Because of our lofty goal to achieve financial independence by May 18, 2019, we’re focused on cash flow rather than trying to save 25x in our investment accounts. Had we started 10 years ago, 25x saved in 10 years would have been reasonable. But we didn’t, so we’re going with plan B: grow the gap. (Shoutout to Montana Money Adventures!)
To arrive at our passive income goal, we took at look at what $8,000, $80,000, and $800,000 could buy us that would help us accelerate the path to financial independence.
In an effort to make this an apples-to-apples comparison, we focused on the potential ROI in terms of cash-on-cash returns. Consider this a high-level overview of the things we’ve considered investing in. Know that I’ve not considered ARV, creating upside, depreciation, etc.
NOTE: I am not an investing expert…far, far from it. Returns aren’t guaranteed…this is for entertainment only…get help from a qualified professional (not me)…yada, yada, yada.
With an FHA loan and 5% down, one can easily buy a duplex for $160,000 in Pennsylvania. House hacking, for the win!
Based on the 1% rule, let’s assume the mortgage is $152,000 / 4% interest on the loan. The payment is $1,039 a month including principal, interest, and PMI. Let’s say you cash flow about $500 per month, which isn’t unreasonable as we’ve met some REI in this area who see $300 cash flow per unit. Five duplexes and we’d be FI!
Now, we’d have to set aside money for repairs and whatnot, but $500 isn’t bad—that should cover electricity, water/sewer, and garbage. With $8,000, we might not have any living expenses, which frees up cash for investing in additional properties. GuyOnFIRE is a house hacking master, so check out his story.
$8,000 = about $6,000/year
Cash-on-cash return for 5% down = (6000/8000) * 100 = 75%
With 20% down instead of 5%, the cash-on-cash return is lower (obvi).
Cash-on-cash return for 20% down = (9000/32000) * 100 = 28.13%
With $80,000 down and owner financing, we could do well with a manufactured home park.
Many Baby Boomers with MHPs might be in a sticky situation if their kiddos aren’t interested in becoming landlords, so there could be some deals here in PA.
Let’s say we find a park and we decide to take on debt (!!!). We put 20% down on a park valued at $400,000. Lot rent in some parts of Lancaster County is HIGH. We’ll go with something a little more reasonable to assess this deal. Let’s say it’s a park with 15 lots to rent with lot rent at $400. Expenses, we’ll say 40%, which leaves us with $2,600 before debt service.
A $320,000 commercial loan at 5% interest and 25 year amortization means we’ll have a P & I payment of about $1,870 or an interest-only payment of $1,333. That leaves us with a net profit of around $1,300 a month or $15,000 a year. Two MHPs and we’d be FI!
$80,000 = $15,000/year
Cash-on-cash return for 20% down = (15000/80000) * 100 = 18.75%
If multiple exclamation points in the previous section didn’t make it obvious, know that the thought of debt makes me cringe a little. Same with Garrett. We just eliminated all of our debt in the spring, so do we really, really, REALLY want real estate? We’re not pushing forward on the REI front until 2018 when we’ve had a little breathing room to consider next steps.
In seeking other avenues to passive income, I’ve stumbled across dividend investing. Some folks out there blog about the dividend-generating portfolios they’re working on, which sounds like a lot of work for 4%. So I sought out a lazy approach to dividend investing.
Let’s say we had $800,000 invested in VYM. At a yield of about 3%, we’d see about $24,000 each year of passive income, which is pretty close to the $30k goal.
The tradeoff is that we have to accumulate this kind of wealth to see such dividends, which we don’t have today. Our real investment is trying to make this happen is time.
Dividends have a much lower cash-on-cash return, but there aren’t any septic systems to windows to replace, so maybe it’s worth it…?
$800,000 = about $24,000/year
Cash-on-cash return = (24000/800000) * 100 = 3%
Cash-on-Cash Return Calculator
After hours and hours of conversation about investing for the purposes of passive income, we took a big step back to look at the big picture and to see if there were opportunities to make our money go farther.
What’s the best source of passive income for the least amount of stress?
How much passive income do we need/want ($30k annually) and how much money do we need/want to invest to make that happen?
Is real estate ever truly passive?
We put together this super crude cash-on-cash return calculator in Google Sheets. Initially, we put together this investment calculator to assess new projects we’re launching this summer, but we found it was also helpful for a birds-eye view of everything we’ve discussed (REI included). Check it out and let me know what you think.
UPDATE: We chose dividend investing for financial independence!