How to Make $100K with Real Estate (Passive Income)

Who doesn't want to make $100,000 in passive income and do it on autopilot?

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This is one of the most frequently asked questions when I get on strategy sessions or talk to people.

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“Ravi, how do I make $100,000 replace my active income so I can go and retire on a beach.”

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In this article, I'm going to share with you two strategies as to how you get there with real estate.

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It's actually simpler than you think, so if you're interested in what my thoughts are, definitely keep reading.

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Key Strategies to Make Money with Real Estate

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Now, I'm going to make this super simple.

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I will show you exactly how you get from 0 to $100,000 in passive income using these two strategies.

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_{Strategy 1:}

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Our goal is to get to $100,000. We have two main options that will help us get there:

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Option A: You buy and hold

‍Option B: You buy and sell

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Let's break down each one.

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Let’s say you choose the buy-and-hold option. This effectively means that you purchase a property and never sell it.

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In this example, we're going to use a $500,000 property at a 90% LVR, which basically means a 10% deposit from our end, while 90% is being funded by the bank.

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In most situations, given today’s interest rates, we're going to be in negative cash flow territory—not by a lot, depending on where you purchase, but you will be negative until about year three.

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This is very important to note because when people go out there and buy real estate, you often can get confused saying: Well, I want $100,000 in passive income, but this is negative cash flow, I need to go and find something that's positive cash flow.

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This is actually the wrong way to do real estate.

• You need capital growth; 
• You need cash flow; and
• You need to be in the game for a long period of time.

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That is how you get there. So let me explain how it works.

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Up until year three, you're probably going to be negative anywhere between $50 a week all the way up to about $150 a week.

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If you've bought well in the right location, where there's rental demand, that number will start changing.

• From year four, it might be an extra $100 in your pocket. 
• From year five, it might be $150. 
• From year six, it would be $200, and so on.

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Now, these are generalised numbers. It's just to give you an idea of how it works.

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You would then be able to plug in your own numbers, and say: Okay, if I looked at this graph, when would I turn positive in my cash flow?

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We're assuming quite conservatively that by year 20, you're making about $700 per week by holding that property, and that would be about $35,000 in cash flow.

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If your goal is to get to $150,000, you probably need about five of these homes.

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If it's to get to $100,000, you probably need three of these homes.

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Again, I can't cover off every strategy, but I'm giving you the principles or at least the tools for you to implement into your own life.

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Now, it's very important to note we’re not actually paying off these homes.

• We’re purchasing the property; 
• We focus on interest-only repayments; and 
• We’re just going in and holding the property.

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As we hold the property, a couple of things happen: Your debt stays the same, right? So that debt is not going to change.

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However, your rent will increase.

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If you've got average growth of rent in that area, it's probably closer to about 3 to 5%.

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What will happen is you're going to find that after a few years, you're going to then break even and post that, you're going to see growth in this section, which essentially means that now you're going to be in positive cash flow territory.

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These numbers could change, depending on where interest rates are.

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If you look back over the last couple of years where interest rates were really low, in that time, you could have bought a property, and seen positive cash flow from day one. 

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However, that's not really the way you need to approach it.

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You need to say: Okay, that's a bonus. But, really I need the capital growth and the cash flow just allows me to hold this property.

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This is how you've got to think about it, and I know it's counterintuitive because you're like: I need to generate cash flow and income, not the capital growth because I can't touch that, Ravi.

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However, you need that in order to be able to grow the portfolio, have multiple properties, and that then gives you the income in 10 to 15 years time.

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In this case, if you went ahead and bought five properties, you would make about $150,000 a year in 20 years time.

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So to recap strategy one: You’re holding the property, you're not paying any of the debt down, and over time, you're going to see that it then becomes positive cash flow.

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We can see with this graph here that over time, we're going to get to positive cash flow.

So this is strategy one—not interested in paying down debt, we can hold the properties, and that's what we're holding.

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Over the next 15 years after that, you're going to see your cash flow continue to improve, because you may go in and improve the actual home so then you can attract a higher rent.

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Or…

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If you're in an area where the rental demand exceeds supply, you'll continue to see rents increase.

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_{Strategy 2:}

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This is where you will buy and sell.

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What you're going to do is you're going to find yourself in the exact same position for the first couple of years, where in year one, you're going to be negative, and you're probably negative for the first couple of years, then it suddenly turns positive.

In this case, you're still not focusing on the debt.

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If you think about this, 99% of people (your mom, your dad, your aunties, and uncles) probably did this where they said: Well, it's debt and I need to pay it off as soon as possible so I'll do interest plus principal.

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Last June, I posted this article, specifically addressing this and why the 1%, the ones who grow mammoth wealth in real estate, actually don't focus on interest plus principal. They focus on interest only.

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Going back, in this case, the debt stays the same, but the question is: Do we want $150,000 or $100,000 in 20 years? Or do we want $50,000 or $75,000 in 12 years?

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This is where I'm about to break it down.

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Let’s say you did purchase those five properties. You then go: Okay, I'm going to sell two, and I'm going to pay down the other three in terms of debt.

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Your initial purchase is $500,000.

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Your debt is $450,000 because it was a 90% LVR.

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Now 12 years later, the value of that property is $1 million, but your debt stays the same, because again, we're only focusing on holding these properties, not paying them down.

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So in this case, you could go ahead and sell one property, pay off the debt on property two, and it would be completely debt-free.

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Let me explain that:

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If you go ahead and purchase two $500,000 properties, that would mean the value of these properties today would be $1 million.

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Your debt would be $900,000.

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However, 12 years later, they would be worth $2 million while your debt again stays the same.

Now what you could do is sell one for a million dollars, and then keep one, which would be worth a million dollars as well, but it would be debt-free.

So in option one, you still carry the debt. You're comfortable with it.

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However, in strategy two, you could go out and say: I don't really want debt. I'm working right now, but in 15 years, I want to carry no debt.

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This means: I'm okay selling my investments. 

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You could sell one, pay off the debt immediately, and you can see in the example (shown in the photo above) that in 12 years, you can pay off a loan that normally takes 30 years to pay off, so you've got a house completely debt-free.

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However, the main question really comes down to this: what's your actual goal?

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Do you want to retire early, but you're okay to have a lower income?

Or…

Are you okay working for the next 40 years, and having a later retirement, but with a higher income?

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Not only do you have a higher income the longer you wait, but you also have assets that continue to compound growth.

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This is why it's so important to understand what your goals are from the start.

• You start with your goal; 
• Come up with a strategy as to how you execute on that; and 
• Put in the work.

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This is how I would think about this:

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Goal: To reduce my body fat percentage or get this ideal physique in the next six months.

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What’s the strategy? Well, you may:

• Go and eat clean; 
• Get enough protein every day; and
• Train four times a week.

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However, it comes down to execution.

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You may say: Well, look. I actually can't do this, because I've never done this in my life, so instead I'm going to go and hire a personal trainer and they're going to keep me accountable as we go through this journey together.

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At the end of the day, a professional trainer is going to cost you money, but you got to your goal and that might mean that you're happier, because health-wise, your risks have fallen and this is the same way it works when it comes to real estate, especially if you're going to go out there and get the right team and help.

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If you think about it, your goal is to purchase investment properties so you can retire early.

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On the other hand, the strategy is to go and purchase three to five properties, and that might be in your super or your personal name, whatever the case is.

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Now you have the strategy. However, you still need to execute.

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If you've never bought property, especially being $500,000 interstate in areas that you probably never heard of, you're going to really struggle with this, especially if you live in, say, Sydney or Melbourne.

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You’ll be like: I can't buy property for $500,000. Are there properties even out there for $500,000?

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Believe me, there are.

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We're purchasing anywhere between 12 and 18 properties every single week and the average price point is about $500,000.

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This is why I use $500,000 as the guide in these examples.

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So if you get down to execution and need help, then you probably need help with not just a buyer’s agent, you need someone:

• Who’s going to help you with the strategy; 
• Keep you accountable; and 
• Set higher goals for yourself, so you can achieve more than you ever thought was possible.

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If you're interested in getting help with executing, then definitely contact my Search Property team by booking a FREE discovery call.

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I hope you guys have learned so much from this article.

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I'll catch you guys in the next one!

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Thanks, guys.

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