New here? Great! Hit that subscribe button so you never miss another episode. We are doing three episodes a week, and I would love for you to stay on top of the questions that people are submitting.
Today’s question comes from Eric. Great question by the way, he’s wondering if his future real estate plan is reasonable and he writes in and says, hello, Marco, I have been listening to your podcast for a couple of weeks and have found your delivery of information, very easy to understand, thank you for your time and teachings, Eric.
Thank you. And you’re welcome.
My current future plan is to purchase a townhouse in the next two years, start a family and then purchase a longterm home within the five following years, I intend to rent out the townhouse to provide another source of income and help pay off the new home. My conservative side wants me to only have one mortgage at a time due to a fear of having too much debt. And so I can have a higher cash flow. Therefore I would pay off the townhouse completely before starting a mortgage on a new home. My goal is to own four paid off income properties to supplement my job’s income. Do you think this plan is reasonable and has the potential to generate a cashflow over $2,000 a month for the townhouse and home or house? I am looking between 150,000 to 250,000 for the townhouse and 300 to 450,000 for the house, respectively. Additional rental properties can vary from say 100 to $200,000 each. Thanks again – Eric.
Okay, Eric. Well, thanks for the question. So your plan overall is great. I have a couple of issues with it, but essentially you’re thinking about settling down, getting a home, starting a family, purchasing a home with a longterm perspective, but also starting off with a townhouse, which is less expensive and keeping it as a rental. That’s a great way to start. So here is my comment. You’re talking about your conservative side and having too much debt. So the first thing that flashed in my mind was Dave Ramsey and Susie Orman. You know, the issue I have with people saying that debt is either bad or I have too much debt is they’re not defining it properly or at all. And that really leads to a problematic mindset. When you make a subtle mental shift in how you see debt and whether it’s a tool or a weapon, then you will start to understand how you could use it because let’s face it. You know, debt can be good or bad. It cuts both ways. When you look at debt that is used to acquire income-producing assets. It’s a good thing. When you look at debt as something that you spend on what Robert Kiyosaki calls due dads, but essentially things like cars, vacations items that depreciate and become worth less or worthless, completely worthless over time. Then that is a reflection of poor decisions and using debt for things that really don’t make any sense.
So first of all, define how much debt is too much, but more importantly, is define what the debt is and how it’s being used. Because if you asked me the question, well, let me turn it around. Let me ask you the question. If I could lend you as much money as you want at a low-interest rate, a very low-interest rate, but you can make at least twice as much in return by borrowing that money and investing it. How much of that would you want? And if you thought about it, I mean, if you ask me, I would say as much as I could possibly get, and you kind of need to look at it that way because your uncomfort with it essentially is because you are looking at this incorrectly.
You need to learn to be comfortable with debt and not fear it because debt and leverage is your friend. It can be and is your friend when used properly. So there’s no such thing in my opinion of having too much debt if that debt is actually one being paid off by other people in this case, your tenants, number two is generating passive income, monthly and annual income for you., three is increasing your wealth because your equity and net worth is growing month after month, year after year and certainly over time in a measurable way, quantifiable and measurable way. So, you know, there’s an old saying, how do you increase your net worth by $1 million or something to that effect? And the answer is, well, just go $1 million into debt. Now it’s an oversimplification, but it’s basically saying, look, if I have a million dollars of debt put towards income-producing real estate over time as that property or those properties are paid off, that million dollars, a debt turns into a million dollars of net worth. That’s just the amortization on the loan. That’s not including any appreciation in those properties over time. So a million dollars of debt paid down and paid off by your tenants ultimately becomes a million dollars of net worth. It becomes your equity.
So the slow path and the fast path is the following. The slow path is to execute the plan. As you laid it out in your email here, the fast path is to take the investible capital you have as you have it over the months and years and acquire as fast as you can, income-producing real estate in good neighborhoods, good markets, good neighborhoods, and let your tenants pay off that debt for you. I don’t think you should stay focused at least not initially and at a young age of accelerating the pay down of the mortgages. I think the better strategy is a growth strategy where you’re accumulating as much properties you can, as fast as you can in your earlier years, so you have a large portfolio. Then at some point in time, when your portfolio is big enough to essentially achieve the monthly income goals that you have, then you shift your focus on paying down those mortgages as quickly as you can using the cash flows from the property. So you can focus on, let’s say one property at a time and just have a snowball effect. Or you could just put in the extra cash towards all the properties at the same time. Those are just two slightly different ways to go about it outside the scope of your question here. But I would go wide sooner than later than trying to go deep one property at a time because you are not going to benefit from the amortization and the appreciation of multiple properties, more properties than less number of properties. So you’ll have more cash flow in total. The aggregate total will be higher and your equity, your net worth will grow exponentially faster. And that’s the biggest point I’m trying to make here.
So you have a question. My goal is to own four paid off income properties to supplement my job’s income. Well, that’s a great goal. My question to you is how fast do you want to build that up? And maybe my bigger question to you is why only four? Why not five? Why not six? Why not? 40? You’re kind of capping yourself here. Maybe there’s a reason for it. And I understand that, but let’s just say your income goal is kind of setting the bar relatively low, $2,000 a month, supplementing your income. Great. But there’s no reason why you couldn’t do 8 or 10 or 20. Just think about that. Maybe your goals will change next year. Who knows?
Do you think this plan is reasonable? It has the potential to generate cash flow over $2,000. Yes. I mean, it’s just a matter of what the numbers are on the properties specifically and how those are going to grow as the years go by, but you certainly will get to that $2,000 a month in cash flow sooner or later, you get to that point, especially if you’re executing on this plan of removing the debt, because if those properties are debt-free and they’re in the hundred to $200,000 price range, then you’re probably going to be in the 700 to $1,500 a month per property, net cash flow on each of these properties. Again, it’s going to depend on what your debt services.
So anyway, it’s a good question. I think I’m really posing more questions to you to think about an answer then I’m really giving you in terms of answers, but it’s a great start. So Eric, thank you for the question. I appreciate it.
If anyone else has a question, just go ahead, go to AskMarco.com or passiverealestateinvesting.com, and submit your question. I would love to answer it on the show. If you haven’t subscribed already, please do so. Help us share the show with other people. We love the growth and we love your comments and feedback. And I appreciate all the five-star ratings and the reviews that you’re providing. So thanks again for that, and we will see all on our next episode.
Talk to you soon.
———————–
Are you having a hard time finding great investment properties? Unfortunately, the best deals are rarely found locally successful investing begins with the right properties in the right markets. Norada real estate provides everything you need to invest in the best deals across the US. Our simple proven system will help you create real wealth and passive monthly cash flow. Get your free copy of the ultimate guide to passive real estate investing at www.NoradaRealEstate.com/guide.