The majority of people who call themselves real estate investors have a single rental property. That’s great! But they usually have some lofty plan of buying 100 houses and living on the beach. That’s also great, but they have no means to get there, and end up spinning the wheels, becoming more disenfranchised with the whole ‘real estate game’. Here’s how to not become one of them.
Set Your Long-Term Vision
Using the word ‘vision’ conjures up thoughts of CEOs and business-speak, which I despise. But, you really should be coming up with a vision for where you want to be when you retire from actively trying to make money.
Do you want to live on the beach in Florida, doing no work all day, enjoying the weather and your life? That’s not for me. I’ll have a hard time doing nothing, but it’s fine if that is your vision. Maybe you want a modest house near your children, where you can fly to visit your grandkids whenever they have a soccer game or band concert. That’s my vision. Whatever that vision is, write it down. What does it take to get there? Generally it takes money. And that will either come from savings or income.
Consider How to Achieve Your Vision
For your beach home, let’s say you want to have a $1,000,000 property. In Florida, this will get you a nice place on the beach, but no mansion. Let’s say you want to take 5 trips per year at a $10,000 budget apiece. You’ll need to factor in property tax and insurance and healthcare. Whatever else you want you should put in there. These can be estimates – you don’t know how much things will cost when you retire. For this property, let’s say you want 250k per year. Now, you can work backwards to figure it out.
For the rest of this, we will ignore inflation. That is a risk. Inflation will increase the dollar amount of your initial investments, but will be able to purchase less in the future. I’m going to calculate that as a wash. Neither you nor I have any idea what inflation will do, so increase your required money at retirement to reflect your level of risk tolerance for this.
If you’ll be living off savings, you might conservatively think of an income of 5%. It’ll probably be higher from time to time, but there will be down times. To get to 250k per year, you’ll need 5 million invested at 5%. ($250,000 / 0.05). It’s a lot, but reachable. To live off of savings you will have bought a whole lot of stuff and then sold them right near the end to get the money raised.
Perhaps you are like me and want to live off the income of the properties rather than selling. As an example, you calculate that each single family rental you have paid off makes you an annual income of $7,000. That means that you need to have 36 properties ($250,000 / $7,000) each generating 7k. They don’t all need to be paid off but probably do in order to get this income.
Work Backward From Your Vision
Now, work backward. Let’s say you have 20 years until you want to realize your vision. to get to $6M (that’s the $5M you need plus your $1M property), you need $300k per year in the bank. How many properties would you need to buy and pay off to get there? That’s probably one per year, but the ones you buy later have less time to get paid off, so you’ll need a schedule of purchasing more early on and less later. You’ll have to do this math yourself based on your area.
Your Five-Year Goals
Each five year increment of your next 20 years needs to have a set of objectives.They can be lofty, because you have five years to realize them. They might be: Relocate to the Midwest. Purchase 10 properties which will ultimately each produce $7k annually. Create an office in a commercial building for the purpose of managing my investments. They are big things, not quite a vision, but bigger than goals.
Your Annual Goals
The next step is to create your annual goals. Try to work out all 20 now. Many of them will be repeated. Annually, you will review these and change them to suit your current position. They need to be SMART goals. They have to be something you can measure and achieve. Here’s how to set your annual goals.
The last phase of this is your tactics. Before, we were all about strategy, but now, we need the ability to be nimble and adapt to changes. This part is down to months, weeks, and days. They are the plans you will do in the moment to achieve your goals, which help you achieve your objectives, which satisfies your vision.
But, you can’t do any of this without figuring out where you are going. That’s your vision. Get that part created. Keep in mind that you are allowed to change these. Don’t make a change without careful consideration, but life changes, and you change. Make sure that your vision adapts as well.
