← BiggerPockets Real Estate Podcast
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- [00:00]
Dave Meyer
Four rentals by 40 years old. That's all you need to cement a comfortable retirement or even retire early. If you can achieve this, you'll be significantly wealthier, and I'm talking millions of dollars wealthier than the average American. Plus you'll have passive income to support yourself in retirement instead of just a Social Security check. Getting to four rentals is a huge deal. And today I'm going to share the four step plan anyone can use to build a small but powerful rental portfolio that accelerates their timeline to ret retirement or at least makes them a heck of a lot richer. In the example I'm sharing today, buying only four rental properties, even if you stop there and do nothing else, would increase your net worth by $3.3 million by the time you're ready to retire. And if you're already 40 or you're over 40, don't worry. You can follow the same steps and map out your own retirement timeline using the walkthrough. I'm going to share with you today. So you don't need a dozen properties. All you need is four. This is how you get. What's up, everyone? I'm Dave Meyer, chief investment officer at BiggerPockets. Today on the show, I'm showing you how acquiring only four rental properties by age 40 can completely transform your financial trajectory. We're going to dive right in with an example of how this works step by step. And this is a plan almost anyone can follow. And actually it's pretty similar to the types of properties and the timeline I personally followed on my own journey to finance financial freedom. And I'm sure there are some people out there listening to this who want to scale all the way up to dozens or even hundreds of properties, which is cool if you want to do that. But I think four properties gets most people where they want to go by retirement. So we're just going to talk through the first four steps and if you want to keep growing from there, great. But these four steps will set you up for a successful career, whether you want to go big or not. All right, let's jump into our first property. My recommendation for almost everyone out there is to buy an owner occupied property for your first deal. The idea behind this first deal is not to hit a home run or to get a huge amount of cash flow. The idea here is to set yourself up so that you're saving additional money and you're starting to build equity in your home. And you're going to use those two things, your increased savings and the equity that you build in this first deal to go buy your second deal, your third deal, and your fourth deal. So don't think that you're gonna have to save up a new down payment for each of these four properties. Each deal that you do should help your next deal become easier. So again, for this first deal, you're gonna wanna do owner occupied. This is gonna give you access to better financing loans where you can put as little as 3.5% down, you're gonna get better interest rates, and it's just the easiest way to get into the game. Now, there are generally two different types of owner occupied deals that you can consider. The first, and largely the most popular, is known as house hacking. This is where you buy either a single family home, live in one bedroom, and rent out the other bedrooms to roommates. That's an option for people, some people don't want to live with roommates. So the other option is to buy a small multifamily. This is either a two unit, a three unit, or a four unit property. You live in one and then you rent out the others. And the key is here, you got to stop at 4. Because if you buy something bigger than 4, you lose that owner occupied financing, which is what you really need on this first deal. So I recommend to most people, if you can find them and if they're available in your area, look for a duplex or a triplex and invest in that, live in one unit and then rent out the others. The benefit of doing this again is that you don't necessarily need to cash flow. If you can find a cash flowing house act, that's great. But your key here is to save money. If you buy a house hack, you live in it, and for example, you spend $500 less per month on housing. That's a win. Even if you're coming out of pocket a couple hundred bucks a month for your housing, as long as it's less and significantly less than what you were paying in rent, that's still a win. You're going to use that saved up money for your next property. It also is going to help you learn the business of being a landlord and a real estate investor. And if you're doing it right and you're buying the right kind of deals, you'll be building equity as the value of your property increases over time. That equity is something you can tap for your second, your third or your fourth deals. So those are the basics of house hacking. But I also want you to remember, a house hack doesn't have to be this two to four unit. It doesn't even have to be a single family home with roommates. You can do it by adding an ADU or a mother in law suite. Where I live, a really popular thing to do is people buy split level homes, they do a lock off into the basement and they turn their single family into two units. That's not available to everyone. But the point here is get creative. There are ways to make house hacking work that might not appear immediately obvious on Zillow. And often those are the best deals. So that's it for step one. Save up your money. Invest in an owner occupied strategy so you get that owner occupied financing. Find a deal that's going to allow you to save money and build equity that you can invest in your next deal. And being on site is a great opportunity to get good at being a real estate investor, get good at working with tenants, get good at property management. Those are the three goals of step one. So let's walk through an example here. Let's just imagine that you're 30 years old, you're going to do this house hacking strategy and you find a home for $400,000. In some markets it will be cheaper, some will be more, but that's the median price home in the US today. Now if you get this owner occupied financing that I've been talking about using 3.5% down, your down payment is only going to be $14,000. That is enough. Like I said, if you save $20,000 up for this first deal, you'll still have some money for closing costs and for cash reserves. So this is a realistic deal. Now I look at deals all the time and for deals like this, depending on the market you're in, it is realistic to believe that you could save $500, maybe more, 700, $800 in some examples, off of what you would be paying in rent. So now, as opposed to renting, you are saving $500 per month in cash. On top of that you're also getting amortization, you're getting tax benefits, you're getting appreciation, but just the cash savings alone is $6,000 per year. So if you save that after three years, you're going to have close to $20,000 saved. That that's enough to just do this deal again. So as you can see, buying the first deal and doing that right leads to the second deal and the second deal will lead to the third, and the third will lead to the fourth. But the key is to find a good deal that's going to build you that equity and help you save that money. So that's the first deal. But the second property is where things really start to ramp up and take you from a homeowner to a real investor, which has huge impacts on your net worth and retirement timeline. We're going to talk about the second deal that you should be looking for and how that's different from your first one, but we do have to take a quick break. We'll be right back.
- [07:20]
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- [08:22]
Dave Meyer
Most investors spend all their time talking about their high level returns, but that's not the number that actually matters. What actually matters is what you keep after taxes. And that's where multifamily real estate quietly stands out. With built in advantages like depreciation, the right deals can generate steady cash flow while reducing the tax drag. BAM Capital structures its multifamily investments around those fundamentals, pairing tax efficiency with disciplined operators and a long term approach. This isn't about chasing hype or guessing market timing. It's about building durable tax aware wealth over time. Learn more@biggerpockets.com Bam here's why savvy real estate investors are obsessed with bonus depreciation. It lets you take that rental property or commercial building you own and depreciate most of the cost against your income. Legally, 100% IRS compliant. That's instant cash flow improvement. Cost Segregation guys is the number one firm nationwide specializing in identifying these faster depreciating assets in your property. They've completed tens of thousands of studies across all 50 states, from remote cabins to apartment complexes. So if you own investment property, this is a no brainer. So visit cost segregationguys.com, for your free proposal and find out how much you could save this tax season. Welcome Back to the BiggerPockets podcast. I'm Dave Meyer giving you my step by step plan for getting four rentals by 40 years old. Before the break, we talked about your first deal being an owner occupied house hack that allows you to save money and build equity so that you have enough money to go out and do this again. Now, Property two is going to be a little bit different. Now that you have some experience and hopefully some money from house hacking, we're going to look for a deal that has a little bit more meat on the bones, got a little bit more juice, because we want to build equity. That's the thing that's going to build our net worth and really secure our retirement in the long run. Now, the way you do this is by finding what is known as a value add property. So this is finding a property that's not in the best condition and doing some sort of renovation. It doesn't need to be a full bur. You don't need to tear out all of the walls. This could be anything from a light cosmetic deal or if you want to, you can do one of my personal favorite strategies I call the slow burr. You could do a full gut rehab. That's where there's a lot of equity to be gained. But the point here is property two is going to be a value add project where you actually do a renovation on a property to build lots of equity. Now, depending on who you are, you should decide how intense of a renovation that you want. So if you don't have any experience with renovations, I would look for something that's more of a light cosmetic or a light rehab. That's something like renovating kitchens, painting, putting in new floors. But you're not doing anything structural, you're not moving walls, you're not popping the top, you're not doing anything like that. Unless you have experience with renovations. If you have experience or working construction or know someone who could help you with that process, you could do a bigger project. But for deal two, I would recommend most people stay on the lighter side of the renovation. It will reduce your risk and there's still significant upside in these kinds of deals. The next thing that you need to look for in your deals are one, in today's market, you should be looking for deals that have been sitting on the market for 60 days or more. We are in a buyer's market right now, which means that buyers have leverage. And if any seller has a property that's been sitting on the market for 60 days or more than they're going to probably be pretty motivated to negotiate with you. So look for those deals because that's where you're going to be able to buy below current comps and that's going to give you even more equity throughout the course of your deal on top of just looking for things sitting on the market 60 days. I think two key things that you want to look for in your deals are areas where you think there is going to be rent growth. So where there's going to be a lot of demand for renters, that is always helpful as a real estate investor. And the second is a place that's in the path of progress. You don't want to invest in a place where properties aren't going to appreciate. There's not going to be demand if you want to sell it. So look for places where people want to live, where the government is investing. Those are great ways to take your deals from a single or a double to a home run over the lifetime of your investment. So those are the things to look for in the deal. And just as a reminder, the goal of this deal is to build equity as much as you can and to get a cash flowing rental. All right, so let me just give you an example of how this works. You go out and buy a property worth $300,000, then you're going to need to put money into it, right? Let's say you have a rehab budget of 50 grand, which is a generous budget, right? Like that's enough to make significant improvements to a property. So your total all in costs are going to be 350,000 for this deal. And what a lot of people do for a brrr property is take out what's known as a hard money loan. These are loans that are designed specifically for these types of projects where you don't just borrow the money to buy the property, you also borrow the money that you need to do the renovation. And oftentimes with a hard money loan, you can put as little as 10% down. So because your total costs are 350,000, you're going to need $35,000 to get into this deal, which after a couple of years of saving up your money from your first deal plus building equity, you should be able to do this within two, three or maybe four years. You should have that much capital. Now you go into this deal, you buy it for 300 grand, you add value to it. After putting in 50 grand, hopefully this property is now worth, let's just call it 450,000. So you put in 350, now it's worth 450,000. And I know that might sound like magic, but it's not. You can absolutely put 50 grand in and build $100,000 of equity. And that happens all the time. That is a relatively normal type of return that you can expect on a good BRRRR deal. So you build that equity, which is great. Obviously your net worth just went up. But the real magic of the BRRRR property is that you can take some of the equity that you built out and apply it to property number three. So you're going to take out a new mortgage, you're going to have to put 25% down, which is about $112,000. You're going to need to pay off your old mortgage, right? You still owe the hard money lender 315,000, but after those two things, you can take $20,000 out of this deal. So you only put 35 in, right? Remember? And now you're pulling $20,000 out of this deal for your next deal. Now some people want to do a perfect burr where they can pull out 35,000. That might be possible. But even in this example, you're pulling out 20,000 that you can go use for your next deal. You're more than halfway to your next deal. That's what's so powerful about the BRRRR strategy. And on top of that, you should also have a cash flowing rental property at this time, right? Because the key is, even after that refinance, you need to make sure that this deal is going to cash flow at least modestly. Doesn't need to be tons of cash flow. It doesn't have to be the highest cash on cash return. Remember, the main goal of this deal was to build equity, which you have done, and to get at least break even. I would recommend 3,4% cash on cash return minimum for this kind of deal. Now once you've done that, you have 20 grand already. You're saving 6 grand a year from your house hack. Now you're making, let's call it $3,000 a year in cash flow from deal number two. And so in two years, you should be able to get deal number three, right? You have 20 grand in equity, plus you're saving nine grand a year in cash flow. That will get you $38,000 in just two years. And this deal we just did only cost us $35,000. So in two years you can get to deal number three. So that brings us to property number three. And the goal of this property is to generate as much cash flow as you can. You still want to buy a great property. You don't want to be buying something that's never going to grow, but you want to prioritize cash flow and cash on cash return here over equity appreciation. So we're not necessarily doing a burr or a house hack here. We are trying to find a cash cow. So the way that we're going to finance this is through the equity from our first two deals. Presuming both of those properties continue to appreciate at a modest rate of 3% per year. That's about average. And you add that to the equity that you built in the BRRRR deal, that was a significant amount of money. Plus you're saving $800 a month. If you waited, let's just say two years between your second deal and your third deal, you're now 35 years old in our example. You should have, just from doing those first two deals, another 60 to $70,000 to invest, which is more than enough to invest in this third property. Now, I know for some people or if you watch a lot of social media real estate content, you might think waiting two years for your next deal is a long time or waiting five years from your first to your third deal. I don't actually think so. It took me six years to get to my third deal and three properties. I had eight units at that point, but it took me three years and that has been totally fine. By 15 years of doing this, I have become financially independent. And so I promise you, you can follow this timeline. It can absolutely work. Your goal, remember, is to get to four properties by 40 and you're already at three by 35 on this timeline line. Now, there's sometimes a trade off between cash flow and appreciation, not always. And you honestly want to find a little bit with both. I personally never look for deals that just maximize cash flow. Like you can buy something, maybe it's in a D class neighborhood or a market that's never going to grow. Maybe you can get a 12 or 15% cash on cash return in those markets. I don't personally like those kind of deals. For Me, I need to at least be able to believe that these deals are going to grow at least on average appreciation and that they're still going to be good assets sometime in the future. They're still in a desirable place where there's going to be demand. But I am willing to give up buying in the best possible neighborhood in order to get my cash on cash return up to eight, ideally closer to 10% on this kind of deal. Now if you have 70 grand to invest, which you should by this point of your investing journey, you should be able to buy something for about 300 grand. Now that's not going to buy cash flow in every single market in the United States. But I think this deal is an example of a good time to go out of your current market. Unless you live in western New York or the Northeast, parts of the Northeast or in the Midwest. If you live in some of those areas or even Tennessee, some areas in the south, you can buy a cash flowing duplex for like 250 grand or 300 grand. But if you don't live in these markets, you can just invest in those markets. I know it sounds intimidating to invest long distance, but if you've done two deals at this point, you've already done a burr, you've already done a house hack, I promise you you can invest long distance. I have done it is not that much harder and in a lot of ways it forces you to develop some of the skills and systems that are going to make you a better investor over the long run. So I would personally not shy away from that once you've found a market where you can actually do this realistically. Again, lots of places in the Midwest, in the Southeast, some places in New York or in New Hampshire, places like that, this is definitely possible. The things I would personally target on this deal is an 8% cash on cash return or better after stabilization. Now we're not going to prioritize a big equity bump on this. We're not going to do a big brrrr project. But sometimes, and honestly, oftentimes in today's day and age, like you gotta fix up the house a little bit, you gotta throw some paint on there, put in some new floors, make a couple of improvements, and then once you have gotten rents up to fair market value, that's when you need the 8% cash on cash return. So even if the rents today and the Zillow price don't give you that 8% cash on cash return, that's actually fine, that's quite normal. What you need to do the job of you have as an investor is to project out what's my cash on cash return going to be when I'm done fixing up this property. And if it's 8% or better, that's what I look for, then I would look for at least 2 to 3 upsides on these deal because 8% cash flow is great, but you obviously want the deal to perform better and better over time. And so I like looking for areas where there's likely to be rent growth if it's in the path of progress or I also love places with zoning upside. Now, I just want to say one more thing before we go back to our example that there are a lot of markets in the Midwest that you can buy these kinds of deals. But I recommend looking for ones that still have good appreciation. I said it before, but I want to reiterate here that as a real estate investor, you do not want to see your property values going down. So look for places like Milwaukee or Indianapolis or Grand Rapids or even Detroit over the last couple of years. These are markets that are growing and they have good strong fundamentals, but they're still really inexpensive. That's what you want to look for. You don't just want to find deals that are cheap because they're cheap. A lot of times if they're in a mediocre market and they're cheap, it means that they're probably not going to appreciate. You're going to miss out on a lot of the benefits that you should be getting from holding onto this property long term. So presuming that you find this, you get a $300,000 deal with an 8% cash on cash return. If we return back to our example, now we're getting 750amonth from property number one because rents have been growing at 3% a year, 350amonth from property number two and 400, 420 per month from property number three. That is over 1500 dollars a month in tax advantage cash flow, which is closer to earning $2,000 per month, like in a job that's going to get fully taxed. Now, you're only five years into this, but hopefully you're starting to see that these things start to compound what is not a lot of cash flow in the beginning gets a little bit more and a little bit more and a little bit more. And it's not just when you acquire new deals just by owning these properties and you've already gone from modest cash flow and deal number one to 750amonth on property number one. Now you're up to 350amonth on a BRRRR deal that was prioritizing equity growth over cash flow. But you're still getting cash flow. And as you'll see in our next property, the longer you hold this, every deal continues to get better. It's not just about acquiring new properties. It's about allowing every deal that you own to mature over time. And just like wine or many other things, most deals continue to get better and better the longer you hold them. So now that we've done property number three, let's move on to our fourth property that you should be targeting before the time you turn 40. We're going to get to that, but first we have to take one quick break. We'll be right back.
- [23:35]
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- [24:05]
Dave Meyer
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- [25:59]
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- [26:12]
Dave Meyer
Welcome Back to the BiggerPockets podcast. I'm Dave Meyer. We're going through how to get four rental properties by the time you're 40 years old. All right, so now that you've done your first three properties, you've done your owner occupant, you've done the brrrr, you've tried a cash flow play. Step four is to pick your fourth property. And for your fourth property, you can honestly just decide which of these things that you like doing. If you want to do another owner occupied strategy, moving from house hack to house hack is a super powerful strategy. If you were comfortable doing a brrrr and like doing a value add, you can absolutely do that again. Or if you're progressing through your investing career and kind of wanna be hands off and wanna buy in more turnkey kind of rental property that's more focused on cash flow, you can absolutely do that too. The great thing about building a portfolio over the course of six, eight years like this plan has you doing, is that you have options now. You've built up enough equity, you have cash flow coming in that it's easy to get more loans. You can repurpose equity from one of these first three deals into your next one. And that allows you to expand and build your portfolio in the way that you want. The key things to know though are that if you want to grow the most net worth, you got to focus on equity. So I would say either doing a house hack or more likely a Brrrr. If you want to build that net worth as quickly as possible. If you want to do as little work as possible, which is a totally worthwhile goal, I would focus more on this sort of cash flowing deals. And if you want to take the least amount of risk as possible, I would do another house hack. You refinance that first one into being a regular rental property, then do another house hack. Now for me personally, if I was making this choice, I I like the brrrr because I think it gives you a little bit of both, right? It allows you to build equity at the same time as you're building cash flow. So to continue our example, let's just assume I'm going to go out and do a brrrr again. This time I'm going to take a little bit of a bigger swing. I'm going to buy a property that needs renovation. That's $400,000. Remember, the first bur we did was about 300 grand. We put 50k and I'm buying something this time, 400k, taking a bigger swing by doing an $80,000 renovation. If I do a hard money loan at 10%, that means I'm going to have to put about $48,000 of equity into this deal. And we should have that, you know, two or three years after doing deal number three. So again, you're not necessarily having to put much more money into this. From the cash flow you're building through deals one through three, plus the equity you're building, you should be able to afford this deal about eight years after starting. So in our example, you're about 38 years old at this point. So on this deal, you buy for 400, you put in 80, the ARV is going to be about 650, which is totally reasonable here. I think a lot of times a good rule of thumb is your equity growth should be about double your renovation costs. That's an efficient deal when you're doing a kind of burr. So this is realistic that you can get your ARV up that high. And that means that even if you don't refi any money out, like if you do four deals and stop, which is the plan that we are giving you here today, so even if you don't take money out to do another deal and you factor in your holding costs and the debt costs that you're going to have to pay while you're doing the renovation, you're going to build about $120,000 in equity just from this deal alone. And hopefully by renovating your properties, you can drive up your rents and get an 8% cash on cash return, which I think is totally reasonable.
- [29:45]
Podcast Producer/Disclaimer Voice
That's not like the highest end.
- [29:46]
Dave Meyer
I think that's a realistic return you can gener generate. So from this fourth deal alone, you're getting 120k in equity and an 8% cash on cash return, which means over $10,000 a year in cash flow. So those are the four steps. Those are the four deals that I would recommend anyone do if you want to get to four rental properties by 40 years old. Now, I understand that just doing these four deals and the numbers that I've been using so far may not seem like the most exciting thing in the world. It may not sound like those people who are buying thousands of units on Instagram. But let me just take a minute here and explain how just these four deals will help you stack up against the average American at age 30. When you start this, you're saving $500 a month. You're going to have a $400,000 home that's appreciating rapidly. You're getting amortization and you are getting huge tax benefits that will help you save more money to grow. By age 33, you now have your second property. You're generating more than $10,000 a year in CA and you have $119,000 in equity just from these two properties now. Might take you two or three years to get to that next deal. But why? The time you're at age 35, your cash flow is now up to $16,000 a year and your equity value is 214,000. Then by the time you're 40, you bought your fourth deal. You've been holding onto it for two years. You have $30,000 in tax advantage cash flow. That's more like earning $40,000 a year in your career. And your net worth just from these properties is up to a whopping $490,000. Your equity after 10 years, $490,000. Compare that to the median 40 year old in the United States whose net worth is $76,000. So by buying these four properties alone, in just 10 years, your net worth will be five times the median 40 year old. And from there, the benefits only start to compound by the time you reach a more traditional retirement age of 60, actually 65 in the United States here. But just by 60 now, you'll start paying off the mortgages. You'll be done with property number one. Your cash flow is going to skyrocket at that point to $75,000 a year again because of the tax advantages that's more like making $100,000 a year. And your net worth at 60 years old just from these properties will be $3.3 million. This is the power of real estate. You don't need to buy a lot of units, you need to buy them. And hold on. As you can see, the benefits just continue to compound more and more and more. Like I said, you have a little over six grand in cash flow at age 60. But once you start paying these things off, it gets even better. At 63, it's 8k a month. At 65, it's 10k a month. At 69, it's 13k a month in tax advantaged cash flow. Now I know that seems like a long way away, but this is a much better recipe for retirement than anything else out there. I don't know anything including a 401k that could come even close to touching this in terms of how much passive income it generates and the net worth that you generate. So if you're out there looking for a way to build wealth to pursue financial freedom, this is the exact plan I would follow. It's very similar to the plan I did for the first eight years. Now, of course, this is just an example. Like, I don't know if it's going to take you two years between deals or three years between deals, but this rough outline can get you to a successful retirement. And of course, I did all this in this example. Four properties in just eight years. If you want to keep going after that, by all means you should. There's you have 20 years of working potentially to keep building that portfolio, build more cash flow, build more net worth. But for the average American, just four deals can be completely life changing. As you can see. Building more, more and more units, it can help, but it's not necessary really. Personally, I like to keep my portfolio relatively small because it's enough for me to comfortably retire without having to add any additional work or stress to my life. To me, that's the beauty of real estate investing, that there's disproportionate benefits for the amount of work that you have to put in, especially over the long term. And it's also something that so many Americans can do, they just haven't taken the steps to try. But as we've shown you in today's episode, you can start with as little as $20,000 and build a massive portfolio worth millions of dollars starting in your 30s or your 40s. Hopefully this gives you a game plan that you can follow in pursuing financial freedom. If you want to learn more about any of these topics, dive deep into how to be a great house hacker, how to pull off a great brrrr. Make sure to subscribe to the BiggerPockets YouTube channel. Thank you all so much for watching. We'll see you next time. Thank you all for listening to the BiggerPockets Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calico, content and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com.
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Podcast Producer/Disclaimer Voice
the content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect, consequential or other damages arising from a reliance on information presented in this podcast.