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- [00:00]
A
What if one simple number could tell you exactly how many rentals you need to walk away from for your 9 to 5 and when that day could be circled on your calendar?
- [00:10]
B
We're about to play the rookie freedom number game. And by the end of this episode, you'll know your personal freedom number and the property roadmap to hit it step by step.
- [00:25]
A
This is the Real Estate Rookie Podcast. I'm Ashley Kerr.
- [00:28]
B
And I'm Tony J. Robinson. And with that, I'm. Let's get into these steps you need to follow to find and execute on your freedom number. All right, so we spent most of this episode talking through this seven step journey, but let's focus a little more attention on your actual finish line. So one of the things that you'll start to notice as your portfolio grows is that your equity starts to grow as well. And different investors have different plans, ideas, beliefs when it comes to equity. Some want to leverage it, some want to protect it. And it's a very personal choice that every investor will have to make for themselves. But equity is capital that can be used to help you keep growing your portfolio if you choose to do it that way. And I think the goal for us is to just quickly talk through planning for your equity and how you can use it to scale your portfolio to get to your freedom number faster. So step number one is to define your baseline. What are. What is the amount of money you need to keep the lights on for your life, for your lifestyle? You know, think housing, food, transportation, insurance, just the basics to necessitate and sustain your current lifestyle.
- [01:42]
A
I think one of the really easy ways to do this because, like, you can do back of napkin math and just like, okay, my mortgage is this. My car payment is this, you know, food. I probably spend this amount every month, but is actually going through your bank statement and your credit card statement. Because if you have never done this, I think you'll be very surprised where your money is actually going. Like those $99 subscriptions from Apple from your streaming device, they really add up quickly. So I think actually going through line item by line item, there's a bunch of apps too, that you can use where you can actually connect your accounts. And then it will say like, oh, okay, you know, Wegmans, or, you know, whatever your grocery store is, that is food. So that goes into the grocery bucket. And then it will actually, you know, allocate those for you. So you can look each month and say, okay, I've spent $800 on groceries. I've spent $500 on dining out, getting one of those apps, the one I use as Monarch Money. But you can get that to kind of help build out that process of really understanding where your money goes. Because you could take those bills and add them up, but all that discretionary income really adds up too.
- [02:58]
B
Yeah. Ash, I, I love the idea of, of going through line item by line item. I've. I do that probably a couple times a year both like in our, in our business and in our personal life. Just because like it's good to have that exercise of understand like, am I actually overspending in certain places that I don't need to. Like I said, I've mentioned this before, but like I just did this again last actually a couple of weeks ago where I went through all of our business transactions specifically looking at software charges. And like we were just like we had a bunch of different software that like we didn't even need anymore. Again, we have people that were, you know, in the software that we weren't even working with anymore. So it's good both on a business and a personal level. Export at least like the last 90 days. I feel like that gives you a good snapshot of both regularly recurring charges and then some of those one off expenses. But if you look at the last 90 days and you just go boom, boom, boom, boom, boom. I found that to be a super easy way to do it. And like my little hack here using a tool like Monarch Money, super cool. I don't know why, in my brain it just makes more sense for me to just like use Excel. But when I do it in Excel, I'll export all my statements and I'll sort them by like the vendor or like who I'm paying that money to. That way it's super easy to categorize all of those by vendor at the same time. Don't do it by date. I used to do it that way. Then I found myself like relabeling the same thing over and over again, sort of by vendor. Copy and paste all the way down and you can get through it a lot faster.
- [04:22]
A
Yeah, the app is way easier. You like things automatic. You want to have to export, import, sort.
- [04:39]
B
Come on, you're supposed to be the spreadsheet expert over here, you know, and you're, you're, you're telling people to, to automate. But no, yeah, there's probably tools that do it a lot. You could probably even do like chat GPT now.
- [04:49]
A
But the Excel is free, I will say so. Excel is free.
- [04:53]
B
So I mean someone could probably even Use like, like some sort of, you know, chat, GPT or cloud or Gemini or whatever to also help with this now, too. Those tools are getting. Getting pretty smart there. And I don't think the goal as you guys go through this exercise is to, you know, feel forced into cutting a lot of expenses. You know, we're not saying that you need to go like Dave Ramsey nuclear, but just understand, like, hey, what is a reasonable baseline for me in my life to sustain what we currently have? Because we also don't want this freedom number to be a life where it's like you're eating nothing but, you know, what does Abraham say? Beans and rice. You know, rice and beans. Like, we want you to still be able to go out and have a date night with your spouse. We want you to be able to go on vacation. We want you to be able to do all the things that your life currently allows you to do. Otherwise, it's not really freedom, you know, you're just like, barely getting by. But that's the first step is to understand what your current baseline number is. All right? Step number two is to add your lifestyle cushion. And the reason that we say this is that we want you to add. Call it like a 20%, you know, like, life upgrade buffer, because again, the first step was just making sure that you're maintaining all the basic things, but that cushion is for all the other things that you still want your life to be able to do, right? So we talked about vacations, your kids, sports, you know, maybe you like a nice truck, you know, whatever it may be, but you want to add some additional cushion on top of that baseline.
- [06:11]
A
So with this goes, I. I just kind of like started learning about this on social media. And so I've been looking into it more and more, and there's like this trend this summer called revenge saving. And so most people say, like most people used to do revenge spending where they go through a breakup and they buy themselves something to feel better or, you know, they not something bad would happen and they'd splurge on a vacation or whatever. So now this trend is revenge saving. And it. Part of the concept is after COVID 19, so many people splurged on things, increased their lifestyle to make up for lost time, I guess, of COVID or whatever. But now people are revenge saving. And part of the concept is also, like, when you do feel that pain of losing your job and not having the money or something else financially detrimental happening to you, revenge saving is when you don't want that feeling again. So you're going to save so that you have that buffer. So if something else happened to you or the same thing happened to you, again, you would have that savings. So that whole concept of just revenge saving, I think fits into this so well as to be when you're starting to learn how to invest or to reach this financial independence. You do need to know how to save your money, and you do need to have reserves and life saving set aside.
- [07:49]
B
Ash, you know, I couldn't agree with you more. And I think personal finance really comes down to two different levers. You have offense and you have defense. Offense is your ability to earn. Defense is your ability to save. And if you can aggressively attack both of those, that's when you really start to put yourself in a position to get to this freedom number even faster. So I think the more you can focus on both of those things simultaneously. Like, I feel like Dave Ramsey is all about defense. You know, she's like, defense, defense, defense, defense wins championships, you know, and, you know, I talk like, maybe Grant Cardone is the opposite, where he's like, just focus on making more money, you know, make more money, make more. But if you can blend both of those, you tend to maybe land on a more sustainable approach that actually produces more consistent results over the long run. So both of those things are super important.
- [08:38]
A
Yeah, and I think that's like, you want to have that money to enjoy your life, too. Know what your lifestyle cost you, but also be aware of how much you need to save every month. What is that cushion that makes you comfortable so you can do your revenge saving. But yeah, so you should have both of those figured out as to how much do you, you know, for your discretionary income, how much do you need for your lifestyle, but also for that saving for retirement or just to put into a savings account, whatever that may be, make sure you're adding that into your dollar amount of how much you need every single month. The last thing I want to say towards this is like this idea of saving, budgeting, or figuring out your number and reaching that financial independence, you know, do you remember that TV show was like, on tlc and it was like they would interview people who are like, extreme budgeters.
- [09:35]
B
Wait, I think. Wait is I feel like I've seen one of the clips on Social where it was a guy at the grocery store and he had, like, used a bunch of coupons and it was supposed to be like 97 cents was his total, and it came out to like a dollar. Oh, four. And he was upset that it was Four pennies off. I think it might have come from that show.
- [09:52]
A
Okay, no, that's extreme couponing. That's a different one, but same concept. One would go to people's houses and they would show how like they didn't use toilet paper by paper towels because they had this like one rag that they continuously rewashed to save money. How they would, you know, just like they would take one minute showers because their water bill would decrease that much by not running, you know, a five minute shower and stuff. Just like these extreme things. And so I want to make that this episode and that your journey in life. It shouldn't be about depriving yourself, it should be about having control over your money. And I want to make that clear that this isn't about, oh, we're going to turn you guys into extreme budgeters and you have to live off rice and beans like Tony said, or my favorite ramen or ramen noodles, however you prefer to say it. But just remember that this isn't about depriving yourself. This is about having control over your money.
- [10:52]
B
By the way, the show is called Extreme Cheapskates for anyone that's, that's interested. I looked it up while Ash was talking and it's streaming on HBO Max. So if you want some motivation, you guys can find it there.
- [11:03]
A
And honestly, it will motivate you because you will be feel really guilty for things you said.
- [11:09]
B
Now before we keep moving. I just want to give like a, a baseline, right? Let's say that, that you're in step one. You identify your baseline to be, call it 3,800 bucks a month. And that's between your mortgage, utilities, food, insurance, discretionary spending, you're at $3,800 per month as your baseline. That 25% cushion that we talked about in step two, that would push you up to 4,750 per month. So that gives you an extra 25% to cover those other things that you want to do. So 4750 is now your freedom number. So that is how you back into what number do I need to plan for now the rest of this episode we're going to more so talk about how to get you to that number, but that is the baseline that you want to shoot for. Now, Ash, let me ask you from like a, a personal finance perspective, are there any other things that Ricky should think about when trying to plan this freedom number?
- [12:02]
A
Yeah, I think maybe just like taxes. Like do you have, like, are you self employed that you know you have to pay? You know, you Have a business or something where you're making estimated tax payments, make sure that's included in that. Or if you usually have a tax bill at the end of the year, you know, make sure that's included. Like literally think of everything that can come up. Your kid's annual dentist appointment or every six months or, you know, what is that? Like, think of those fees that maybe only come up once a year or a couple times a year that need to be included in that amount too. And then just retirement. Like I did mention that briefly, but like how much do you need to save for retirement? Do you have a college savings fund for your kids that you're contributing to? So it is difficult to think of everything and account for it. But I think having that nice buffer, Tony said, were some of those things that you might miss out on. Weddings are so expensive. Not to have a wedding, but to attend a wedding. How many weddings do you expect to attend a year? That could be a couple thousand dollars attending weddings.
- [13:14]
B
But I think that takes them to step three ash, which is to just run a quick sanity check on the freedom number that you landed on. I think a good rule of thumb is that it should be somewhere close to what your current after tax income is. And let's say that your freedom number is, again, let's use 4750. But your after tax income, like your take home pay is 3750. Well, that means you've been subsidizing $1,000 per month using some form of debt most likely, right? So if you notice there's a big swing between what your freedom number is and what your current actual pay is, that's probably not a sustainable lifestyle, right? So you want to make sure that you, you kind of bring those numbers back down somewhere. You got to trim the fat somewhere. But if you're in line, right, or maybe you're even under what your current take home pay is, and maybe you're just like someone who saves really aggressively already then, then you're in a really good spot. But I think what I would encourage a lot of you guys to do is to, to get this number visually present somewhere in your life. I know, I know investors who have little cards on their mirror so when they wake up every morning and they're brushing their teeth, they see their goals right there as they're brushing their teeth. So maybe that's a good place for you to slap your, your freedom number. Every morning, every night as you're brushing your teeth, you're staring, staring at that number and it's staring right back at you to recenter yourself on what's important. Because guys, I will tell you right now, your ability to be successful as a real estate investor will not always come down to skill. It will not always come down to intellect. More often than not, what it comes down to is your ability to stay consistent over a long period of time. And I think that's what most people misunderstand. And the stronger emotional motivation you can have, the easier it becomes to really stay motivated.
- [15:01]
C
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- [16:39]
B
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- [17:19]
A
So the next thing is to choose your strategy and you want to do this before you actually figure out how much you need from each door and decide on what kind of door you're actually buying. So there's many different real estate investing strategies out there. There's long term rentals, rents by the room, midterm rentals. So you have to figure out, in my opinion, where do you have the most opportunity. So I know some people say like, oh, you want to leave your nine to five, like find something you enjoy, like will you love designing homes and you should flip houses. I think it's actually the opposite. I think you should do even if it's boring, you should do what is going to be the best opportunity and where you have an advantage. So for example, for me I knew investor that had long term rentals, I was working as a property manager so I already had knowledge of how to manage a long term rental, what rents were in that market. I knew, I knew a lot and that was an advantage to me. And that's where I built my foundation with long term rentals. So to choose your strategy I would look at do you have any opportunities or any advantages, whether that be in a market because maybe you lived there before so you know neighborhood to neighborhood, you went to college there. Maybe you have somebody that lives in a market that you've analyzed and it's pretty good and you know you have that boots on the ground person to actually walk properties for you, things like that. And then for your strategy, do you have an advantage as to you have an uncle that does midterm rentals and he's willing to mentor you and help you through it. Or do you live in a market that there really is a need for rent by the room and co living because housing has just got so expensive that people can afford to rent to their own place. So Take a look at what those opportunities and advantages might be that you already have.
- [19:11]
B
Yeah, couldn't agree more. I think the opportunities you have are a great kind of filter. I think some other things to assess are how much capital do you have? Because different strategies require different amounts of capital. Buying a, a short term rental in a popular vacation destination market is probably more expensive than buying a long term rental in Davenport, Iowa. Different purchase prices, different costs to, to get those properties quote, unquote rent ready, different down payment options, like everything kind of shifts depending on how much you know what market you're in, what strategy you're taking. So ask yourself, what access to capital do you have? And I guess not even just capital, but what is your overall purchasing power? So how much capital do you have to cover down payments and closing costs and set up a rehab? And then also what kind of loan can you get approved for? You know, can you get approved for a million dollar loan which opens you up to virtually every market in the United States, or can you get approved for a $100,000 loan which maybe limits your options a little bit? So available capital, purchasing power. I think the first thing to consider, the second decision filter on which strategy you should choose is your available time and energy. Again, different strategies require different amounts of time, but depending on the person, they also require different amounts of energy. I would be a terrible traditional long term rental manager. Right? Like it, it just doesn't give me the excitement in a way that launching a new short term rental does. So for me, the energy required to be a good long term rental landlord is a lot more than what it takes for me to be a good short term rental landlord. And that's just me personally, right. Flipping. Actually, I don't, I don't mind flipping as much. For someone else, flipping might be the biggest energy drain they could think of. So as you go through these different strategies and how much available time do you have to commit to them and then from an energy perspective, does it drain you? Right. Does the idea of doing it make you want to roll over and die or does it create energy? Right. And make you want to do more of those things?
- [21:22]
A
Along those lines is you should also completely understand what your role and responsibilities are for that strategy. What will you actually be doing? So you know, for short term rental hosts, you're in the hospitality biz, baby. Like it is way different than a long term rental. And so I having an understanding of like Tony said, your time commitment that you're going to be putting in and what actual job description that is going to be. And if there is the option to outsource the things that you don't like or don't want to do and looking at that and seeing if the numbers still work with hiring the help that you would need to actually do the job. So that timepiece and what you're actually going to be doing, is it something that you could actually handle? Like, I could never be a wholesaler because that involves a lot of talking on the phone or talking to people at, you know, face to face and like a lot of personal interaction to get these deals done. And I am, you know, I'm terrified of just answering the phone if I don't know who it is and having a awkward silence or awkward conversation. So, like, I could never wholesale because of that piece that I am just like not comfortable or good at even is small talk with people to kind of build that rapport, that relationship.
- [22:42]
B
So those are the first two decision filters and there's two more that I want to cover. So we already talked about capital, we talked about time and energy as the second point, the third. And this kind of ties into what Ashley said, but it's just desire and skill. So, like, do you think you'll actually be good at this or do you have the capacity to, to get good at this? And if, if you can honestly answer no to both of those questions, it doesn't matter how much cash flow that strategy will produce. If you don't have the actual skill set or the capacity to build the skillset to get good at it, you'll never do well in that situation anyway. I think we saw a lot of that in the short term rental industry where a lot of folks saw the potential, didn't necessarily have the skill set or the ability to develop the skill set to do it well. And they end up buying deals that were mismanaged, they bought deals they shouldn't have purchased, and it didn't work out the way that they wanted it to. So you've got to ask yourself, desire and skill, do you have it?
- [23:39]
A
And I think too like understanding that strategies, markets, laws and regulations can shift. Because when I started in 2018 with my first little rinky dink Airbnb arbitrage, it was very different time to be an Airbnb host. It was very, very low expectations. We didn't have to fluff the pillows, offer every kind of coffee flavor available, do all these little unique touches, you know, have fresh. We do one property now we have fresh flowers upon arrival. Like these little things like you, you could basically Respond short little yes or nos. We didn't have automated messages set up with like a guidebook and all these things. And as time has shifted, like the expectations of being an Airbnb host has drastically changed. So think about that as you go into a strategy. Are there things that could change that you would not have time for or be able to conform to? And I know it's hard to predict, but like, look at other strategies and things that have changed over the years, like just tenant landlord laws. Being able to understand, like, do you have the capabilities to pivot and change if your state were to change laws and things like that. But a lot of those go with short term rentals, midterm rentals, as rules, laws and regulations change too.
- [25:07]
B
And I think that's a great segue into the fourth decision filter, which is your individual risk tolerance. Different strategies carry different levels of risk. And which risk are you willing to accept? Like Ashley said, if you buy, you know, a 100 unit apartment complex, you've got 100 different tenants that you've signed leases with. You're subject to all the local landlord tenant laws. And depending on what location you're buying in, maybe those laws are swinging in your favor as a landlord. Maybe those also are swinging out of your favor as a landlord. If you choose to flip. If you're flipping in a high cost of living area, there's a lot of capital you have to put out to be able to get the return you're looking for, right? And are you willing to accept that risk? Obviously, with short terms, there's a regulatory risk. So every strategy carries some form of risk. Like if there was no risk, there'd be no reward in real estate investing. So no strategy is risk free. But which strategy gives you risk that you're willing to accept? So those are the four things to consider again. Capital, time and energy, desire and skill, and your overall risk tolerance. And as you go through each of those, apply them against those filters to see which one actually aligns best with your specific profile. I think the last thing I'll say, Ash, and we've seen this a lot with guests on this podcast, don't be afraid to mix and match or combine these strategies as well. You can house hack, say you've got limited capital. You can house hack, call it a triplex. You live in one unit, you do the second unit where you rent by the room, and maybe the third unit, you do a midterm rental. And now you've got a mix of all these different strategies. You got them for a Very low, low cost. Because it's your primary residence, you're reducing your expenses. Now you're able to save more money for your next deal. And, and it all just kind of starts to snowball together. And we've seen lots of folks combine.
- [27:04]
A
Those strategies and you renovate it as a live and flip too, and then sell it for three gain and two years.
- [27:11]
B
So there's so many different ways you can go about it. So don't feel like you've got to choose just one. If you, if you find a deal that allows you to tackle multiple, that's a good next step. All right, step number five is to pick a cash flow target per property. Now the reason step five comes after step four, right? The reason you have to pick your cash flow target per property after you choose your strategy is because the strategy you choose will help dictate your cash flow target per deal. So I don't know, let's say that you have a traditional long term rental. In today's environment, maybe you should be happy with $200 in that cash flow per door. If you're doing rents by the room, maybe Your goal is $200 in cash flow per room, right? So if you've got a three bedroom, maybe it's 600 bucks. If you've got a midterm or a short term rental, maybe your goal is $1,000 per door. So different strategies and different markets will give different targets you should shoot for. But you've got to identify, okay, what is my kind of buy box, what is the baseline that I'm looking for on a per deal basis. So then we can back into the other parts of this equation. But again, let's go back to our example. The 4750 is your freedom number. And let's say that your goal is, or the strategy that you choose is traditional long term rentals. And let's assume that for your specific market you can get 275 a door. So 275 per door is your target for your strategy in your market. Your freedom number is 4750. 4750 divided by 275 gives us 18 doors. So now you know, all I need to do is get 18 doors that at minimum meet my cash flow target and I've been able to achieve my freedom number. So you guys can see how it all comes together to really back you into a singular number that you need to focus on.
- [29:05]
A
And so when you're finding this number this to 75 per door, make sure you're being conservative with it that you're not maxing out. So if you're going to try and say like, well, I want less doors, I'm going to aim for maybe $500 per door, then I need less doors. If that is very, very, very hard to achieve in your market where you're not going to be putting any more cash down to have a lower mortgage payment every month because you put more cash into the deal, that is just going to stall your acquisitions. So make sure that the cash flow number is reasonable and you can actually find a deal. Because yes, I'd love to say I only going to buy properties that have thousand dollar cash flow with putting 20% down in my market right now, that actually would be pretty difficult to do to find that. And I probably will. It will take me so much longer to actually reach my goal because it is harder to actually find a deal that does that.
- [30:08]
B
That's a great point, Ash. You definitely want to make sure that these numbers are rooted in reality. And I think you'll, you'll be able to understand what a good cash flow target per door is once you start analyzing deals that meet your strategy within your specific market. And maybe if you do that analysis, and to Ashley's point, you're like, man, I actually can't get that number here. Or maybe instead of it being 18 doors, it's got to be 30 doors, right? You got to double that number. Then you've got options. Either go back and pick a different strategy within that market or maybe go to a different market where you can get better margins. That's why the, the whole plan all, all kind of works together as you do this. But that, that's. Step number five is to pick your cash flow target per property. Step number six is to set your acquisition pace. Right? So how quickly do you want to do this? And maybe a more aggressive time frame is five years. Maybe a more balanced approach is, let's call it 10 years and maybe a more lifestyle approach is 15. I feel like we've met a lot of folks in the podcast, Ashley, who within that 10 year time frame have been able to replace their W2 income. We just interviewed Matt Krueger and I think he said it took him seven years to be able to replace his income. We interviewed Laura Sides, who I think within three years, between flipping and her rentals, she was able to replace her income as a teacher. So we've interviewed folks who have done it quickly, we've interviewed folks who have done it longer. Dion McNeely, another prime example Someone who did within like a decade. Coach Carson did it within within a decade. So there are lots of folks who, if you just kind of consistently plug away, doing it within 10 years is actually a very reasonable goal to have. But your ability to scale really comes down to three skills. And Ash and I will break down each of these one, one by one. But skill number one, and we talked about this earlier, but it's your personal savings rate. The wider the gap between your income and your lifestyle spending, the quicker you can reload money for down payments and rehabs and acquiring that next deal. But if all of your income is going towards just sustaining your lifestyle, where are you going to get the money to buy your next deal? So you've got to be able to increase the amount of money you're saving. And again, like I said earlier, that comes from either playing better offense, making more at your job, getting a side hustle, or playing better defense, decreasing your expenses.
- [32:35]
A
One thing with this too is to how you're going to acquire the properties is you need to be comfortable with your loan to value. So if you do find, you know that you're able to get low money down on these deals, things like that, make sure that you're still going to be able to sleep at night and not be stressed because all of a sudden you have all this debt or you have these, you know, high mortgage payments, things like that, make sure that it's still within how comfortable you are. So maybe part of your plan is going to be to save more, to put 20% down, even if you could get the deal for, you know, 10% with using private money or whatever it may be. So make sure you are comfortable on whatever level you decide to how you're going to acquire these properties. Because you can acquire properties really, really fast by using loan money. But is that, are you going to be comfortable with that, that you have no equity in these properties even though they're cash flowing? But what if you have a vacancy or you have a bunch of vacancies and all of a sudden you can't make these mortgage payments because you are so leveraged and you don't have any equity to tap into, you can't sell them because you would actually have to bring money to closing. So as you're putting together your acquisition plan, make sure you take that into an account what your comfortable level is.
- [33:59]
B
All right, Your second option is your portfolio cash flow. So the goal here is that you reinvest every dollar of net cash flow from your existing doors and use that as fuel for your next acquisition, not money that you get to spend. And again, this is a very consistent theme we've heard from our own lives, from folks we've interviewed on the podcast, that those early days of your portfolio are not for discretionary spending. It's for helping you buy that next deal. And the cool part is that this starts to snowball. You're going to, you're going to use a lot of energy to try and get that first deal. It's almost like sending a rocket into space. Like what? I'm going to make up a number here, but it's directionally correct. But rockets use like 80% of their fuel just to get out of Earth's atmosphere. That's where they burn the majority of their fuel. Once they've made it out of the atmosphere, then it's, you know, there's no gravity. You're flowing, you're going, everything's moving smoothly. And real estate investing is much the same way. That first deal, it's going to use up 80% of your energy, of your, of your reserves, of everything you have. Once you get that first deal now things start to snowball. The second deal becomes easier. So using the, the proceeds, the net cash flow from your first deal, tell by your second deal and then your deals, number one and two, those proceeds to buy your third deal, you're saving more money. You're compounding all these things together. You start to acquire properties faster. So number two, using your portfolio's cash flow. And number three, and this is a skill that Ash and I both leveraged to build our portfolios, but it's using other people's money. This is where you create the ability to raise capital. Private lenders, JV deals, whatever it may be. That way you're no longer capped by your own wallet, but you're able to tap into the resources of folks that you know, who know like and trust you to make it a win win, where they're getting a good return on their investment, you're able to continue to build your portfolio and get you close to your freedom number. Now, one thing I will say, if you are raising money from other folks, if you're doing it as like, private money, where they're just kind of like funding your rehabs and, you know, you're paying it back off when it's done, that doesn't really change the math. But say you're doing equity deals where, you know, say, me and Ashley buy a deal together, we're 50, 50 partners. Now. I need to, you know, that 275 number I had on my cash flow target per door, well, that number gets cut in half. So instead of me needing 18, now I need an extra deal. Right. To get to that same number. So just be cognizant of how partnerships and equity sharing impacts that freedom number that we talked about earlier.
- [36:27]
A
Okay, then step seven is to make sure you account for vacancy. And really there should be several things that you're accounting for that isn't a fixed number. These things can vary, so we call them your variable expenses over time. So having that vacancy buffer of 10% is kind of a rule of thumb. And then your cap X expenses. So these are capital expenditures for like big ticket items that actually add value most often are depreciated on your tax return. And these are not repairs and maintenance, but things that kind of add value to the property or increase the longevity of your property, like putting on a new roof, siding and replacing your H vac system. So these expenses hopefully do not come up every year for you, but you need to save for them when the time comes. So you want to make sure it's accounted for. So you could use 5 to 10% each month to actually that's your number that you know that in the future you will have to use and you're just going to take that out of your cash flow every month. I think that when you're trying to determine your percentage for Capex, you should look at how old the property is. How old are different things in the property. If it's a very old property and it's had, you know, a septic that's been there for 20 years, it's had an H vaccine system that's 10 years. Hot water tanks, my God, what do they last these days? Five years, you know, like so looking at how old the things are in your property, you want to have a higher percentage that you're accounting for in your numbers. If you're getting a brand new property or maybe it's recently had all new mechanics put into it, then you could do this lower. So you want to make sure that that's per door that you're accounting for these percentages.
- [38:22]
B
So those are the seven steps to actually use your real estate portfolio to help you get to your freedom number. What we're going to cover next are the different exit strategies as you start to build your portfolio and how they impact you getting to your freedom number faster or slower. First, we'll take a final break to hear a word from today's show sponsors.
- [38:41]
C
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- [39:40]
D
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C
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- [41:48]
D
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- [42:34]
B
So what we're going to cover are seven steps you need to follow to figure out the exact number of units you need to help you get to your freedom number. So just really quickly a few ways you can leverage the equity that's in your portfolio. There's the cash out refinance where you're keeping the door. You get a tax free chunk of cash, but you're swapping out whatever your original mortgage was for this new mortgage. Maybe that's great if you locked in an 8% mortgage and you're refinancing down to a 6 maybe not as great if you locked into 3 and you're refinancing up to an 8. Right. So depending on where you started, cash out refinances could be good.
- [43:09]
A
Tony. I actually looked at this in one of my properties that I have a lot of equity in that I bought in 2018, I think it was, and I had purchased it at X amount or whatever and amortized it over 15 years. And you know, the mortgage has been paid down slowly. I looked at it though. If I went and refinance and pulled out a cash out refinance, I could pull out a good chunk of money, restart my amortization over another 15 years, and my mortgage payment would stay exactly the same. Yes, I'd be paying it longer, but that would give me the valuability to not affect what my cash flow is right now. And I could pull out, I think it was like another $50,000. I could pull out right now and my mortgage payment would stay the same. It was just resetting that amortization. And that's like, I feel like a, a car salesman now. They say like, oh, your payment only got $1, if you add this warranty in, but yet you're like having to add on five more payments. But I'm just saying, like as a real estate investor, like you're pulling that cash out, you can use that $50,000 for another investment or something like that, not affecting the cash flow that's coming in from that property and it will still be paid off over time. You're just extending. So it depends on what you would rather. Would you rather the property be paid off sooner or tap into the equity and use it now.
- [44:35]
B
And that's the benefit of the cash out refinance, right, Is that it gives you the ability to use some of that equity today. The second option to tap into your Equity is a 1031 exchange. So a 1031 exchange for folks that aren't familiar with it, is basically the IRS tax code, allows you to sell a piece of real estate and defer any capital gains tax. If you use all of those proceeds to buy another piece of real estate. So you could do a 1031 exchange where in as the situation maybe she sells and she gets, you know, call it 75k that she uses as a down payment on a bigger property, that maybe cash flows even more than the property she has right now. Then that's another way to tap into your equity. A third way is just to straight up sell the property. You know, whatever money you have, just sell it you get a check. Typically you do have to pay taxes on that. So I think that's maybe the downside there. And then the fourth option would be maybe a HELOC or some sort of portfolio line of credit. You know, if you've got multiple deals with, with equity as well. And this, this works almost like a big credit card, right? Where your properties are the collateral and you use it, then you pay it down, you use it, you pay it down. So those are all the different levers you can start to look at as your portfolio grows to free up equity, to then buy more deals, which then gets you to your freedom number faster. Now going back to the debate that we kind of started earlier of is that the right choice, does it make more sense for me to deleverage and live debt free or does it make more sense for me to leverage and accelerate my growth? Truth is, I don't know. It's a very personal choice and it's a personal decision based on your philosophy, based on your risk profile to, based on where you're at in your life and what do you value more. If you're a younger single person, then yeah, maybe scaling faster and taking on a little bit more leverage makes more sense. If you're someone who's closer to retirement than they are to college graduation, then maybe deleveraging and paying off these deals makes more sense. But just know those are the two different paths you can take to help you get to your freedom number is either hey, let me just pay everything off and I've got eight paid off rentals that give me the 4,750amonth, I'm solid. Or maybe I've got 40 rentals, right that are leveraged at, you know, 90%. But hey, I'm at my freedom number there as well. Either path works fine.
- [46:59]
A
I actually had it. Somebody reach out to me the other day that was an investor in the area and he's looking to sell his portfolio or whatever but like he is very, very conscious of like how he's going to do it because he wants to like keep some of them for a little bit and you know he's going to do a 1031 exchange and things like that. But he and offer some seller financing because he has had them all paid off and he chose to have a smaller portfolio and work to pay those ones off and then just continue to have that cash flow that's coming in. I think I'm like a mix of it. Like I've always made sure I have a couple properties that are paid off. But I'm not opposed of doing a cash out refinance. I have three rental properties that have lines of credit on them to tap into that equity that I used to acquire a lot of deals or to pay for the rehabs and things. So you can also mix it where it's not set in stone to either you're working towards paying off your property or you're just going to continue to re leverage re leverage to grow your property and expand. And I think it also depends on really the numbers if you're going to do a cash out refinance. Does that is that cash more valuable in another deal where it's going to make you more money in the long run?
- [48:17]
B
Well, Ricky's those are the steps that we'd encourage you to follow to find your freedom number Now, I know Ash and I, you know, it's what, been 40 minutes? We kind of blew through a lot of these topics, but the goal here was to give you the overview. We've got a lot of other content on the podcast youtuber if you want to listen, that goes in depth on some of the strategies that we talked about, but at a high level. I think the goal and purpose of today's episode is to force you to think a little bit more strategically about your plan as a real estate investor. And if you can start with the end in mind, it becomes easier to create a plan that works and actually gets you closer towards that goal because we've seen a lot of investors who spin their wheels, a lot of activity, but they're not actually close to the goal that they have. So start with the end in mind, then work backwards and we hope this episode helps get you there.
- [49:02]
A
Thank you guys so much for joining us today. I'm Ashley and he is Tony and make sure you're following us at Bigger Pockets Rookie on Instagram. Thanks so much for watching. We'll see you guys next time.