How to Retire Early from Real Estate Investing

what's up you guys it's Graham here so this is a really fun video for me to make because we're gonna be talking about my favorite topics of all time in one video that's right we got real estate investing passive income financial independence retiring early and smashing the like button if you haven't done that already all in one place I know I can't believe it either what it's time to be alive but anyway here it is how to retire early by investing in real estate and these are the types of videos I really enjoy doing the most because all of these are things that I have done myself personally none of this is theory or anything like that all of this I have done myself firsthand and I've seen it work for me it's taken about a decade of saving investing and following these strategies to get to the point where my rental income covers all of my expenses and at which time I can pretty much do whatever I want within reason of course I'm not going off in like buying Lambos every day i buying Tesla Model 3 s no Lambos but this works for a Tesla Model 3 but anyway let's go over exactly how you can replicate these strategies so you can do something similar and again that's the entire point of the video by the way I realize the term retired is used very frequently now on YouTube like everyone is retired and then meanwhile they're still working like 80 hours a week on you know not being retired so let's just make it very clear I am NOT retired I'm not going to call myself retired I have no plans of laying on a beach and playing golf all day I'm not even that good at golf however the point of the video is to get to the point where you could retire if you wanted to or not the choice is really up to you so now let's start here and this is where it all begins and this point is not real estate-related at all but it's still massively important and that is just this take the time to add up all of your expenses then you'll come up with an average number that you will need to replace with rental income every single month I know this point is rather dull and boring but this is something you'll have to do otherwise it's really like trying to navigate somewhere without having a map so anyway here's my challenge for you and I dare you to do this because most people are just gonna watch the video and never actually do it that defeats the point so you know you're different than that you're actually going to do this hopefully that is just this it's very easy track all of your expenses for the next four let's track everything you spend your money on every single penny if a penny leaves your account or leaves your pocket I want you to account for it you can always use mint.com or personal capital comm if you want automated software that does it for you or you could just use your own Excel spreadsheet I don't care what you use the point is you absolutely must know how much money you spend every single month so that way you can figure out how much rental income you need to replace that with now when doing this I highly recommend you break up your expenses into two categories the first one will be your necessities the second one is going to be your discretionary spending for example your necessities might be your housing payment your insurance groceries internet utilities and everything else that's non-negotiable your discretionary spending on the other hand should be something that you don't absolutely need that you can cut back on if necessary for instance that might be vacations or going out shopping or going out to really expensive dinners or wrapping the Tesla video coming soon so anyway once you've done this congratulations you've done what probably 9 out of 10 people will never do in their lifetime so there you go you're already ahead of the game now your first goal should really just be to earn enough rental income to cover all of your basic necessary spending now if you want to break something like this down into even smaller goals I recommend having a list of all of your necessary expenditures and that way you can just check those off every time your rental income pays for it like I remember when I made my first $900 a month in rental income and I thought to myself okay now I have my car paid for my car insurance paid for my phone bill paid for and my groceries are paid for and then I thought to myself well if I have another $900 coming in that would pay for half of my housing payment and then if I have another $400 coming after that I would have all my property taxes paid for so anyway once you figure out exactly how much money you spend every single month that becomes your goal that is how much rental income you will need every single month to replace your necessary spending so now of course this is where the work comes in and that is actually getting that amount of rental income so here's what I would do if I were starting over with zero dollars today and my monthly expenses were let's say $3,500 so that now be our goal to get $3,500 a month in net rental income now here's the strategy that we're gonna be following to achieve this and there's a term for this coined by Brandon Turner over at BiggerPockets and that's called the BIR method except I put my own little twist on it it's kind of like the house hacking burr method of real estate investing so I'll explain exactly how this works and exactly what you can do now the first thing you'll need to do is save up a downpayment between 10 to 20% of the property's purchase price so this means if you're buying $100,000 property you'll need between ten and twenty thousand dollars saved up or on a $200,000 property you'll need between 20 and 40 thousand dollars saved up now this could definitely take a while depending on how much you're making how much you're saving and how expensive properties are in your area however I really believe this part is essential this single investment can absolutely fund your entire retirement with passive income if you're just willing to listen to these strategies and actually implement them and stay consistent with them long term and in terms of actually saving this amount of money you really just need to make this a priority if that means that you need to cut back on vacations or work more hours or pick up a part-time job just so you'll be able to save a little bit more money doing it it's so worth it I can tell you 100 percent that delaying any short-term gratification is absolutely worth it when you see the long term end result now anyway once you've got that down payment saved the next step is to go and buy a two to four unit building that you can move into yourself now here's why this step is so important when you go and buy a primary residence meaning you're going and buying a property that you intend to live in yourself you qualify for what's called conventional owner-occupied financing this means you'll qualify for a lower interest rate and also a lower down payment when compared to buying an investment property now the only two requirements when doing this is that you must buy four units or less and you also must live in the property between 12 and 24 months after buying it after that you could do whatever you want with the property but meanwhile you've locked in your low downpayment and your low interest rate now the reason I really like this method a lot is that you can get a conventional owner-occupied loan up to four units so this means if you want to invest in real estate you can buy all of the units under owner keep I'd financing with a lower down payment and a lower interest rate even though you're renting out the other units and only living in one of them this is a tremendous life hack and a huge advantage to investing in real estate and getting cheap financing and as we all know cheap financing really just means more money back in your pocket the third step here is that ideally you should be fixing up the property anytime you're looking to not only increase the value of the property but also increase the cash flow fixing it up is really just the way to go for me I'll only look at two to four unit properties that need work because I know that when I'm done fixing it up it's going to be worth more than what I paid for it I personally go for really light rehabs like redoing floors redoing the landscape paint kitchen and bathrooms these are all very simple renovations that any contractor should be able to do in less than a month and all of these renovations have an extremely high ROI so let's just use this example so I can show you how it works let's just assume you buy a $300,000 property that's three units you then put 10% down that would be $30,000 and you finance two hundred and seventy thousand dollars at a four point three percent interest rate fixed for thirty years but then after all of that you take an additional thirty thousand dollars from your own money and you go and fix it up and after that the property's value is now worth three hundred and eighty thousand dollars this means that you've made an extra fifty thousand dollars worth of value just by going and fixing it up that is how real estate investing basically works my favorite places to buy are the ones that just look a little outdated like maybe it was built in the 70s or 80s and it's a little old or it looks a little bit like grandma's house maybe it needs some new countertops and new paints you remove the carpet you get some new bathroom tile easy stuff like this and in most cases I never try to rearrange floor plans or go in add square footage and for someone really just starting out I don't recommend that you take on too big of a project very light cosmetic stuff is very easy it's very simple for a beginner many contractors can go and do this in a very quick turnaround time and there's not a lot of risk when you're going in with just a cosmetic renovation so now the next step what do you do when you're done fixing it all up and that is you rent out the other units this is where the the other units should ideally cover all of the properties expenses like your mortgage or property taxes your insurance your repairs your vacancy and everything else that goes along with that so now let's just use our previous example we have a $300,000 property with three units you put 10% down financed 270,000 dollars at a 4.3 percent 30-year loan your mortgage payment would then be about thirteen hundred and thirty dollars per month we'll see your property taxes are going to be another three hundred dollars a month we'll say your insurance is going to be a hundred and twenty dollars a month and then we'll say your repairs maintenance and other miscellaneous expenses would be another two hundred and fifty dollars a month so now let's just round this off and we'll say that this property is going to be costing you every single month two thousand dollars however because it's a three unit building and you're only living in one of the units you can rent out now the other two to collect rental income to offset that payment so in this example let's just say that the other units are gonna be renting for nine hundred dollars a month so in total between renting the two units you're gonna be getting at $1,800 a month in rent so now you're only out-of-pocket cost is $200 a month forgetting to live in and own a triplex plus the $30,000 is a down payment plus the $30,000 you spent fixing it up so $60,000 total now I realized that right now we're not any closer to getting to our goal of $3,500 a month in passive rental income because it appears as though we're now cash flow negative $200 a month plus were sixty thousand dollars in the hole invested in this property but here's where the fun begins right now you're only housing expense is $200 a month and chances are that is cheaper than you going and renting something else equivalent to that yourself we're going and buying something without getting the additional rental income so hopefully by doing this you're able to save a little bit more money on your housing expense secondly even though you're paying thirteen hundred and thirty dollars per month is a mortgage just by making that mortgage payment you're paying down the loan balance by on average in the first year about three hundred and seventy five dollars a month this means that your ownership in the property increases a little bit more every single month until eventually after 30 years your home is paid off and owned in full so even though you pay $200 a month out of pocket to live there you're getting back 375 dollars a month in value still though that is not cash flow that you can be able to live off of until that is paid off in full but here's how we're gonna be able to get there the next step is that you're now going to do what's called a cash out refinance this means that a bank will go and give you a brand-new loan based off the new higher price of the property after you've fixed it up and then you profit the difference in cash let's go back to the original example here $300,000 property $30,000 down two hundred and seventy thousand dollar loan you fix it up for $30,000 and now it's worth three hundred and eighty thousand dollars but now because this property is worth three hundred and eighty thousand dollars and you have a loan on the property of two hundred and seventy thousand dollars this means you have a hundred and ten thousand dollars of equity just sitting there so when you go and do a cash out refinance a bank might go and look at this property and say okay we see it's worth three hundred and eighty thousand dollars we will give you a loan up to eighty five percent of this property's value so on $385,000 we'll give you a loan of three hundred and twenty three thousand dollars so now you go and take out a new loan for three hundred and twenty three thousand dollars you take two hundred and seventy thousand dollars of that to pay off the first loan and that gives you fifty three thousand dollars extra in profit cash for you to pretty much do whatever you want with entirely tax-free but now since you've taken out a new loan at a higher amount your mortgage payment will jump up from thirteen hundred and thirty dollars to now about sixteen hundred dollars a month but remember even though you're paying more per month now you have fifty three thousand dollars left over for you now to do something else with and reinvest and of course we all know what that means you can use that fifty three thousand dollars to go and buy another triplex for you to do the exact same thing with so now let's just assume you did the exact same thing you bought the same triplex but the same thirty thousand down spent the same thirty thousand renovation it's worth the same three hundred and eighty thousand dollars here's where it gets interesting because remember you still own the first property but now since you moved out of there to go and do this again you now have another unit that you can go and rent out for nine hundred dollars a month here's how the numbers look for an example like this your mortgage payments going to be going up to $1,600 a month your property taxes will be $300 a month your insurance will be $120 a month and let's just bump up the repairs maintenance and the expenses to $300 a month so now let's just say that roughly this property is going to be costing you two thousand three hundred and twenty dollars per month after doing a cash short refinance and after moving out of it but wait for it because now you have three units each paying you $900 a month instead of two that means that you're now making $2,700 a month now you go and subtract the two thousand three hundred and twenty dollars from this and that leaves you with an extra three hundred and eighty dollars per month in passive income just for buying the place fixing it up doing a cash out refinance renting it out and then moving on to the next one that means that you're only out-of-pocket cost to make three hundred and eighty dollars per month with seven thousand dollars plus the cost of your time to go and fix it up and buy it and rent it out that's it and now you have three hundred and eighty dollars per month and passive income now you own a cash flowing rental property and now you're also paying it off every single month so that in thirty years you're gonna own it outright and also since you now have an extra three hundred and eighty dollars per month coming in and passive income that makes it that much easier to now go and save up for the next one so now we can go and just repeat this exact same process with the next one and assuming you do it with the next one with similar numbers you'll now have seven hundred and sixty dollars coming in every single month and passive income do it with a third place and you'll now get one thousand one hundred and forty dollars every single month and you just continue doing that time and time and time again until it slowly builds up you can also now start investing in more expensive properties because you're making more money you have more money coming in you have more experience and that just speeds up this entire process dramatically another really amazing thing with this concept is that if you just take that extra rental income and reinvest it back into buying more real estate you'll start seeing these numbers grow incredibly fast because now in addition to not only using your own money and your own equity you're going to be using the rental income as well just to buy even more real estate this means that if you've determined you need thirty five hundred dollars a month in rental income to go and retire and then travel the world smashing the like button in every single country you can realistically do this in about seven to ten years just by starting with one property buying it renovating it moving in renting out the other units refinancing it pulling that money into another property reinvesting all of the rental income into buying even more real estate and then pretty soon within a very short timeframe or within about a decade you'll be able to basically retire off your rental income the only requirements in your end is that you just save up enough money to use as a down payment and a renovation budget you never spend the extra rental income because you'll use that to go and reinvest into buying more real estate and you just do this consistently until eventually you hit the number where your rental income covers all of your expenses the concept is all really easy to understand but the hard part is actually staying disciplined with this long term and consistently putting in the work and delaying gratification and because investing in real estate could be a very daunting task especially for someone who's never done it before whose brand new to the business doing this as a primary residence where you can go and live in one of the units and then rent out the others makes this process incredibly easier and now the icing on the cake with all of this is that if you do this consistently within about thirty years all of your rental properties are going to be paid off in full even if you go and spend the extra rental income on whatever you want that's because your mortgage payment consists of both principal and interest so every single month you make a mortgage payment you're paying down the loan balance a little bit every single month until eventually it's paid off and then like I said once it's paid off you're gonna have a ton of extra money to do whatever you want with for instance if you have six rental properties like our last example having all of those paid off would generate you an extra ninety six hundred dollars a month that's because once the mortgage payments is paid off you're not gonna have that $1,600 a month expense on the property so times that by six and there you go ninety six hundred dollars a month and also the icing on the icing on the cake is that your rental income will be going up over time thanks to inflation and also demand and that just makes this entire amount just even larger in the future so as you can see this is really such a great method for retiring early and replacing all of your expenses with rental and all that it requires is really dedicating a solid decade to doing this and really just the discipline of saving everything you can putting in the work taking the time to make this happen and then just repeating the process over and over and over again this is something that I've been doing myself I live in it duplex right now it pays for all of my expenses all the rental income on the other properties pretty much pays for everything else I do and that's it and this is really a decade of really really really solid saving and investing and really being invested in real estate and learning these principles and sticking with it long-term and this is what I believe anyone else could achieve as well so with that said you guys thank you so much for watching I really appreciate it you guys enjoy videos like this make sure to smash the like button subscribe also hit that notification bell if you want to be notified anytime I post a video which is three times per week also feel free to add me on Instagram I post there pretty much daily so if you want to be a part of it there feel free to add me there thank you again for watching and until next time

Channel: Graham Stephan

Views: 815,477

Rating: 4.9570413 out of 5

Keywords: How to Retire Early from Real Estate Investing, real estate, real estate investing, real estate investing for beginners, real estate investing 101, how to retire early, how to make passive income, passive income, passive income ideas, passive income for beginners, passive income 101, financial independence, real estate investing with no money, passive income online, retire early tips, brrrr method, how to flip real estate, how to buy real estate, how to save money

Id: t-5veYUeatw

Length: 18min 37sec (1117 seconds)

Published: Wed May 01 2019