How to Retire Early from Real Estate Investing

What's up you guys, it's Graham here. So, this is a really fun video for me to make because we're gonna be talking about my favorite topics of all time in one video. That's right! We got real estate investing, passive income, financial independence, retiring early, and smashing the like button if you haven't done that already. All in one place! I know, I can't believe it either! What a time to be alive!

But anyway, here it is: how to retire early by investing in real estate. These are the types of videos I really enjoy doing the most because all of these are things that I have done myself personally. None of this is theory or anything like that. All of this I have done myself firsthand and I've seen it work for me. It's taken about a decade of saving, investing, and following these strategies to get to the point where my rental income covers all of my expenses, and at which time I can pretty much do whatever I want—within reason of course. I'm not going off and like buying Lambos every day. I’m buying Tesla Model 3s, no Lambos. But this works for a Tesla Model 3!

But anyway, let's go over exactly how you can replicate these strategies so you can do something similar, and again, that's the entire point of the video. By the way, I realize the term "retired" is used very frequently now on YouTube. Like, everyone is retired and then meanwhile, they're still working like 80 hours a week on, you know, not being retired. So let's just make it very clear: I am NOT retired. I'm not going to call myself retired. I have no plans of laying on a beach and playing golf all day. I'm not even that good at golf.

However, the point of the video is to get to the point where you could retire if you wanted to, or not. The choice is really up to you.

So now, let's start here. And this is where it all begins. And this point is not real estate-related at all, but it's still massively important. And that is just this: take the time to add up all of your expenses. Then you'll come up with an average number that you will need to replace with rental income every single month. I know this point is rather dull and boring, but this is something you'll have to do; otherwise, it's really like trying to navigate somewhere without having a map.

So anyway, here's my challenge for you, and I dare you to do this because most people are just gonna watch the video and never actually do it. That defeats the point! So you know you're different than that. You're actually going to do this! Hopefully! That is just this: it's very easy. Track all of your expenses for the next month. Let's track everything you spend your money on—every single penny! If a penny leaves your account or leaves your pocket, I want you to account for it. You can always use mint.com or personalcapital.com if you want automated software that does it for you, or you could just use your own Excel spreadsheet. I don't care what you use; the point is you absolutely must know how much money you spend every single month so that way you can figure out how much rental income you need to replace that with.

Now, when doing this, I highly recommend you break up your expenses into two categories. The first one will be your necessities. The second one is going to be your discretionary spending. For example, your necessities might be your housing payment, your insurance, groceries, internet, utilities, and everything else that's non-negotiable. Your discretionary spending, on the other hand, should be something that you don't absolutely need, that you can cut back on if necessary. For instance, that might be vacations or going out shopping, or going out to really expensive dinners—wrapping the Tesla video, coming soon!

So anyway, once you've done this, congratulations! You've done what probably 9 out of 10 people will never do in their lifetime. So there you go, you're already ahead of the game. Now, your first goal should really just be to earn enough rental income to cover all of your basic necessary spending. Now, if you want to break something like this down into even smaller goals, I recommend having a list of all of your necessary expenditures, and that way you can just check those off every time your rental income pays for it.

Like, I remember when I made my first $900 a month in rental income; I thought to myself, "Okay, now I have my car paid for, my car insurance paid for, my phone bill paid for, and my groceries are paid for." And then I thought to myself, "Well, if I have another $900 coming in, that would pay for half of my housing payment, and then if I have another $400 coming after that, I would have all my property taxes paid for."

So anyway, once you figure out exactly how much money you spend every single month, that becomes your goal. That is how much rental income you will need every single month to replace your necessary spending. So now, of course, this is where the work comes in, and that is actually getting that amount of rental income.

So here's what I would do if I were starting over with zero dollars today, and my monthly expenses were, let's say, $3,500. So that now would be our goal—to get $3,500 a month in net rental income. Now, here's the strategy that we're gonna be following to achieve this. And there's a term for this coined by Brandon Turner over at BiggerPockets, and that's called the BIR method. Except I put my own little twist on it. It's kind of like the house hacking burr method of real estate investing.

So I'll explain exactly how this works and exactly what you can do. Now, the first thing you'll need to do is save up a downpayment between 10 to 20% of the property's purchase price. So this means if you're buying a $100,000 property, you'll need between $10,000 and $20,000 saved up, or on a $200,000 property, you'll need between $20,000 and $40,000 saved up. Now, this could definitely take a while, depending on how much you're making, how much you're saving, and how expensive properties are in your area.

However, I really believe this part is essential. This single investment can absolutely fund your entire retirement with passive income if you're just willing to listen to these strategies and actually implement them and stay consistent with them long term. And in terms of actually saving this amount of money, you really just need to make this a priority. If that means that you need to cut back on vacations or work more hours or pick up a part-time job just so you’ll be able to save a little bit more money doing it, it's so worth it. I can tell you 100 percent that delaying any short-term gratification is absolutely worth it when you see the long-term end result.

Now anyway, once you've got that down payment saved, the next step is to go and buy a two to four unit building that you can move into yourself. Now here's why this step is so important: when you go and buy a primary residence (meaning you're going and buying a property that you intend to live in yourself), you qualify for what's called "conventional owner-occupied financing". This means you'll qualify for a lower interest rate and also a lower down payment compared to buying an investment property.

Now, the only two requirements when doing this is that you must buy four units or less and you also must live in the property between 12 and 24 months after buying it. After that, you could do whatever you want with the property, but meanwhile, you've locked in your low downpayment and your low interest rate.

Now the reason I really like this method a lot is that you can get a conventional owner-occupied loan up to four units. So this means if you want to invest in real estate, you can buy all of the units under owner-occupied financing with a lower down payment and a lower interest rate, even though you're renting out the other units and only living in one of them. This is a tremendous life hack and a huge advantage to investing in real estate and getting cheap financing. And as we all know, cheap financing really just means more money back in your pocket.

The third step here is that ideally, you should be fixing up the property anytime you're looking to not only increase the value of the property but also increase the cash flow. Fixing it up is really just the way to go for me. I'll only look at two to four unit properties that need work because I know that when I'm done fixing it up, it's going to be worth more than what I paid for it. I personally go for really light rehabs—like redoing floors, redoing the landscape, paint, kitchen and bathrooms. These are all very simple renovations that any contractor should be able to do in less than a month, and all of these renovations have an extremely high ROI.

So let's just use this example so I can show you how it works. Let's just assume you buy a $300,000 property that's three units. You then put 10% down; that would be $30,000, and you finance $270,000 at a 4.3% interest rate fixed for thirty years. But then after all of that, you take an additional $30,000 from your own money, and you go and fix it up. And after that, the property's value is now worth $380,000! This means that you've made an extra $50,000 worth of value just by going and fixing it up—that is how real estate investing basically works.

My favorite places to buy are the ones that just look a little outdated, like maybe it was built in the '70s or '80s and it's a little old or it looks a little bit like grandma's house. Maybe it needs some new countertops and new paint; you remove the carpet, you get some new bathroom tile—easy stuff like this. In most cases, I never try to rearrange floor plans or go and add square footage, and for someone really just starting out, I don't recommend that you take on too big of a project. Very light cosmetic stuff is very easy; it's very simple for a beginner. Many contractors can go and do this in a very quick turnaround time, and there's not a lot of risk when you're going in with just a cosmetic renovation.

So now, the next step: what do you do when you're done fixing it all up? And that is, you rent out the other units. This is where the other units should ideally cover all of the property's expenses like your mortgage, property taxes, your insurance, your repairs, your vacancy, and everything else that goes along with that.

So now let's just use our previous example. We have a $300,000 property with three units. You put 10% down, financed $270,000 at a 4.3 percent 30-year loan. Your mortgage payment would then be about $1,330 per month. We'll say your property taxes are going to be another $300 a month, we'll say your insurance is going to be $120 a month, and then we'll say your repairs, maintenance, and other miscellaneous expenses would be another $250 a month.

So now let's just round this off, and we'll say that this property is going to be costing you every single month $2,000. However, because it's a three-unit building and you're only living in one of the units, you can rent out now the other two to collect rental income to offset that payment. So in this example, let's just say that the other units are gonna be renting for $900 a month. So in total, between renting the two units, you're gonna be getting $1,800 a month in rent.

So now, your only out-of-pocket cost is $200 a month for getting to live in and own a triplex, plus the $30,000 as a down payment plus the $30,000 you spent fixing it up. So $60,000 total! Now, I realized that right now we're not any closer to getting to our goal of $3,500 a month in passive rental income because it appears as though we're now cash flow negative $200 a month, plus we're $60,000 in the hole invested in this property.

But here's where the fun begins. Right now, your only housing expense is $200 a month, and chances are that is cheaper than you going and renting something else equivalent to that yourself. We're going and buying something without getting the additional rental income, so hopefully, by doing this, you're able to save a little bit more money on your housing expense.

Secondly, even though you're paying $1,330 a month as a mortgage, just by making that mortgage payment, you're paying down the loan balance by, on average, in the first year, about $375 a month. This means that your ownership in the property increases a little bit more every single month until eventually, after 30 years, your home is paid off and owned in full. So even though you pay $200 a month out of pocket to live there, you're getting back $375 a month in value.

Still though, that is not cash flow that you can be able to live off of until that is paid off in full. But here's how we're gonna be able to get there: the next step is that you're now going to do what's called a cash-out refinance. This means that a bank will go and give you a brand-new loan based off the new higher price of the property after you've fixed it up, and then you profit the difference in cash.

Let's go back to the original example here: $300,000 property, $30,000 down, $270,000 loan. You fix it up for $30,000, and now it's worth $380,000. But now, because this property is worth $380,000 and you have a loan on the property of $270,000, this means you have $110,000 of equity just sitting there. So when you go and do a cash-out refinance, a bank might go and look at this property and say, "Okay, we see it's worth $380,000. We will give you a loan up to 85% of this property's value." So on $380,000, we'll give you a loan of $323,000.

So now you go and take out a new loan for $323,000. You take $270,000 of that to pay off the first loan, and that gives you $53,000 extra in profit cash for you to pretty much do whatever you want with—entirely tax-free! But now since you've taken out a new loan at a higher amount, your mortgage payment will jump up from $1,330 to now about $1,600 a month. But remember, even though you're paying more per month now, you have $53,000 left over for you now to do something else with and reinvest.

And of course, we all know what that means. You can use that $53,000 to go and buy another triplex for you to do the exact same thing with. So now let's just assume you did the exact same thing, you bought the same triplex, did the same $30,000 down, spent the same $30,000 renovation, it's worth the same $380,000. Here's where it gets interesting because remember you still own the first property, but now since you moved out of there to go and do this again, you now have another unit that you can go and rent out for $900 a month.

Here's how the numbers look for an example like this: your mortgage payment's gonna be going up to $1,600 a month, your property taxes will be $300 a month, your insurance will be $120 a month, and let's just bump up the repairs, maintenance, and the expenses to $300 a month. So now let's just say that roughly this property is going to be costing you $2,320 per month after doing a cash-out refinance and after moving out of it.

But wait for it, because now you have three units, each paying you $900 a month instead of two, which means that you're now making $2,700 a month! Now, you go and subtract the $2,320 from this, and that leaves you with an extra $380 per month in passive income just for buying the place, fixing it up, doing a cash-out refinance, renting it out, and then moving on to the next one. That means that your only out-of-pocket cost to make $380 per month is $60,000 plus the cost of your time to go and fix it up and buy it and rent it out. That's it!

And now you have $380 per month in passive income. Now you own a cash flowing rental property, and now you're also paying it off every single month so that in thirty years, you're gonna own it outright. And also, since you now have an extra $380 per month coming in and passive income, that makes it that much easier to now go and save up for the next one.

So now we can go and just repeat this exact same process with the next one, and assuming you do it with the next one with similar numbers, you'll now have $760 coming in every single month in passive income. Do it with a third place, and you'll now get $1,140 every single month, and you just continue doing that time and time and time again until it slowly builds up. You can also now start investing in more expensive properties because you're making more money, you have more money coming in, you're gaining more experience, and that just speeds up this entire process dramatically.

Another really amazing thing with this concept is that if you just take that extra rental income and reinvest it back into buying more real estate, you'll start seeing these numbers grow incredibly fast because now, in addition to not only using your own money and your own equity, you're going to be using the rental income as well just to buy even more real estate.

This means that if you've determined you need $3,500 a month in rental income to go and retire and then travel the world, smashing the like button in every single country, you can realistically do this in about seven to ten years just by starting with one property, buying it, renovating it, moving in, renting out the other units, refinancing it, pulling that money into another property, reinvesting all of the rental income into buying even more real estate.

And then pretty soon, within a very short timeframe or within about a decade, you'll be able to basically retire off your rental income. The only requirements on your end is that you just save up enough money to use as a down payment and a renovation budget. You never spend the extra rental income because you'll use that to go and reinvest into buying more real estate. And you just do this consistently until eventually you hit the number where your rental income covers all of your expenses.

The concept is all really easy to understand, but the hard part is actually staying disciplined with this long term and consistently putting in the work and delaying gratification. Investing in real estate could be a very daunting task, especially for someone who's never done it before or who's brand new to the business. Doing this as a primary residence, where you can go and live in one of the units and then rent out the others, makes this process incredibly easier.

And now the icing on the cake with all of this is that if you do this consistently within about thirty years, all of your rental properties are going to be paid off in full. Even if you go and spend the extra rental income on whatever you want, that's because your mortgage payment consists of both principal and interest. So every single month you make a mortgage payment, you're paying down the loan balance a little bit every single month until eventually it's paid off.

And then, like I said, once it's paid off, you're gonna have a ton of extra money to do whatever you want with. For instance, if you have six rental properties, like our last example, having all of those paid off would generate you an extra $9,600 a month! That's because once the mortgage payments are paid off, you're not gonna have that $1,600 a month expense on the property. So times that by six, and there you go—$9,600 a month!

And also, the icing on the icing on the cake is that your rental income will be going up over time thanks to inflation and also demand, and that just makes this entire amount just even larger in the future. So as you can see, this is really such a great method for retiring early and replacing all of your expenses with rental. And all that it requires is really dedicating a solid decade to doing this and really just the discipline of saving everything you can, putting in the work, taking the time to make this happen, and then just repeating the process over and over and over again.

This is something that I've been doing myself! I live in a duplex right now. It pays for all of my expenses, all the rental income on the other properties pretty much pays for everything else I do. And that's it! This is really a decade of really, really, really solid saving and investing and really being invested in real estate and learning these principles and sticking with it long-term. And this is what I believe anyone else could achieve as well.

So with that said, you guys, thank you so much for watching! I really appreciate it! If you guys enjoy videos like this, make sure to smash the like button, subscribe, and also hit that notification bell if you want to be notified anytime I post a video, which is three times per week! Also, feel free to add me on Instagram; I post there pretty much daily. So if you want to be a part of it there, feel free to add me there. Thank you again for watching and until next time!