Read an interesting article today titles, "Sorry, rentals won't make you rich." Yes, that article title was click bait, just like my Subject. (wink)

Author blogs for another REI website. Idea behind the topic is that real estate can make you better off, but to achieve a vast, life-changing difference in a relatively short period of time (<10 years) is unfeasible for most. Maybe a few outliers manage it through luck--they hopped into California real estate at the bottom and got out right before it tanked, but overall the bottom line is 99 out of 100 real estate investors will achieve only moderate levels of success, and it will take a lifetime to do it.

To be clear, this author set the bar of "life changing wealth" at $10MM. No, that's not adjusted for markets, but I would say that for most of the folks who post here that amount of $$$ would make you view your life today a little differently.

Huh. Wow. I was skeptical at first seeing the title. Who is this upstart to say such things? Then the more I thought about it and read the comments: he's right. I've been at this game over 11 years. I am by no means wealthy, and even though things are going along at a good clip now, it's going to be another decade (at least) before I am well north of the number many would consider "wealthy." Think about it: even if your net after tax income is $250,000 per year....it takes 40 years to get to $10 MM. Wowza....I knew the math but the math never hit me like that.

Would $1-$2 million change my life? Sure, but $10 million would REALLY change it. I think it's the difference between what we dream of when we first got into this game vs. what we accept as "good enough."

Author's purpose is not to poo-poo rentals, but rather to get us to think about the real time and capital requirements it takes to succeed in rentals as a passive income strategy. He argues (rather persuasively) that the only folks who make big money in real estate are those for whom real estate is a business. Folks like our own Jeffrey who does have rentals, but who has a business in Mr. LL. who travels, speaks, and hosts conventions. Folks like Brad 20K who wholesale, flip, RTO, etc and do a lot more than just save up, buy a rental, repeat process. Folks like Robert J who are contractors who build, rehab, develop...and do rentals on the side and fight with the State of California when they're "bored." (wink) Authors says those folks who are wealthy and own tons of real estate did not MAKE the wealth with rentals, but to preserve and grow the wealth they have already made by either owning a successful business or from a very lucrative W-2 income (think of neurosurgeons who park their money in rentals).

I have to say, the article is thought-provoking and challenged me to my core. How many of us jumped into the game because we wanted to "build wealth"? How many of us have achieved what we set out to do, and more importantly how long did it take? How many of us bothered to take the time to even have a plan in the first place?

We didn't get into this game to get wealthy. We got into this game to provide income for our retirement, after we lost enough in the stock crashes over the past 30 years that I could not FACE relying on that for our only income.

DH could not talk me down off the ceiling, nor could he persuade me from my opinion that "the Emperor had no clothes" when it came to the stock market as the only way to make money.

As I've said before, we can learn the rental market. We can't possibly LEARN and UNDERSTAND the stock market...

I don't need 10mm. I need a couple of hundred thousand dollars a year to live comfortably, finance a bit of the grandkids' college, put some aside for safety's sake and have something to leave the kids when we die.

Rentals provide you with cash flow , not net worth. I started buying rentals to get cash flow, not net worth of wealth.

If you have $250k of passive income from rentals, yeah you hit it big. Not billionaire Bill Gates big, but big enough to do pretty much whatever you want for the rest of your life.

And not to belittle Jeffrey but your description of his business is far from passive. He has to not just manage the business but also be 100% involved as he is the speaker and organizer

Sure it's nice money but it's not passive income.

I too read the article whenever it hit my inbox. The key is that there is no multiplier effect in selling rentals as there is in valuing a business. Having sold a sales business, I can attest that the authors reasoning is spot on.

I had an idea for a business and looked into starting one. The problem with starting a "business" is that even if you find a need you can meet, if there are fat profit margins, other people will see what you're doing and also enter that business. Then your profits aren't so fat. In other words, a business profit margin doesn't grow forever or even stay the same.

David, businesses are valued as some multiple of EBITA. The multiple depends on the type of business. Whereas houses are valued by comps.

BULL!

So -- I can't help but be curious then... What DO they recommend that I can invest in with fairly little funds up front (either ACTIVE or PASSIVE) and hit $10,000,000 in 10 years or less?

Seems weird to go "Hey -- you can't get there with this" and not have any recommendation on what to do instead? :)

- John...

You talking to me?

i am sad no one here has posted other ways to get rich other than rentals

A vibrant discussion so far, excellent! I'll do my best in these limited online means to provide more info. First, I have to apologize as some readers appear to be misunderstanding my original post. I will try to clarify.

David[MI], I did not say Jeffrey's work was passive: I used him, Brad 20K, and Robert J as examples of the OPPOSITE of passive rental income. The have businesses that are built around rentals and other real estate activity. So, if you'll go back and re-read with that in mind hopefully it makes more sense.

Sisco, I thought you would respond as you did based on some of our past chats. Appreciate the citation of the business valuation multiplier. Author John T. Reed cites a similar factor with apartment complexes. For every $1 you move to the bottom line for expense reduction or income increase, not only do you get that $1, but you get the equity/increased valuation of the asset itself. Just so with a business.

David Krulac, thanks for chiming in. I read your response on the other website as well. I get what you're saying, but I confess you are one of the few people I've met who have had that level of success using mostly rentals. If I recall your book correctly you were / are an active real estate agent almost from the beginning. Not saying you don't deserve your kudos and not arguing against your methods, but you do have a business connection to real estate many of us don't have. Also, as you've pointed out you've written a book and attend conventions and do speak engagements. All of those activities contribute somewhat to your success beyond what the typical "passive" real estate investor does. By the way, I met you at the 2015 Convention (we talked in the hotel lobby one morning) after I attended your topic on buying HUD homes. I bought your book, and you were kind enough to sign it for me. A very enjoyable and useful read. I recommend it to anyone looking for creative ways to get started or who just need a quick "pick me up" success story. With 50+ chapters--each one discussing a different kind of deal--there is much wisdom and outside the box thinking to stimulate most any reader. Hope to see you again soon.

John, the author of the blog post is a CPA who interacts with some high-net worth clients, and his recommendations are based on him quizzing these folks about their success es. He said that all of his clients have followed one of three paths: 1) high income W-2 job that includes lucrative stock options 2) entrepreneurs who build up and sell one or more successful businesses or 3) win the lottery (I'm KIDDING!) # 3 was actually having a sales job where you can rapidly increase your earning via commission of high dollar items. All of these are very challenging "careers" and probably most folks won't have any better luck getting into those than they would into a vastly profitable rental empire. But that's as good as he says it gets, and therefore what he offers is perspective. It's not the usual "anyone can do this" hype, and frankly I appreciated his honesty. It was a refreshing take on a topic vs. gurus who claim real estate is easy and anyone off the street can do it if they just buy their $20,000 "mentoring" program. He would probably tell us that if we want to grow wealthy to find a business aspect to real estate, specialize in being awesome at that (think or Mr. LL!), and use that to multiply wealth. Overall, he is trying to help starry eyed newbies come down to earth a little, I think.

Sid, I also read the article. I guess the click bait worked on many of us. I don't think it is an apples to apples comparison.

First, what is rich? Is it defined by cash flow? Net worth? $/hr? Brad20K preaches FREEDOM. How much do you need to be free? $10MM may be the number for some people, but others may set it much lower or use a different metric.

Rentals are much more passive than W-2 or sales jobs. And, you can do both.

Sisco, you point out that businesses are valued by multipliers of sales, EBITDA, cash flow, etc. So are rentals: cap rates, GRM, etc. You could buy an under-performing rental and increase the income, then sell for a multiplier of the increased income.

Stock market v. rentals.

They are different. They require different skills. Either stick to your own skill set, or be prepared to learn something new (or fail).

It is easily seen how profits from rentals are limited. Renting requires capital investment (have to start somewhere, a job, an inheritance or savings), good credit, good general business sense (location, people skill, legal reasoning, handyman skills are helpful, but not necessary). Most profits will come from paying off a mortgage from tenant payments, and the profit from that is limited and easy to calculate.

Stock market investment can start with a minimum investment, adding small amounts of money as it becomes available. Credit is not important, unless you like to live vicariously, on margin. People skills are mostly irrelevant, no physical or mechanical labor is required, legal experience does not apply. However, analytical skills are everything, so is facility to deal with data, and especially, ability to think. The same market opportunities are available to investors anywhere in the country (world). You don't have to live in CA to profit from discoveries in San Jose, or San Diego. And the legal environment is the same wherever you are. No more petty local complications. Capital gains governs taxes, and tax-deferred accounts protect profits, especially Roth instruments. Selection of issues is as important as selections of property locations. Also necessary is the ability to perceive ups and downs and to be able to predict where they will lead, and to decide to ride them out or to sell and regroup. Courage is a must.

WMH is right, that if you cannot learn & understand markets, then you should stay away. Market activities are predicable, although with a stochastic component. Learning about them is not really so hard, but if you are not motivated and capable of learning, then it is no place for amateurs. Its a little more complex than renting. The market doesn't really "crash", it merely adjusts for changed conditions, and a great part of market analysis is knowing how to predict such changed conditions and how to make appropriate adjustments to your own position when it happens. Upper limits on profits are often open-ended.

A good market portfolio contains diversified investments. Holding both real estate and equities can easily be part of a good strategy.

Hi Sid, I do remember our speaking in 2015. I've had a real estate license for a long time, but early on, I had another job and the real estate both investing and agent was strictly part time. I've done a lot of different types of real estate investing besides buy and hold, which is here I started. I've flipped houses, I've rehabbed houses, I've bought scattered lots as well as done land subdivision. I've also done some condo developments.

I did read the CPA article and am not dissuaded about doing buy and hold investing. Its an easy place to start investing because you can start small, see if you like it and then go from there to be as big or as small as you want to be. In one of the late chapters in the book I talk about some of the others that I have known who are investors. One close friend of mine bought a duplex, and moved into one of the units. Later bought another duplex and moved into one of the units, keeping the first as a total rental. Then moving into a SFH as a personal residence and stopped doing any more investing contend to own 2 duplexes and 4 tenants. that's not the path to $10million, but it is a successful path none the less.

Sid,

Step One to getting rich: stop reading click bait! :)

I have not read the article, nor will.

Everybody has an opinion and that guy or gal got paid to write an article which brings in readers.

I will agree that BASIC rentals will not bring riches, mostly due to Mom&Pops not treating it like a business. They leave THOUSAND$$$ on the table or spilling on he floor, pay THOUSAND$$$ in debt service, closing costs...pay full price for houses...

Done right it can be very profitable, starting with cash flow. Then DO SOMETHING with the cash flow.

As for active, it can be done with just a few hours per week.

BRAD

perspective.

my kids eat better than most.

Pattyk, we say that a lot: we eat well!

David Krulac: Sorry for any confusion -- I was talking to the author of the original article. (And then Sid answered it after that.)

My post just happened to come after yours, but wasn't directed at you.

Thanks!

- John...

I remember reading some material dating from the 1980's.

Around 1980, inflation was HIGH. (I believe 10-12%). There were several years in the 1970's where inflation exceeded 10% annually.

Had I bought leveraged rentals in 1970, I probably would be "rich" today.

Assuming I purchased some rental property for 100K, 10% inflation would have that property worth 110K in one year. Plus, rents may have gone up 10% as well. If you have several years of that... you make good money.

But, I first purchased in 2000. Rents were basically flat for 10-12 years (for the most part). Inflation has been quite low (if you believe the government's numbers). So, I haven't gotten rich... yet.

I had to laugh at the "win the lottery" comment. I think I've mentioned before that a young extended family member won $1 million in the lottery - and invested most of the after-tax money by buying the mobile home park that the family lived in.

To me the biggest take away is treat it like a business and hit it hard and heavy like a business while you are building your empire.

I might mention that when we were building it the fastest - hot and heavy! I had a long-hours commission based job, 3 elementary school kids, helped with soccer, was Cubmaster then Scoutmaster, teaching Sunday School, leading Youth Group, and I forget what else!

The KEY was the spend time building my DREAM which propelled me to get out there and get it done! and opened my eyes to possibilities and teachers.

And I never sat down! The hardest part is getting out of the easy chair and turning off the tube. (can we still call it a TUBE??)

Want something done? Give it to a busy person.

I get weary of wannabes who won't even show up to a local Saturday association training session.

Another key was to delegate. The crew fixed up the house while I searched for and closed the next one. The Mom&Pop who do all their own work and don't attend Conventions will most likely not see great wealth.

BRAD

My parents were in their fifties during the 10-12% years. They sold their home and moved to Florida, renting a beautiful and dirt cheap apartment on a lake (overbuilt apartments!) Dad put every dime he made into long-term CDs paying HIGH interest rates.

They saved enough in 10 years time to retire in their early 60's, and when they died, there was still a big chunk o' change left...it was split four ways so not life-changing money to any of us, but still a great gift to us, their kids.

Sid, here is another clickbat title "you can't make wealth in rentals without leverage"

It does help to buy with 20 cents on the dollar and wait 20 years.

Hah, good one frank! See you at the Convention.

I was laid off when the dot-com bubble burst, and did some temp work for an insurance company doing data entry. I will always remember a phone conversation one of the neighboring cubicles was having with a surgeon, who was demanding to know how he could possibly survive on $250,000/year. We all had a good laugh over that-- I think my husband and I were earning a combined $40k take-home at that point? -- but it really drove home a few thoughts.

One was that income is just a number; lifestyle is the one that's important. As our earning power increases, our expenditures increase, too. My husband and I were paying off student loan debt from undergrad, socking money into savings, and about to each pursue an advanced degree, all on $40k. But that surgeon with his $250k was as immobilized as we would have been if we suddenly went from a $40k/year lifestyle to having to get by on $20k. And as time has passed, our lifestyle has grown as well. It would be hard for us to go back to that $40k/year budget. It would be doable--- but it would be jarring. So my goal for retirement is not necessarily a particular number, but "What does it take to maintain our lifestyle?"

I am the first one to say that rentals are not sleek and sexy investments - they are designed for passive income. I like to think of them as the only real bail out that was ever offered to Main Street.

Where else can you go into debt for $10M, and just hand the bill off to your tenants?

According to Buckminster Fuller, you are rich if you have enough passive income to meet all your basic needs. I guess by that definition, I am rich.