There is a physician I know, Dr. C, who is considered a very savvy real estate investor. Everyone thinks he lives the good life, and he’s at the age that most doctors start thinking about retirement. In one of our conversations, he informed me that he had technically retired years ago but had continued working simply because he enjoyed it. What doctor wouldn’t want that? So of course I asked how he accomplished this.
He readily admitted that he’s not particularly savvy or smart when it comes to investing. He just listened to the advice of a mentor: "Buy one real estate investment property a year."
I tried to nail down some specifics (ie. condo, house, or apartment building). He simply stated, “It doesn’t really matter, whatever you can reasonably afford, just do it.”
So I went home to see what that might look like and tried to model it out on paper.
Here’s my disclaimer: this is my N=1, my one simplified example.
This might be a good time to quickly address the oft-debated
simple vs. complex model
argument. I think the answer is that no one can definitively state which model truly has a better predictive value. This quote by a well-known British statistician, George Box, sums it up perfectly, "All models are wrong, but some are useful."
I believe this pertains to both real estate and stock market models. However, what we do know is that
simpler models are easier to apply and to take action on
, mostly because you feel you can replicate it.
With that in mind, here is what it might look like if you tried to buy a rental property every
year for 10 years. Here are the
of this model:
- Each property purchased is a single family home.
- The purchase price stays constant at $100,000 (to keep the numbers round).
- Each year requires a 30% initial investment ($30,000 in this case).
- The home loan starts at $70,000 (= $100,000 purchase price - $30,000 investment)
- The max # of home loans at any one time is four. According to Fannie Mae / Freddie Mac, you can possibly have up to 10 residential home loans, but after four it becomes a bit more difficult to get additional loans, so I decided to keep it at four.
- Cash flow per property is $400 a month - vacancy, property management, and future maintenance have already been taken into account. This number was chosen because this is very attainable, as proven by my own rental property.
- All the cash flow throughout the year is saved and goes back into paying down the home loans at the end of the year.
- Once a property is paid off, the property cash flows $800/month. That’s because there is no longer mortgage and interest to be paid.
- If you have the max four properties, the $30,000 initial investment goes towards paying down one of the loans.
- Referencing the Case-Shiller index, used 3.4% as the appreciation rate.
taken into account in this model:
- Equity pay down over time, which works significantly in your favor but can get confusing for the calculation.
- Rents increasing over time, which would work in your favor
- Increased maintenance over time
- Any cash flow changes
- Purchasing your own home
After all that, here it is. If the details become excessive, skip below for the summary.
Summary after 10 years:
- You own eight rental properties at this point. You were very close to your goal of purchasing one a year and you didn’t need to violate the max four loans at a time rule.
- Four homes are completely paid off, four still have mortgages on them.
- Cash flow by end of year 10 is $57,600 a year ($4800 per month). If you had a $2 million portfolio at this point, and started to draw down 3%, you’d have a very similar cash flow.
- Again, roughly figuring out the appreciation of each home using a rate of 3.4% yields total equity in the properties around $750,000.
- Total investment has been $300,000.
- You can start seeing a snowball effect happening although it seems to just be hitting its stride by year 10.
- This is something most physicians could replicate.
- The cash flow is starting to amount to something substantial by Year 10. What would that cash flow by year 10 allow you to do? Would it cover educational expenses for your child? How many shifts would that allow you to give up?
By year 20, equity in your properties would be 2.8 million and your cash flow would be $172,800 a year.
At this point, I think it’s pretty safe to say that working is relatively optional and total retirement is a possibility. That's some serious passive income, doctors! Imagine starting this when you’re in your early to mid 30’s when you first became an attending.
So did I follow this advice?
Find out more and see the fully detailed analysis here.
For more articles by Passive Income M.D., visit his website or find more of his articles on Physician's Money Digest here.