Welcome to passive real estate investing, the show where busy people like you learn how to build substantial passive income while creating wealth for the long term. And now here’s your host Marco Santa [inaudible]. Hello and welcome to another or episode of Ask Marco where I answer your investing related questions. Today’s question is a good one and it comes from Billy and Billy says, Hi Marco. Love the podcast. Great stuff for sure. Quick personal background. I’m 30 some years old and live in Vail, Colorado. I have an Undergrad degree in architecture and a master’s in real estate and construction management. I have been working for a real estate developer here in the Vail Valley for eight years now. Ever since I finished Grad School, I’ve been very interested in developing a passive real estate portfolio or real estate values and rent to value ratios and Vail resembled the California coastal markets if not more expensive and in balance. Therefore investing locally is not an option. I feel your pain. I have been doing a lot of research about investing in other markets and agree that this is very possible with the right research analysis and working with the right team.
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And you’re absolutely correct about that. I understand that buying $100,000 properties is a great way to start, but I’m wondering what you would suggest if you have a lot more money to invest and would like to build a portfolio a little bit quicker. For conversation’s sake. Let’s say you had $1 million. Do you think buying $100,000 ish Holmes is the most efficient and viable way to go about creating passive income? And are there other strategies you like more in this scenario? Thanks for your time. I look forward to hearing back from you Billy. Well, Billy, I hope you don’t mind me answering your question here on the show. Um, I think it’s a great question and probably one that applies to a lot of people who are either equity rich, uh, or actually have a chunk, a large chunk of investible cash. So I’m going to give you an answer.
I’m probably going to give you four scenarios here. Um, and again, this is for conversation’s sake because there’s a lot of variables and here’s the thing. It is a good problem to have when you have a lot of investible cash, but it’s a great place to be because it gives you lots of options, so it’s really a matter of evaluating your options, penciling out the numbers and making objective decisions as to what markets make the most sense and what you can get in those markets in terms of inventory, cash flow, rates of return. What is an overarching theme or question here is what is your overall objective or goal? Are you focused more on appreciation potential? In other words, you want large gains in terms of equity and that’s what you’re striving for without giving up positive cashflow. Of course, you’re going to sacrifice some cash in order to do that in many markets just because they may be more expensive or heated or are you looking for just stable passive income or something in between.
The other thing too, I have to consider here is are we talking about like you said, $100,000 ish properties or our 125 $150,000 ish properties. And I say ish because you know it’s plus or minus. I mean I’ve seen a range and we have a range from 80,000 to $150,000 single family homes plus and then there are the occasional duplexes which almost double that number. And then there are the fourplexes which come close to the 650 to $700,000 price range for a premium higher end neighborhood type of fourplex. So I ran some numbers for you and I’m just going to give you some general scenarios to give you an idea of what’s possible really at the end of the day I suggest two things, consider different scenarios and pencil the numbers and look at, look at it like I’m doing here, making some basic assumptions and or a number to talk to one of our investment counselors who can run through these scenarios with you and give you some more color.
And perspective and maybe some wider range of potential options. But here are the three or four scenarios I came up with. It’s really three and then just you know, some other food for thought. So without going too long on this, I took one scenario where you’re looking at $100,000 single family homes in good neighborhoods. We’ll call them just be plus type neighborhoods. So with the hypothetical million dollars and looking at $100,000 homes, and again, I’m just rounding numbers here, rounding to the dollars. I’m not talking about closing costs here, just to simplify the scenario because we can get into a lot of detailed, and I don’t want this to be complicated, but hypothetically, $1 million, we’ll allow you to invest in 10 $100,000 homes. So that’s a hundred percent down payment, 100% down payment, obviously because you’re buying all cash, there’s no financing. Again, rounding the numbers, you’re looking at approximately $700 per month in net cashflow.
So Times 10 that’s $7,000 per month. Passive income, no loans. Now what if you wanted financing? Let’s say you put 25% down on those a hundred thousand dollar homes, that’s $25,000 with the million dollars, you can leverage that to 40 $100,000 homes. So at around $300 a month in passive income per property, 300 times 40 is $12,000 per month passive income. Now obviously you’re going to have to use portfolio loans and we have portfolio lenders that will allow to do this. The reason is is because you’re only allowed 10 conventional loans, you and your spouse. So that’s theoretically 20 conventional loans that start at 20% down and go up to 25% down. But let’s just say for the sake of this conversation that they’re 25% down portfolio loans and you’re looking at roughly $12,000 per month passive income. Now that gives you 72% more cashflow than buying the 10 $100,000 homes all cash.
So the fact that you’re leveraging your investment capital, and this is why we’re so big on the power of real estate and using leverage, and I talk about it a lot. I believe it’s my 10th rule of my 10 rules of successful real estate investing. Actually, I think it was number line, but that gives you 72% more cashflow than just buying all cash. Now we’re talking about single family homes and we’re making the assumption that you’re looking at $100,000 homes. Here is scenario number two of my three but that could potentially be 10 20 different scenarios of course, so just keep that in mind.
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So what if we threw a fourplex into the mix? Let’s just say you looked at one of the fourplexes we have, whether it’s in Idaho or Salt Lake City or Houston, they’re roughly $680,000 their premium properties in premium neighborhoods, they are not as sexy in terms of cashflow, cap rate, rates of return on the cash, on cash. However, the give and the take here is they have been and are continuing to appreciate very strongly because of the areas they’re in. So these are properties that will stand to give you greater appreciation potential in lieu of that cashflow on the front end, but that will grow in time. So all the investors that have invested in these have done very, very well. But that’s uh, on the side. So let’s just say you picked up one of these fourplexes, which if you purchased all cash, it would give you approximately $4,000 in net operating income.
So that’s $4,000 per month in net operating income, but you’ll have some money left, you’ll have $320,000 left on that million dollars. So let’s just say you picked up three $100,000 properties, all cash as well. $700 a month in cash flow. That’s $2,100 a month because there’s three of them. So grand total is you’re looking at approximately $6,100 per month in passive income. Obviously that’s not as attractive as the scenarios with the single-family homes. But remember the give and the take, you stand to gain greater short term appreciation potential with that fourplex. Again, this is all market specific and to some degree neighborhoods specific. So we’re making some broad assumptions here. So at this point, the hundred thousand dollar homes sound more attractive whether you do 10 or 40 now what if we add financing or leverage to that second scenario? Let’s say you take um, 25% down payments and acquire five of these fourplexes.
What you would have, just to kind of simplify the math here is you would have five times $1,000 a month in passive income. So grand total of 5,000 per month in passive income from these five fourplexes, but you still have some money leftover. So let’s just say you put 25% down on four single family homes, the hundred thousand dollar homes, and you’re again generating that $300 per month in passive income per property times four, that’s $1,200 grand total. Bottom line here is $6,200 a month. So it’s a little better than that second scenario, but there’s a give and take with all of these, you know, you have fewer properties, uh, a little less to deal with. Your portfolio size isn’t as large in terms of the footprint in terms of number of properties, but you know, it’s, it’s just a matter of what makes the most sense for you.
Last but not least, I kind of considered, well what if you invested in let’s say a four or $5 million apartment complex and you put 25% down with that million dollars? The question is is where are you going to be looking for that apartment complex? It’s a very competitive space. What type of apartment? What type of neighborhood are you going to go to the c class neighborhoods to get that greater cashflow and greater rate of return? Are you going to try and find a B class neighborhood apartment complex? Which I happen to like, uh, the problem is is that they’re out there but they’re hard to find. The cap rates have been compressed. They’re lower than what you typically find with the single family homes into, to a large degree the duplexes and fourplexes out there. And here’s the other challenge there is, uh, no market appreciation.
That doesn’t mean there isn’t appreciation. Often with apartment complexes, you’re going to gain that appreciation one of two ways, value add, where you’re improving the property in order to increase the rents or you are going to increase the rents over time. But they don’t appreciate based on comparables in the market, like single family homes do duplexes and fourplexes because those are based on comps are market comparables and they go up and down based on the values in that market or that neighborhood versus the net operating income, which is how you determine market value for an apartment complex. So that’s a different discussion. They’re out there, they’re just a little bit more difficult to find and they just operate a little differently. And the financings different, you’re looking at 25 year amortizations with terms where you have to reset or refinance your loan versus a 30 year fixed rate mortgage, which is doable on residential real estate.
So this is a long answer to your question, but you have to understand that you’re asking a question that has many leavers that you can pull and change in order to create the scenario that you want. So Billy, I hope that was helpful. My suggestion is continue this conversation with one of our investment counselors and they can help you dig down and you can always email me too and I’ll just connect you with somebody if you haven’t already. All right, well hopefully this has been helpful. It’s a bit of a complicated question, but I tried to simplify it by giving just three scenarios here. That’s it. So if you have a question about real estate or investing or finance and you’d like me to answer it on the show, I’ll do the best I can. Go to passive real estate investing. Click on the ask Marco Button and it’ll take care of it from there. If you haven’t already remember to subscribe to this podcast, help us share this show with other likeminded people who could benefit from it as well. Visit us on iTunes or Google play wherever you may listen to your podcasts and leave us a rating and review. I greatly appreciate it. Thanks for listening and I’ll see you on our next episode.
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Are you on track to achieve your financial goals? Income producing real estate is the most historically proven way to accumulate wealth and has created more financial freedom than any other means. You’re at a real estate, provides everything you need to invest in the best turnkey cash flow rental properties. Our simple proven system will help you create real wealth and passive monthly. Get your free strategy session with our knowledgeable Investment Counselors at www.NoradaRealEstate.com.