My dream was to always replace my “earned income” with “passive income” or investment income. I was in Paris with my wife quite a few years ago visiting the Eiffel Tower. The tower at night, all lit up, is a stunning site. Every night my wife and I would dance to the music of a merry go round on the banks of the Seine River beneath the lights of the Eiffel tower. It was very inspirational.
On the third night when we went back to the hotel room, I began to write in my journal different ways that I could become financially independent. I listed several, but the one that caught my attention is the one I am about to share with you.
I wrote in my journal: “30 houses x $300 dollars a month positive cash flow after PITIM (principal, interests, taxes, insurance, and management) is $108,000 annually”. As I reflected on how to accomplish this, a thought came to me that was so strong it was as IF someone spoke out loud to me and said: “and yeah it will all be tax-free”. Here’s a peek at how I did it, and how you can, too.
How I Replaced My Income with Investments
Real Estate Strategy
I knew when I started investing in real estate I needed a strategy. After learning all that I could, speaking with mentors, and praying about it, I came up with this strategy and formula:
- Acquire 30 single-family homes
- Each house has a total investment of $100,000
- Cash flow needs to be $300 per property after PITIM
- Depreciation would shelter the positive cash flow making it tax free
- 30 houses x $300/month in positive cash flow = $9000/month, or $108,000 annually.
Could you live off $108,000 annually? I bet you could. Now, there’s a lot more that goes into this as sophisticated investors know, like managing the properties and vacancy costs. However, this is a good strategy to have in order to replace earned income with passive income.
In an earlier blog, I mentioned a tax benefit in real estate investing called depreciation. The IRS allows for your property minus the value of land under it, to be depreciated at approximately 1/27th per year. That means if a property minus it’s land value has a cost basis of $100,000 then $3704 ($100,000 divided by 27) is considered a loss even though, in reality, the property is appreciating every year. The positive cash flow of $300 per month per house equals $3600 annually per property. The positive cash flow is “sheltered” by the “phantom loss” ($3704-$3600) so that no net income is booked even though you are putting $3600 per house in your bank account. You get to spend the money tax-free. This changed my life.
Today’s blog is for illustration purposes only for what can be accomplished in real estate investing. For the neophyte investors please know that vacancy and repairs can affect cash flow. Also a “1031 exchange” would need to be used if these properties were sold.
I hope you were encouraged by today’s post, and you were able to see the opportunity that real estate presents. If you are interested in learning the in’s and out’s of real estate, I suggest you attend my real estate workshop. You can find details about that here!