How to Make $5,000/Month with Rentals (Starting from Zero)

Summary

BiggerPockets Real Estate Podcast Episode: How to Make $5,000/Month with Rentals (Starting from Zero) Release Date: August 8, 2025

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Introduction

In this insightful episode of the BiggerPockets Real Estate Podcast, hosted by Dave Meyer, the Head of Real Estate at BiggerPockets, listeners are guided through a comprehensive strategy to achieve $5,000 per month in passive income through rental properties, even if starting from zero. Dave leverages his 15+ years of investment experience to demystify the process, emphasizing that generating significant passive income is more attainable than many might believe.

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Understanding the Foundation: Equity and Return on Equity (ROE)

Dave begins by breaking down the fundamental two-number equation essential for reverse engineering the desired passive income:

1. Total Equity Invested: Calculated by subtracting total liabilities (debts, primarily mortgages) from total assets (property values).
2. Average Rate of Return (Return on Equity - ROE): This metric assesses how efficiently the invested equity generates cash flow.

Notable Quote:

“If you can generate $500,000 in total equity and achieve a performance of a 12% ROE, that's going to get you that $5,000 a month in passive income.”
[02:45]

Dave illustrates this with a simple example:

• Assets: $2,000,000 (total property value)
• Liabilities: $1,000,000 (total mortgage debt)
• Total Equity: $1,000,000

With a 12% ROE, this equates to $120,000 annually or $10,000 per month, comfortably surpassing the $5,000 target.

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Scenario Analysis: ROE-First vs. Equity-Building Approach

Dave contrasts two investment strategies to highlight the efficacy of focusing on equity:

1. ROE-First Approach (Scenario One):

   • Initial Investment: $10,000
   • ROE: 20%
   • Annual Income: $2,000 ($160/month)
   • Progression: Investing the same amount repeatedly leads to incremental growth but is time-consuming. Achieving $5,000/month would take approximately 11 years with modest returns.

2. Equity-Building Approach (Scenario Two):

   • Initial Investment: $10,000
   • Equity Growth: 30% per deal through strategies like flipping or BRRRR (Buy, Rehab, Rent, Refinance, Repeat)
   • Deals Per Year: 2
   • Equity After 5 Years: $138,000
   • Transition to Cash Flow: Reinvesting equity at a 10% ROE yields $14,000 annually (~$1,166/month).

Notable Quote:

“If you can flip houses or do BRRRRs for five years, then go out and reposition your portfolio to get a 10% ROE, you'd be earning $14,000 per year.”
[15:30]

The equity-building strategy accelerates wealth accumulation, making it a more viable path towards the $5,000/month goal.

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Strategies for Building Equity

Dave emphasizes the importance of focusing on equity-building investments initially, especially for those without substantial starting capital. Key strategies include:

• Flipping Houses: Purchasing undervalued properties, renovating them, and selling for a profit.
• BRRRR Method: Buy, Rehab, Rent, Refinance, and Repeat to steadily increase equity and reinvest capital.

Notable Quote:

“If you can find a deal that builds your equity at 30%, it allows you to reuse your capital and continue growing equity over time.”
[10:05]

Building equity rapidly provides the foundation needed to transition into more stable, cash-flow-generating investments later.

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Transitioning to Cash Flow: The Harvest Phase

Once sufficient equity is amassed (e.g., $500,000 to $600,000), the focus shifts to generating consistent passive income. This involves:

• Repositioning Portfolio: Selling or refinancing equity-heavy investments to fund cash-flowing properties.
• Target ROE for Cash Flow: Aim for an 8-10% ROE by investing in properties located in desirable neighborhoods with reliable rental incomes.

Notable Quote:

“Certain properties are better for building equity, while others are optimized for cash flow. Shifting your buy box is essential to achieve your passive income goals.”
[30:20]

Dave warns against getting stuck in the equity-building phase without making the transition, which can hinder reaching the desired passive income level.

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Realistic Timeline and Execution

Achieving $5,000/month in passive income is a long-term goal that requires patience and strategic planning. Dave outlines a realistic timeline based on different investment paces:

• Conservative Estimate: 11 years with two equity-building deals per year.
• Aggressive Estimate: 5-6 years by increasing the number of deals to four per year.

Notable Quote:

“If you're willing to do four deals a year, you could probably achieve your goal in five to six years. It's achievable if you're dedicated.”
[20:50]

He underscores that consistent effort and strategic reinvestment are key to shortening the timeline.

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Phases of a Real Estate Investing Career

Dave introduces Chad Carson's Three Phases of Real Estate Investing, aligning them with the discussed strategies:

1. Starting Phase: Learning and executing the first few deals.
2. Growth Stage: Building substantial equity through value-add strategies.
3. Harvest Phase: Transitioning to cash-flow-focused investments to generate passive income.

Notable Quote:

“Understanding these phases helps ensure you don’t get stuck in the growth stage without ever reaping the benefits of passive income.”
[35:10]

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Practical Steps to Reverse Engineer Passive Income

To encapsulate the journey towards $5,000/month in passive income, Dave outlines a three-step framework:

1. Understand the Equation:

   • Determine total equity and average ROE.
   • Set realistic targets based on market conditions and personal financial status.

2. Build Equity:

   • Engage in equity-building investments like flipping or BRRRR.
   • Reinvest profits to accelerate equity growth.

3. Harvest Cash Flow:

   • Reallocate equity into stable, cash-flowing rental properties.
   • Aim for properties with 8-10% ROE to ensure consistent passive income.

Notable Quote:

“It’s not just about buying more properties; it’s about strategically building and reallocating equity to maximize your passive income.”
[37:30]

Dave emphasizes discipline and strategic planning throughout these steps to avoid common pitfalls, such as remaining trapped in the equity-building phase without transitioning to cash flow.

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Conclusion

The episode wraps up with Dave reiterating the importance of reverse engineering financial goals and strategic equity management. By systematically building equity and then transitioning to cash-flow-focused investments, even those starting with minimal capital can achieve significant passive income over time.

Final Takeaway:

“Follow these three steps—understand the equation, build equity, and harvest cash flow—and you can achieve your passive income goals without relying on unrealistic promises.”
[38:20]

Dave encourages listeners to utilize BiggerPockets' resources for further learning and invites them to engage with him through social media and the BiggerPockets community.

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Key Quotes with Timestamps

1. On the Simplicity of Passive Income Generation:

   “Earning $2,000 or $3,000 or even $5,000 or more in passive income isn't magic. It's simple math and execution.”
   [00:00]

2. On Return on Equity (ROE):

   “Return on equity measures how efficiently your portfolio is generating passive income for you.”
   [05:15]

3. On Equity-Building vs. Immediate Cash Flow:

   “Focusing on equity first allows you to build a solid foundation, making it easier to generate significant cash flow later.”
   [16:40]

4. On Realistic Goals and Timelines:

   “You're going to need to find great deals, and it's a marathon, not a sprint. Patience and diligence are your best allies.”
   [22:10]

5. On Shifting Strategies:

   “Once you hit your equity target, shifting to cash-flow-focused investments is crucial to achieving your passive income goals.”
   [36:55]

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Final Remarks

This episode serves as a strategic blueprint for aspiring real estate investors aiming to cultivate substantial passive income through rentals. By emphasizing foundational financial principles and providing a clear, actionable roadmap, Dave Meyer empowers listeners to pursue financial freedom with confidence and clarity.

For more detailed strategies and resources, listeners are encouraged to visit BiggerPockets.com and engage with the community forums or direct messaging for personalized guidance.

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Disclaimer: The information provided in this summary is based on the podcast transcript and is intended for informational purposes only. Investment in real estate involves risk, and listeners should consult with qualified advisors before making investment decisions.

Transcript

[Dave Meyer]

Would an extra $5,000 per month in passive income change your life? Of course it would. That covers car payments, it covers tuition payments. It could pay for really nice vacations. But if it was obvious how to make five grand a month in passive income, you'd probably already be doing it. But the good news is it's actually much easier to achieve this than you might think. And today I'm going to break down exactly how you can reach $5,000 a month in passive income from rental properties, starting almost any way. Hey, everyone. Welcome to the BiggerPockets podcast. I'm Dave Meyer, head of real estate investing at Bigger Pockets and an investor for over 15 years. When you first get started in this business in real estate investing, or even just hear about the idea of real estate investing, it can be really exciting, but it's also kind of daunting. How do you go from wanting to build a portfolio to bringing in significant amounts of passive income every month? What are the actual steps that you have to take? Today I'm going to show you. Because even though it may sound complicated, earning $2,000 or $3,000 or even $5,000 or more in passive income isn't magic. It's simple math and execution. I happen to pick a number, $5,000 a month, that I think would be pretty life changing for anyone. An extra 60 grand of income per year that is typically taxed at a lower rate. Huge win for any investor. And today we are going to reverse engineer how you can do it too. So how do you actually do this? How do you get $5,000 in passive income from rental properties? This concept just requires two numbers. That's all you need to know. Number one, the amount of equity that you have invested in your overall portfolio. And number two, your average rate of return. If you know just those two simple things, you can reverse engineer $5,000 in monthly cash flow. So we're going to start with our first number here, which was total equity invested. So all you need to do this is actually a really simple equation, is if you want to figure out your total equity invested, all you need to do is subtract your liabilities from your total number of assets. So assets is basically the total amount that your properties are worth. And I know that if you're just getting in real estate, you don't have any properties, and that's okay. Remember, we're reverse engineering this, and so I'm trying to just explain to you the math equation that will help you figure out how many properties you're going to need to buy eventually. So assets equal basically your total property value. And then liabilities is super easy. That's your total debt. And so for the context of this conversation, what we're talking about is how many mortgages you have. So this is how you get your total equity. Say you have five properties. You add them all up there with $2 million. Right? I'm just going to estimate that there were $2 million at the end of your portfolio. Again, I know that sounds like a big number, but if you follow the steps we're going to talk about today over a period of time, if you're patient and you're diligent, you can achieve this. So $2 million of total property value. But let's just say that you have mortgages. Most people use mortgages to buy properties and say that your total liabilities are $1 million. That. And that would leave you with total equity of $1 million, right? $2 million of property value. Those are your assets minus $1 million in debt. That is your total equity value. And remember, that is the first number that we need to reverse engineer. So I'm just going to number this number one. That was easy, right? If you own a portfolio of properties, you should be able to do this very simply. You can get estimates of your property value from an agent from Zillow, from all sorts of places, and you'll know exactly what your debt is, because every month on your mortgage statement, they'll make sure to tell you how much debt you still owe them. So that's pretty easy to add up as well. Now, the second number that we need to figure out is something called our rate of return. For me, and for the purposes of this conversation, I'm going to use one of my personal favorite metrics. And I know I'm a giant nerd because I have favorite metrics, but I do, and one of my favorite metrics is return on equity. This is the one we're going to use today, and I might just be calling it roe. That's what it stands for, Return on equity. And so return on equity, I think it's a really nice metric because it measures how efficiently your portfolio is generating passive income for you. And like we said, the goal of this whole conversation, the examples that I'm giving you today are how to generate $5,000 in passive income. And so we need a way to measure how efficiently we are getting $5,000 a month. So we're going to use return on equity as our rate of return. And this one is, it's super easy. To calculate, all you need to do is understand your total amount of cash flow and you divide that by your total equity. And we just showed you how you can calculate total equity. So all you would need to know in this situation is what your cash flow is. So if you had $5,000 a month, you need to annualize that. So that equals 60k a year, right? So if you have 60k a year, you divide that by 500,000. That equals 12%. That's your return on equity. That is a very strong, good return on equity. It's probably a target that you might want to be aiming for. Maybe we'll use that as our example for the rest of this episode here. But this is all you need to do. In fact, I actually just now sort of inadvertently reverse engineered how you can generate $5,000 a month in passive income. If you can generate $500,000 in total equity and you can achieve performance of a 12% ROE, that's going to get you that $5,000 a month in passive income. And I know you probably have a lot of questions about how can I get $500,000 in equity? That's a great question. We're going to get to that. You probably want to know, how do I generate 12% return on equity? Another great question. We're definitely going to get to that. But I just want to show you at the simplest level, this is how you generate passive income. You need money to invest in your portfolio. I don't care how many people on social media or YouTube say that you could do this with no money down, you could do it with nothing. That's not true. You can absolutely get started with a little bit of money down. But to actually generate long term, truly passive income, you need to build up equity in your portfolio and you need to efficiently generate cash flow with that equity. That's the whole game. So that was just one example. But let's just imagine that you had, instead of $500,000, you had $600,000 in equity, right? So that means you only need a 10% return on equity. So I want you to see that the more equity that you have in your portfolio, the easier it is to actually generate cash flow from it. I know that doesn't sound intuitive because a lot of people say you have to pick either cash flow or equity, but that is not how this works. The more equity you have, the easier it is to generate. Because if you had 500 grand in equity, you needed to achieve a 12% ROE. It's not super easy to find deals like that on the market today. But if you had $600,000 in equity now you only need a 10% ROE, which means deals are going to be easier to find and means you're going to have to take less risk and your portfolio is just going to require less overall work. You're not going to have to do as many renovations or renovations with as big of a scope as if you have less equ equity. And so your job as an investor and as you develop your strategy for how to go about this, need to sort of figure out what your targets are going to be. Again, there is no right answer here. It really depends on how you want to do it. But I would say just given some of the numbers that we're talking about here, you should target generating somewhere between $500,000 in equity, up to $1 million in equity in your properties and generating somewhere between a 6 and 12% return on equity. Okay, so this is the simple formula you need to follow to reverse engineer cash flow. But of course we need to figure out how do we get those great deals that produce roe? And bigger question probably for most people, how do you get that much equity to invest in your portfolio? We'll get into that right after this break. This week's bigger news is brought to you by the Fundrise Flagship Fund. Invest in private market real estate with the Fundrise Flagship fund. Check out fundrise.com pockets to learn more.

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[Dave Meyer]

Welcome Back to the BiggerPockets podcast. I'm Dave Meyer talking today how you can reverse engineer $5,000 a month in passive income using a very simple formula that I outlined before the break. Just as a quick reminder. Basically you need to figure out how much equity you need to invest in your portfolio and the rate of return or your return on equity that you can realistically accomplish. We talked about that. Hopefully that math is pretty simple, makes sense to everyone. But you're probably all wondering, how do you actually go about and do that? Dave recommended getting 500,000 to $1 million in equity. That is a ton of money that almost no one has lying around. So let's just talk about how you're going to go about getting that. So you're going to need to develop a strategy to get there because there are trade offs, right? You can't go out, it's not very easy, I should say, to go out and buy a property that both builds a lot of equity and throws off cash flow at the same time. And that's why for the vast majority of people out there, I recommend a strategy where you focused almost entire on building equity at first. Now, I don't believe that you should buy deals that don't cash flow. So I want to caveat that. But I think if I were starting out right now, today, and was trying to reverse engineer this and I didn't have just hundreds of thousands of dollars lying around, I would focus almost entirely on the types of deals that could help me build that equity as quickly as possible. Because that side of the equation to me is a lot harder figuring out how to get that equity. Once you have $500,000 or $750,000 in equity value in your portfolio, finding deals that can throw off a 10% return on equity I think is relatively easier than the equity building part. So I would focus almost all of your attention on that. So let's just game this out a bit and talk about starting with $10,000 as your original savings. If you took a different strategy, right, and just went and pursued the highest return on equity, the second part of first, it's going to slow you down. And I'm actually going to show you this math. So we'll call this one Scenario one and I'll call this the ROE first approach, right? So let's just say you do this, you have $10,000 and you're starting and you manage to find something with a 20% ROE. These deals do exist, but the ones that cash flow like this are usually not in the best areas and they're usually not going to appreciate. So this is sort of the trade off that I was talking about earlier, where you could find this deal that throws off good cash flow, but it's not going to build your equity at the same rate. And even if you found this amazing deal that is really unique, sort of uncommonly great cash flow in today's day and age, you're still only making like $2,000 a year, right? Because let's go back to our equation. If you take $10,000, the equity you have invested times your 20% ROE, that equals $2,000 a year or $160 a month. That's good. It definitely helps. But you're not really even close to your goal at that point. And how do you go from this one to your next deal? Right? If you only had $10,000 saved up, you just invested all of it into this one deal and you're generating only $160 a month. If you do it that way again, you can, that's your choice. But it's going to take you years to save up to buy a similar property. Maybe it takes you four years, maybe it takes you five years, then you buy another similar deal and then you're earning four grand a year. So if you did this times two, right, then you're equal to $4,000 a year, which is great. But it's still a far cry from the $60,000 a year or $5,000 a month that we are trying to do it. And for me, honestly, I don't know if that's worth it. You just spent five years investing all of your money to earn an extra 4gr. I mean, honestly, you could do a side hustle, you could do doordash, you could do consulting online businesses. That will probably make you more money than just doing what I'm suggesting here. But what about if we go after equity first? If we go into scenario two, which I'm going to call equity building, then look how this can actually change if you focus on deals that build equity. These are deals like flipping houses, which is not for everyone but is a great way to build equity, or just doing heavy value add types of projects where you are doing the Burr strategy, for example, these types of deals can build equity very quickly and allow you to reuse your capital to continue growing equity over time. So let's just imagine that we can find a deal that builds our equity at 30%. And this isn't easy, right? This is going to take work, it's going to take time. If you're going to flip a house, if you're going to do a BRR that earns this type of return, it is definitely possible even in today's day and age, even in 2025, you can find deals that do this if you're willing to do the work. But let me just show you why I think this approach is actually worth it. So just to be clear, what I'm talking about here is let's say you buy a house that's $250,000 and you renovate it, you put some work into it, and then after that it's worth $400,000. And after all of your expenses, you are able to grow the equity that you put into that property and by 30% or more. So you put in $10,000. And I understand that with 10 grand to buy a house for $250,000, you could do that if you use an FHA loan, but you might need to partner. This still works with partnering, by the way. You don't have to buy the entire asset. What you need is your $10,000 of equity that you put into that deal to grow to just $13,000 in equity. That is a 30% return on your investment. And when you think about it that way, it's not, not as complicated, right? You need to take 10 grand and turn it into 13 grand on your first deal. And again, you could do that if you buy a property outright. You can do that if you are partnering. But to get that kind of return in a short period of time, you're going to have to do a renovation. That's how you build equity as fast as possible in the real estate game. So again, all you need to do is take that $10,000 and turn it into $13,000 by getting that three 30% return on equity. And the reason this is so great is because you can do this in a relatively short period of time. If you are flipping a house, you can hopefully do this in six months. If you're doing a brrrr, six months to nine months, you should be able to do this. And just as an example, let's just say that you can do this two times per year. This is realistic for flippers. Like most flippers I know try to flip a house in nine weeks, 10 weeks, 12 weeks, maybe 16 weeks, then you obviously have to sell it. That can take some time. So six months, if you get good at this, is absolutely realistic. That is what most experienced flippers look for. So these aren't just made up numbers, pie in the sky. These are real things that you can do. Now let's just imagine that you do this two times per year for five years. Remember that's the example I gave using scenario one. Remember I said if you did this for five years, you would wind up with about $4,000 per year. But if you do the equity first option and you do two of These deals for a year, for five years, you would have. I know this sounds crazy, but you would have $138,000 in equity. That is a crazy difference, right? You go from having $10,000 in equity and making four grand a month in cash flow to $138,000 in equity. That's incredible. Just as an example, if you decided to take all that equity, let's just say you liquidate everything and you have $138,000 sitting in your bank account, then you go out and find a deal with just a 10% return on equity. Remember, that's half of what I said in scenario one. We were using a 20% equity number in scenario one. But in scenario two, if you flipped houses or did burrs for five years, then went out and repositioned your portfolio to get a 10% ROE, you'd be earning $14,000 per year. So just as an example, after five years, if you go after return on equity and get an absurdly great deal after five years, you're making four grand a year in cash flow. It's not bad, but it's certainly not $14,000 a year that you would be earning in equity. And this is why I highly recommend to people going after equity first. I am of course, just using simple examples here, but hopefully you can see the idea of focusing on that first half of the equation, building up your equity. Then it's much easier to get cash flow in the long run, which is why I recommend you consider this. So let's turn now to talk about how long this will take. Because if you agree with me and you think this strategy might work for you, you're probably wondering. That sounds great. I want my $5,000 a month in passive income right now. Let's talk about how long it will realistically take for you to achieve something like this. I'm going to again, pick some numbers here. This might not apply to you, but I could at least talk you through how you could do the math for yourself. So I'm going to do another example here. And we are going to talk about someone who makes $60,000 a year. That's below the national average for household income. And we have 10k per year in savings. If you focus on the equity side, what you're going to need to do is 18 deals at a 25% ROI. So basically, if you can flip 18 houses and you do this, you know, every six months, you flip one house 18 times, you're going to have enough equity built up that you're going to be able to reverse engineer that cash flow that I was talking about. But you know, realistically flipping brrrrs is a little bit risky. So I always think that you should pad these numbers a little bit. You're going to miss even the best flippers in the world miss on some flips. So I'm going to say rather than doing it 18 times, I'm going to add a little bit of cushion. Let's just say you have like a 10, 20, let's just call it a 20% miss rate. Let's say that you need to actually do 22 deals because some of them not going to earn you that 25% ROI. But what you need is over that 22 deals. If you average 25%, some of them you might get a 50% return, some of you might get a 70% return. But if you average that 25% ROI on those 22 deals, you are going to have enough money to then reposition your portfolio into cash flowing assets and that's going to get you the five grand a month. So how long is that going to take? I think conservatively it would take you 11 years. Right? If you're going to do two of these a year, basically one at a time because it takes six months. If you do one at a time, it's going to take you 11 years to generate enough capital and to reposition it and go in get that passive income that you're looking for. Now I know that's not as sexy as what some of the people on social media say and say that you can go out and start with no money and you can retire next week, next year. I'm sorry but that's just not true. It's just unrealistic. What I'm trying to share with you today is a realistic actionable timeline that most Americans can do. Remember we're talking about people who are making below the national household income here of 60 grand and with only 10k of savings, that's nothing to sneeze at. But the average in America is about 40K. So we're starting about talking at a below average financial starting point and realistically being able to get five grand a month in passive income and in 11 years. You know, most people work for 45 years to be able to retire. And I'm saying you can make 60 grand a year in passive tax advantaged income in just 11 years. And that's only doing two of these a year. If you're willing to do four of them a year, start one every quarter, you're probably going to have two of them going at a time. So that does take more work, it does take more time. But if you want to be aggressive about this, you could probably do this in five to six years if you're willing to do four of them a year. And that's not absurd. I was talking to a flipper the other day at a meetup and she had done nine flips last year just by herself. She doesn't have a team, she has children, she has other obligations and she did nine flips last year. Now, it's not for everyone. I'm personally never going to do nine flips in a year. But if you want to be aggressive about it, that just shows she might be able to accomplish this in two to three years. So that is really up to you. But I just kind of want to give you some general guidelines of how long you know on the super aggressive two to three years. But even at a conservative rate, if you get good at this, you could probably do this in about 10 or 11 years. So that's my rant about how to build up equity and why. I think you should focus on that first. But of course, at certain point we have to shift strategies. We can't just keep focusing on building equity. We need to turn this into cash flow. If we want $5,000 a month in cash flow. Right? Because these kinds of deals aren't going to be earning the cash flow that we're looking for. We're going to get into that and I'll show you how you can reallocate and reposition your portfolio right after this quick break.

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[Dave Meyer]

Hey everyone, welcome Back to the BiggerPockets podcast. I'm Dave Meyer talking about how you can reverse engineer $5,000 a month in passive income to help you achieve financial freedom before the break. So far what we've talked about today is how you really just need two numbers. You need to know how much equity you have invested and your return on equity. And that is how you reverse engineer your number. I've talked about how I think for most people, especially if you're not starting with a lot of capital, you need to focus on equity first. I should mention that if you are starting with $300,000 in equity or you have $500,000 to invest, this game is a little bit simpler and you can sort of Fast forward to the part that I'm talking about now where you turn your equity into cash flow. But for the people who are starting with more modest amounts of savings, focusing on equity first is really going to help you get to the point where you reposition your portfolio. There are different ways to think about this, but my friend Chad Carson, Coach Carson, you might know of him, he says there are three phases of being a real estate investor. There's sort of the starting phase where you do your first few deals and just figure things out. There's the growth stage, which is what I was just describing, where you are trying to build as much equity as possible because that gives you optionality later in your investing career. And then there's this third phase which is sort of the harvest phase. And that's the part where you take all the equity that you build up as an investor and start positioning it into to properties that generate more cash flow. Because if you remember what I said earlier, certain properties are better for building equity. Certain approaches like the BRRRR and the and flipping are better for building equity. Then there are other things like midterm rentals or rent by the room or just plain old boring cash flowing rentals. Those are better for generating the passive income that we're ultimately trying to get to. So let's just imagine that over, let's call it eight to 10 years of investing, you generate, let's call it $600,000 of equity. That's amazing. Hopefully you are all able to do that. I have seen many people do this with flipping and BRRRR and different types of real estate strategies and I am optimistic that if you go and learn about this and execute on it, you can do this too. By the way, I can't get into everything in this one episode, but if you want to learn more about BRRRR and flipping, we have plenty of other resources on BiggerPockets BiggerPockets.com that you can check out to learn how to actually tactically go about this, these things. But let's just imagine that you succeed and you build up $600,000 in equity here. Now the math becomes really simple, right? Because as we said before, in order to get that 5k per month in passive income, which is equal to $60,000 per year, what we need to do is take our 600k and get a 10% return on equity and that's it. That gets us our 5k a month. So the question becomes after 8 to 10 years of focusing on a buy box where you're looking at Burrs and you're looking at flips and you're looking at value add investing. You move from this period of value add that you were in for eight to 10 years and you need to move now to cash flow. This is how we get to that harvest stage of our investing career. And this requires you to reposition your resources and assets, which may sound hard, it may sound like this complicated thing, but it's really not. All you need to do is take the equity that you have and that might be in different places. If you're just pure flipping, that might just be sitting in a bank account. If you've been doing brrrr investments, you may have some properties that have equity in them. And so all you need to do is take these properties that you've been buying for years to build up equity and just sell them or refinance them and put all of the equity that you have into cash flowing assets. Now you might be able to have found a brrrr that got you this great ROI but is only earning like a 2 or 3% return on equity or cash on cash return. Because it's just like I said, there's trade offs. Certain deals are better at building equity, certain deals are better at cash flow. And all you need to do is basically just shift your buy box, right? So if this was me, I would just sell some of these assets and then just buy new properties with a totally different buy box. And I'll share with you what I think my buy box would be. And I'll just be honest with you, this is kind of what I'm doing in my portfolio right now. I still do look to do value add, but certain properties that I have, I'm trying to take the equity that I've built up and start to be more efficient about building cash flow. And again, that is not a knock on the properties that I've bought. They've made me a lot of money by building tons of equity, but I didn't buy them because they were going to be these long term cash flowing assets for me, me. So I need to get rid of those and start buying those assets that are going to be long term cash flowing assets for me. So first things first, I still want great assets and hopefully this is self evident. But a lot of people who move into this phase, they go on Zillow or they talk to people and they just buy something that produces the highest possible cash on cash return. And that is one option. But for me, the whole point in generating $5,000 a month in Passive income is that I don't want to be working on this all the time. And if you go out and buy something that maybe produces a 15, 20% return on equity, typically this is not always true, but typically those are going to be assets that aren't in great neighborhoods, that have a lot of deferred maintenance and aren't going to be as passive as you probably want them to be. So I do recommend, even though you're sort of at this end game point and you're trying to generate this income, still being disciplined and focusing on finding great assets in great neighborhoods, because yes, this is going to help you build some equity over time, but it's also going to help you with the third criteria, which is to get great rents. And this means that you are going to need to pay a little bit more for these type of properties. And so instead of getting these 20 or 15% return on equity that you can get if you bought a not great house in a not great neighborhood, I think you can realistically target a 8 to 10% return on equity on these deals. I think those types of deals actually exist today in 2025 on market. And so I'm suggesting to you and telling you that I think realistically, if you have this $600,000 in equity that I was talking about earlier, and you can still go out and buy great assets in great neighborhoods with great rents and target this number in 8 to 10% return on equity and you're going to be able to achieve exactly what I'm talking about. That really can be it. But so many investors get stuck in this stage. They either start by focusing on cash flow and they never build up enough of equity to really get their long term cash flow goals, or they go into value add investing and they build up equity and then never actually transition from the value add equity building stage of their investing career to the cash flow stage. And this is why reverse engineering and understanding the equation is so important. Because if you didn't do what we started with up at the top here and know that what we needed to Target was either 500,000 or $600,000 in equity, if you never went through that exercise, you could get stuck doing these value add deals for the rest of your investing career and you'd probably build up a lot of equity, but you would never actually get to your goal, which in our example here today, and I think is an actual realistic goal for so many investors, is to actually get that passive income. So this is the real final stage that you need to focus on and make sure that you're disciplined about once you hit that equity target that you need and you know that you can get this 8 to 10% return on equity, it's time to move from this growth stage of your investing career to the harvesting cash flow stage of your career. And that's how you do it. It really can be that simple. All right, so that's it guys. That is how you reverse engineer $5,000 a month in passive income. I'll just wrap this up here just as a summary. Step one here is understand the equation, right? Remember we talked that you needed two different numbers to understand this equation. It is your total equity and your return on equity. Those are the two things that you need to understand. And if I were you and just getting started, I would figure out what a realistic return on equity in my market is. Again, I think it's 8 to 10%. Then you figure out how much equity you're going to need and that's probably somewhere between $500,000 and $1,000,000. But figure out what's realistic in your market given your own risk tolerance and the amount of time you want to invest. Step two is build equity. Again, if you're starting with millions of dollars, you can skip this phase and you can go straight to the harvest stage. But this is the growth stage that I think most people are going to get hung up on. And this is where you want to maximize equity growth. And you can again do this through different kinds of value add investing. That can be flipping houses, that can be the BRRRR method, that can be, you know, fixing up a short term rental, operating it for a year or two, and then selling it off. But the goal here is to maximize equity growth. Then you get to step three, which is sort of this harvest phase, and you move from value add to cash flow. I personally am sort of indifferent to what kind of deals that you do, but I think targeting 8 to 10% return on equity is both realistic in today's market and will get you to that, that ultimate goal that we've been talking about in this episode of $5,000 a month in passive income. So that's it. Just follow these three steps and that's how you reverse engineer it. Of course there are difficult tactics. There's going to be hard times. You're going to need to find great deals. We have tons of resources for you on biggerpockets. But I just wanted to provide you all with a framework that helps you understand how to actually achieve this goal. It's not just going out and buying random deals or going to achieve some magical number of units that you think will all of a sudden get you to a certain amount of cash flow, you need to focus on these numbers. How do I maximize my equity? How do I maximize return on equity? And you might not need 50 units, you might not need 20 units. You might only need 5 units or 10 units to accomplish that. This is why you need to understand these metrics first before you go out and start buying deals. That's why I recommend doing this reverse engineering. I should mention too, if you have a different goal instead of 5,000, if it's 10,000 or $2,000, you can follow the same exact steps here. I obviously just had to pick a number for our example today, so that's what we got for you guys. Thank you so much for listening to this episode of the BiggerPockets podcast. If you have any questions at all about this, please feel free to reach out to me on Instagram, where I'm Hedata deli, or on biggerpockets.com where I'm active in the direct messages and the forums as well. For BiggerPockets, I'm Dave Meyer. 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 or to sign up for our free newsletter, please visit www.biggerpockets.com.

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