Article Series: The Path to Passive Income = "Steppingstones"
Updated: Nov 3, 2022
I work with a lot of investor clients at various stages of their real estate investing journeys. I am often approached by ordinary people who wonder how they can get started in real estate investing and what is the trajectory of that investment career going to look like? What should they expect? Over the course of my career, I have come to recognize that there appears to be a clear path from that first investment to the end goal of having enough passive income to replace your current earned income and more. We have been able to guide many clients through these steps to their ultimate goal of significant passive income through investment in commercial real estate.
That path is not direct. It is not a “get rich quick” plan. It is actually a “get wealthy slowly” plan, AND if you follow it, you are likely to exceed your goals over time. I like to think of the path as four steppingstones. I will be posting one steppingstone at a time in a four part mini-series of articles.
Steppingstone Number One—Fixers for Forced Appreciation:
The first steppingstone for many of my clients is to purchase a small multifamily property that needs some updates, is under rented, and could benefit from some good management. Sometimes these properties are ugly! They might need a new roof, new furnace/HVAC, new windows, some paint, some landscaping, and a refresh of the
interiors of the units.
What does something like that cost? Well, one example was a 7 unit property in Caldwell, Idaho that I helped my client purchase for $256,000. It needed everything listed above and more. Another example was an 8 unit property in Mt. Home that was in rough shape and one of the units had been “down” for years. We purchased it for $205,000. As a buyer, you might only need $50,000 to $75,000 down to purchase one of these “fixers”. Then you should have at least that much more available either in cash or lines of credit to complete the necessary updates.
So, let’s just say you need $100,000 to $150,000 to land yourself on steppingstone number one. Well, where are you going to get that money? For a lot of my clients, it comes from a high-income earning job, a business they own, or more often than you might think, from the equity in their primary residence that they leverage out using a home equity line of credit or cash-out refinance. Just getting to this starting point takes some people years and much determination! One other possible way to get a chunk of cash built up is to find a syndicated real estate investment that allows non-accredited investors to put funds in. I believe there are a few, such as Cardone Capital and possibly others, that allow those who are not accredited investors to invest. If you invest a few thousand a year into those properties, when they sell or refinance, you may get some decent returns and be able to grow your money quicker to start so you can do your own deals later.
Once you are able to earn, save or access those funds, find a suitable property and pull the trigger on your first investment property, the ball begins to roll and build momentum like a snowball rolling down a hill and growing larger and larger. If you are doing it correctly, you are increasing the rents on the property that you purchased, you are streamlining expenses, and making the property operate as efficiently as possible. In doing this, you are forcing appreciation and growing equity in the building. Assuming the market is normal or trending upward in your favor, you can either sell this property and do a 1031 exchange into another property like this (but larger), or you can refinance and pull out cash, tax free, and invest it.
In the examples I provided earlier, the owner of the 7 unit apartment in Caldwell opted to sell the property for over $800,000, netting a significant amount of cash that could be re-invested later into a 20 unit apartment building with similar needs. The 8 unit apartment that in Mt. Home was ripe for a cash-out refinance at a value of $800,000 after less than two years of focused effort. A new loan was put in place for $500,000 and pulled over $350,000 in equity out of the property to reinvest in another 8 unit property in similar condition. These investors have also created some very nice apartments that have increased the available affordable and desirable units in those markets and improved the lives of many residents.
My point is, usually, there are two or even three rounds of re-investment into properties that fall into the steppingstone number one category of “Fixers for Forced Appreciation” before moving the money to steppingstone number two.
If you would like to learn more about how you can make the jump to Steppingstone number one, please reach out. Our team at High Ground Commercial Real Estate - KW Commercial can help guide you from where you are to where you would like to be. Stay tuned for more info on the next steps to creating passive income in coming weeks.