his assumptions. The comparison isn’t apples-to-apples because we have 30-year loans, and I’d wager he’s using single-family homes (instead of duplexes) that have hired a property management company to outsource all repairs and make ready work.

Like his plan, both of our properties were purchased with 25% down:

  • Property #1: $45,350 down payment on a property valued at $181,350
  • Property #2: $36,000 down payment on a property valued at $144,000
  • Total: $81,350 down payment on a property valued at $325,350 (4x)

So in 30 years, we’d quadruple our investment – returning 10% per year on the initial investment. The returns are spread out over a longer timeline, which decreases the annualized return rate.

How Reinvesting Cash Flow Effects Return Rate
Next, I looked at the ramifications of accelerating our mortgage payments using the positive cash flow from both properties.

His assumptions maintain that nine $150,000 investment properties will yield a total of $8,100 in positive cash flow each year. Our 2 duplexes generate significantly more per property: $9,732 in combined cash flow each year. This is possible because of several factors I mentioned before: 30-year loans instead of 15, duplexes vs. single family, doing a lot of the repair and make ready work ourselves, and managing one of the properties on our own.

Let’s assume we begin applying the $811 in monthly positive cash flow to Property #1 starting Jan 2014 – that would result in our first free-and-clear property in November 2022, shrinking the 30 year loan to 11 years. Then we’d debt snowball the original $811 plus mortgage #1’s principal/interest payment of $699 to mortgage #2, resulting in a second free-and-clear property in Sept 2026 – finishing off that 30 year loan in 13.6 years.

Since we are purchasing as we go, instead of buying all of our properties at the same time (read: we don’t have a $365k nest egg either), our timelines are staggered a bit. Most of those 11 years for property #1 and 13.6 years for property #2 overlap, but property #1 did get a year and change head start. So total timeline is approximately 14.7 years.

By applying the cash flow to the mortgages, the same $81,350 has now turned into $325,350 worth of free-and-clear property in 14.7 years instead of 30 – returning 20% per year on the initial investment. Holy crud that’s cool.

Investment Property Gravy
If anything his financial estimates are conservative – that $1,350,000 doesn’t include appreciation or rent inflation. He does mention almost as an afterthought that that after his 13.3 year plan is complete, his 9 properties are now generating $11-12k/month after expenses. By comparison, our 2 paid off duplexes would generate about $2,050/month total ($24,600/year) after expenses.

I found his comparisons between real estate and stocks a little sugarcoated in respect to comparable effort – real estate is simply not as passive an investment as stocks. Then again, if I were to rely entirely on a property management company, I could see how there would be less hassle and cash flow, while still being satisfied with the returns of the 13.3 year plan.

The Takeaway
To the naysayers who prefer to focus on why this strategy wouldn’t work for them: dismissing the advice because you don’t have $365k to invest is missing the point. The author only uses 9 properties in the example because it generates a nice, round million dollar number for the article’s headline. There is nothing here that can’t be successfully applied to a smaller investment, even an “underwhelming couple of rentals” as the author phrases it.

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