Real estate as passive income explained by someone who has actually done it, and how you can do it too

To preface, Just like any other forms of passive income it’s not fully passive (don’t say stock because how do you get the money to buy the stocks also it’s post tax money but that a whole other rant) if you live in a high income area or really low income area this may not make sense in terms of being worth it, but the median house price in the US is 250k and it can make sense to buy a house in that price range.
The process is at least where I live (median house prices in my town is 260k)

What you need to do this

* A long-term job (over 2 years in the same industry or if you went to college that counts towards your work history, but you still need to show you make money)

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* Good credit score (over 700 preferably but if you have lower it means you have to pay more interest which means you pay more for the loan)

* Low debt (you don’t need this but for ever $1 of debt you pay monthly you need to make $2 so reducing debt is easier then making more)

* Money (the down payment for the loan (if you’re a 1st time home buyer you might be able to do 5% but otherwise 20% is normal and also count for repairs (I can’t tell you a hard rule but over estimate everything painting flooring roof furnace ECT and then add more to it)

**How to do this**

1. Look at rents in your area, if a nice 2 bedroom 1000sqft apartment is renting for $1200 in your area you need to make sure your numbers work and adjust and estimate this at the low end because you can only see what other landlords are asking for not what there getting.
Estimate all expenses, tax, insurance, loan payments, interest, any shared utilities (usually water and heating) for each property your interested in, if this doesn’t make sense ie. Houses are 400k and rent for $1600 so your loan payment will be to high to be profitable then you might have to look in a different area

2. Find a GOOD realtor one that has done a lot of work in the town your looking at, they will ask you to get pre approved for a loan do that, ask for any loans you might be eligible for ie. Fist time home buyer loan, ask to look at ugly houses (a good metric to go by is price per sq ft, if it’s cheaper then the average in your town there’s a good chance that your getting a good deal

3. Make it easy for yourself, avoid major problems anything structural, avoid ghettos, avoid being on busy roads, avoid anything with a 1 bedroom apartment, generally if you wouldn’t live there after it’s fixed up why would someone else.

4. If you’re town has them, look for multi family houses and ask your city hall about any laws around them, nationally 4 family or less is ok for personal loans but in my town 4 families are required to have extra fixtures like exit signs and sprinklers which makes them more expensive to remodel, and not worth it.

5. Find houses this might take months (the housing market is seasonal) (ask your realtor to setup email notifications for new houses, these are quicker then any 3rd party service you can use like Zillow) Make offers, the realtor will walk you through this but generally to make it better for you do all your due diligence up front before you submit a offer that way you don’t have much contingencies which makes your offer more attractive to the seller.

6. Now you’ve found a house that makes sense, or maybe you’ve found multiples, figure out the renovation costs, ask handyman to come out and take a look at it with you if you don’t have any experience in this, he’ll be able to tell you a general cost of things but not everything, check all major systems ahead of time and call any professionals plumbing heating electrical ect.

7. Rent it out, make sure to not discriminate in your ads or applications that aren’t allowed by your state or nationally, make sure to factor in any debts they have to the income so that they make enough money to afford to live there, but in general this is a topic you can look up and find more information on better then I can explain it.

8. Hopefully now you have a house that’s worth more then what you paid for it and is making you money while paying down your loan

9. Document every expense you had while renovating and find a CPA, they might cost 2k but more then likely it’ll save you 6k more more on taxes so it’s worth it, you could even be “loosing” money on paper due to deprecation but in reality be making money.

**My experience doing this**
Saved up all though high school, got a full time job out of high school making 40k/yr (this is below average for my town and I have to comute 1hr each way every day) have no debt at all)

started looking for houses found a 2 family house for sale for 140k after 2 months of looking daily needed 28k worth of renovations and down payment of 20% (didn’t qualify for any special loans because I wasn’t going to be living there) after renovateing was worth 235k, it rents out for $1350 downstairs unit, $1200 upstairs unit and the garage for $100 each month, monthly expenses are $1029 monthly (shared utilities, insurance, 5% vacancy (it’s in a nice area) tax, loan interest and payment, and $200 extra set aside for emergencies) so it makes $954 every month not including any appreciation, or rent increases, or any tax advantages (such as spending pre tax money or avoiding being put in a higher tax bracket because of paper losses)

* **Purchase & Rehab**
* Purchase Price: $141,000 ($71.7/sq.ft., $70,500/unit)
* After Repair Value: $235,000
* Purchase Costs: $1,410
* Rehab Costs: $28,380
* Down Payment: $28,200
* Total Cash Needed: $57,990

* **Financing (Purchase)**
* Loan Type: Amortizing
* Loan Amount: $112,800
* Loan to Cost (LTC): 80%
* Loan Term: 30 Years
* Interest Rate: 4%
* Monthly Payment: $539

* **Cash Flow (Monthly)**
* Rent: $2,550
* Other income $100
* Vacancy: -$128 (5%)
* Expenses: -$1,029 (40.8%)
* NOI: $1,493 ($747/unit)
* Loan Payments: -$539
* Cash Flow: $954 ($477/unit)

* **Returns & Ratios (Year 1)** it gets better the longer you hold the property
* Cap Rate (Purchase Price): 12.7%
* Cash on Cash Return: 19.8%
* Return on Equity: 9.2%
* Return on Investment: 117.7%

* Rent to Value: 1.8%
* Gross Rent Multiplier: 4.61
* Equity Multiple: 2.18
* Break Even Ratio: 61.5%
* Debt Coverage Ratio: 2.77
* Debt Yield: 15.9%

For those of you coming from stocks this is like a $57,000 stock that goes up every month has a 19.8% dividend payed out monthly, isn’t effected by external trade wars and has a 30 year average of increasing 4% per year ON TOP of the garenteed increase of loan repayment, and can it can be even more liquid then stock if you live in one of the units and have a HELOC which is basically a credit card tired to the house, if you don’t live in it you can also just refinance and pull cash from it, effectively making it a investment with infinite return, all while being able to defer capital gains tax when you go to sell.

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