“The world is full of willing people, some willing to work, the rest willing to let them.” — Robert Frost
One question I get asked a lot is, “How much do I need to put down to make ___________ dollars per year,” or “How much property do I need to own so I will make _________ in cash flow every year?”
This is a great question, and one that many beginning investors want to know. The best way to describe this is by a simple example. I am making a lot of assumptions and generalizations here, but you will get the picture.
Let's say that you want $50,000 per year income from commercial investment real estate. Let's back this up and see, conservatively, how much real estate you need..
If I have $50,000 of income coming from a property free and clear to me, lets assume that this is a 14% return on my investment (we won't use a no money down scenario, that would be too complicated for this simple example)…
But, $50,000 is 15% cash flow of a $330,000 investment (down payment) into a property. So, we have established that if I can find an investment that gives me a 15% return and I want $50,000 of cash flow, I will be investing $330,000.
Follow me so far?
Then, how much will $330,000 buy you? Well, let's assume again that we can get a property for a 15% down payment. If $330,000 represents a 15% down payment then my price is $2,220,000.
So, the short answer is to get a $50,000 per year cash flow you would be looking at owning $2,000,000+ in commercial investment real estate.
Of course it could be smaller or larger depending on how well the property does, but this at least gives you a rough formula to follow.
The mistake I see a lot of beginning investors make is having unrealistic expectations. They want to invest $50,000 and make that back within a year. In some cases I am exaggerating, but for many I am not.
Most people do not have any idea of how much real estate they will need to own to achieve a certain level of cash flow. They do not know what to shoot for.
Now you know.