Have you ever wondered how you could retire early while still enjoying a comfortable lifestyle? I recently had a conversation with a savvy real estate investor, Dr. C., who shared his secret to early retirement with me. It turns out that his strategy is quite simple: buy one real estate investment property every year. Intrigued, I delved deeper into this concept to see how it could work for anyone looking to secure their financial future.
The Power of Buying a Rental Property Every Year
According to Dr. C., the key to his success lies in purchasing a rental property annually. He emphasized that the type of property doesn't matter as much as the ability to afford it. By following this strategy, he was able to retire early and live a comfortable life. Inspired by his story, I decided to model out this approach on paper to better understand its potential.
Before we dive into the specifics, it's essential to acknowledge the ongoing debate between simple and complex models. While no model can perfectly predict outcomes, simpler models are easier to apply and replicate. Dr. C.'s approach aligns with this philosophy, making it an attractive option for those interested in real estate investment.
The 10-Year Plan
Let's take a closer look at what buying a rental property every year for ten years could look like. Here are the rules of this model:
- Each property purchased is a single-family home.
- The purchase price remains constant at $100,000.
- Each year requires a 30% initial investment ($30,000).
- The home loan starts at $70,000 (purchase price - investment).
- The maximum number of home loans at any given time is four.
- Cash flow per property is $400 per month.
- Cash flow equals income minus expenses.
- All cash flow throughout the year is saved and used to pay down the home loans.
- Once a property is paid off, it generates $800 per month in cash flow.
- If you have four properties, the initial $30,000 investment goes towards paying down one of the loans.
- The appreciation rate used is 3.4%, based on the Case-Shiller index.
It's important to note that several factors are not considered in this model, such as equity pay-down, increasing rents over time, maintenance costs, cash flow changes, taxes, depreciation, and purchasing a personal home. Despite these omissions, the model provides valuable insights into the potential outcomes.
The Results After 10 Years
After 10 years of following this strategy, here's what you can expect:
- You will own eight rental properties.
- Four homes will be completely paid off, while the remaining four will still have mortgages.
- Your cash flow will amount to $57,600 per year ($4,800 per month).
- The total equity in the properties will be approximately $750,000.
- Your total investment over the 10-year period will be $300,000.
The Snowball Effect
As the years progress, you'll start to notice a snowball effect in action. By year 10, the cash flow becomes substantial, allowing you to achieve various financial goals. Imagine covering educational expenses for your child or reducing your working hours. The possibilities are endless.
For fun, I extended the model to 15 and 20 years. However, past year 10, the model becomes increasingly complex due to overwhelming cash flow. Still, here are the results:
- Year 15: You own 12 homes, with 10 of them paid off. Your cash flow amounts to $100,800 per year ($8,400 per month), and the equity in your properties reaches around $1.4 million.
- Year 20: You own 19 homes, all of which are paid off. Your cash flow skyrockets to $172,800 per year ($14,400 per month), and your equity in the properties exceeds $2.8 million.
Financial Freedom is Within Reach
It's worth mentioning that if you were to accumulate a $6 million nest egg and withdraw 3% annually, you would have around $180,000 at your disposal in the first year alone. With such passive income, complete retirement becomes a viable option.
Before concluding, it's important to address whether I followed Dr. C.'s advice. While I've had to play catch-up, I've been fortunate enough to acquire enough rental units to match the number of years I've been an attending physician. I'm well on track to buying one property per year, and I'll be sure to keep you updated on my progress.
If creating passive income through real estate and achieving financial freedom interests you, consider joining our waitlist for the next class season. Remember, there is no obligation, and we look forward to having you on board.