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Real Estate: From Zero to Financial Independence

Real Estate: From Zero to Financial Independence
Cody
Hit me up!

Cody

Creator at Fly to FI
Cody is a 22-year-old entrepreneur, life optimizer, and creator of Fly to FI. He is a personal finance junkie who constantly tracks his net worth with Personal Capital.

In his spare time, he enjoys exploring the globe for FREE using a technique called travel hacking!
Cody
Hit me up!

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DOWNLOAD THE EXCEL FILE HERE (CLICK ENABLE MACROS)

Let me start by saying that real estate is not for everyone. Real estate is much more time-consuming than index fund investing. Additionally, properties need repairs, tenants aren’t always great, and leverage can be scary.  However, if you are strategic in your acquisitions, you can quickly build a real estate portfolio to reach financial independence.

The Power of Real Estate

The research I conducted for this post was inspired by Scott Trench, author of Set for Life. After finding out I was a Microsoft Excel nerd, Scott asked me what cash flow would look like if someone were to acquire an investment property every year for X number of years. For several weeks afterward, I worked to create a powerful and dynamic Excel model to demonstrate this. The results were astounding.

Talking about the numbers won’t do them proper justice, so I’ll let you see for yourself!

The Model

If you don’t feel like reading about the model, download it here and start playing around with it! (MAKE SURE YOU CLICK “ENABLE MACROS”)

Real Estate Wealth Accumulation Model

This model projects a scenario based on your inputs and calculates passive cash flow (blue), net cash flow (orange), and net worth (green). The end result is depicted in graph form (featured above) with “Year” on the x-axis and “Cash” on the y-axis.

Passive Cash Flow

This is the annual cash flow received from the rental properties. This does not include one-time expenses (e.g. purchasing costs, sales costs, transfer tax) or one-time gains (e.g. gain on sale).

Net Cash Flow

This is the annual cash flow including all of the one-time expenses and gains.

Net Worth

For the purposes of this worksheet, net worth only represents the wealth generated from the properties (e.g. cash flow, capital appreciation, principal paydown).

Please note that net worth includes your equity in the properties. For example, if the final net worth in your scenario is $5,000,000, this will not be the dollar figure in your bank account. A portion of this net worth will be tied to your equity in the properties.

Equity = Property Value – Debt

The Inputs

To make it easier for users, I narrowed the model down to six inputs. Of course, there are hundreds of variables to consider, but I thought that these six were the most crucial. Let’s break them down.

Holding Period

This is the amount of time you plan to hold each property. In the model, the “default” holding period is five years, but you can change it to whatever you’d like! If you leave this value blank, the model assumes that you will hold the property indefinitely.

$ Value of First Acquired Property

This is the estimated value of the first property you acquire. In the screenshotted example, the investor bought a house hack for $200,000. The down payment on this property with a 3.5% FHA loan is $7,000 ($200,000 * .035). You can play around with this number depending on how much cash you have to invest.

Annual % Increase in Purchased Asset Value

This input allows you to control the purchase price of future properties. For example, in the screenshot above, I assumed a 5% annual increase in purchased asset value. Basically, this means that the Year 1 Property = $200,000, Year 2 Property = $210,000, Year 3 Property = $220,500. Leaving this value at 0% would assume no change in the future purchase price, so your input for “$ Value of First Acquired Property” would remain unchanged for each additional property.

# of House Hacks Acquired

This value indicates the number of “house hacks” you plan to acquire. For the sake of this model, a House Hack is a duplex. If the value entered was “3”, this would assume — Year 1: Move into your first house hack. Year 2: Move out of the first house hack and move into a second house hack. Year 3: Move out of the second house hack and move into the third house hack.

Note: The model assumes the acquisition of ONE PROPERTY per year. When you move from one house hack into the next, the model automatically changes the previous house hack into an investment property.

Year Moved Out of Final House Hack

This input indicates the LAST year you plan on living in your final House Hack. In the screenshot above, I entered “2”. This means that at the end of year 2 I will move out of the final house hack. At the beginning of year 3, the house hack will convert to an investment property.

Another example: If I entered “5” for # Number of House Hacks Acquired and left “Year Moved Out of Final House Hack” blank, the model would assume that I moved out of the house hack at the end of the year it was purchased, which in this case was Year 5. The final house hack would become an investment property beginning in year 6.

Note: This number indicates the YEAR END. For example, if you input “6”, the model will assume that you live in the final house hack through year 6 and thus convert the property to an investment property in Year 7.

# of Investment Properties Acquired

This value indicates the number of “Investment Properties” you plan to acquire. This input is similar to the House Hack input, except the model assumes that the first investment property is purchased AFTER the last house hack.

For example, if you entered “3” for House Hack’s acquired and “2” for Investment Properties acquired, the model would assume this:

In Year 1: Move into first house hack.

Then in Year 2: Move into second house hack, first House Hack becomes an investment property.

Next in Year 3: Move into third House Hack, second House Hack becomes an investment property. (This third House Hack will become an investment property in the year you specified for “Year Moved Out of Final House Hack”).

For Year 4: Purchase first Investment Property.

Finally in Year 5: Purchase second Investment Property.

Note: The model assumes the acquisition of ONE PROPERTY per year.

The Assumptions

There are two types of properties depicted in this model: House Hacks and Investment Properties.

 

NOTE: MOST OF THESE ASSUMPTIONS ARE BASED ON U.S. NATIONAL AVERAGES. CERTAIN ASSUMPTIONS MAY BE DIFFERENT DEPENDING ON A VARIETY OF FACTORS INCLUDING LOCATION, PROPERTY CLASS, LOAN TERMS, INCOME LEVEL, AND MANY MORE.

The 1% Rule

This model assumes that every property meets the 1% rule exactly. The 1% rule is a calculation used by real estate investors to gauge the cash flow of a given property.

For example, in order for a $200,000 property to meet the 1% rule, the property would have to generate $2,000 in gross rent per month ($200,000 * 1%). As a general rule of thumb, a “good” investment property should meet this criterion.

Changing the Assumptions

If you have no experience with Microsoft Excel, please do not try to change these values. Each value is linked to multiple cells within the worksheet that work to calculate your scenario. However, if you do have experience, feel free to change some of these values based on your specific circumstances.

I will not get into every line item, but I want to highlight the main two differences between the House Hack and the Investment Property.

#1: The House Hack assumes a 3.5% down payment with an FHA loan, which is only available to owner-occupied properties. The Investment Property assumes a 20% down payment, which is reasonable for a single-family home in most areas.

#2: The House Hack includes the cost of utilities at 20% of rent (U.S. National Average). The Investment Property assumes that the tenant(s) pay their own utilities.

Important Notes: The model will automatically adjust utilities, depreciation, and taxes when property changes from a house hack into an investment property.

How to Use the Model

First, download the Excel File here.

^In order for the Spreadsheet to work, you must click “Enable Macros”.

As I highlighted before, there are six inputs on the summary page. The excel file reiterates the instructions I mentioned above.

After you input your scenario, click “Run New Scenario” and let Excel work its magic! You can run as many scenarios as you want, just click “Run New Scenario” each time you enter a new piece of data.

If you want to return to the default values, you can click the “Reset” button.

Let the Fun Begin!

Now that we’ve gotten through most of the technical junk, let’s have fun and start to look at some scenarios!

Scenario 1

Johnny plans to buy three house hacks followed by two investment properties. His holding period for each property is five years. He will live in the final house hack until he sells it. His first property costs $200,000. Over his five-year acquisition period, he will look for properties approximately 10% more expensive than the previous one. Let’s check out his scenario!


For the first five years during Johnny’s acquisition phase, he has a negative net worth. However, after he stops making massive down payments on new properties, Johnny’s net cash flow is amazing! In year six, he manages to bring in $104,040 in net cash flow.

After all of Johnny’s properties have been sold in Year 10, he has amassed a net worth of $637,680 from rental income, paying down the principal on his mortgages, and modest property appreciation (2% annually).

The net worth accumulated from Johnny’s real estate is modest at $637,680, but let’s check out the next scenario to see how holding properties indefinitely can affect an investor’s net worth.

Scenario 2

Henrietta plans to purchase two house hacks. She will move out of her second house hack at the end of year 3. Henrietta is a buy-and-hold type of gal, so she plans to never sell these two properties. She wants to purchase both house hacks for approximately $300,000. Let’s check it out!



Henrietta suffers a negative net cash flow in Years 1 and 2, but boy does this investment pay off in the long run!

In Year 4, Henrietta receives passive cash flow of $26,397. Every year afterward, her passive cash flow increases by approximately the rate of inflation (2% to be conservative).

If she can live on less than the passive cash flow generated by these two properties, Henrietta is set for life!

Not only is Henrietta generating healthy cash flow from her properties, but also a massive net worth as well. Eleven years after the first property was acquired, her real estate portfolio has lifted her net worth just over the $1 million mark.

As indicated by the green columns, Henrietta’s net worth continues to grow and grow as she receives rent payments and experiences property appreciation. If Henrietta bought that first house hack at age 21, her net worth gained from these two properties at age 96 (75 years later) would amount to $31,784,657!

Scenario 3

Jardine strives to accumulate millions in net worth. Her plan is to purchase three house hacks followed by twelve investment properties. Her first house hack will cost $100,000 and she plans to increase her purchase price by 5% each year. Jardine will move out of her final house hack at the end of year 3.  She plans to hold on to her properties indefinitely. Let’s see how she’s doing in the model!


In order for Jardine to amass her 15-unit real estate portfolio, she must persevere through negative net cash flows during the first four years.

However, if she can manage through the early stages of her acquisition phase, the future is looking bright. Just after Jardine has acquired her final investment property in year 15, her net worth crosses the $2 million mark!

After Year 5 or 6, the net cash flow gained from Jardine’s properties might be enough to sustain her lifestyle. If not, it will at some point! Her net cash flow continues to soar as she acquires more properties.

If Jardine is a young investor planning to attain a massive net worth to support her family for generations, she’s surely off to a good start. 75 years after Jardine’s first purchase, her net worth has skyrocketed to $62,458,024!!!

Key Takeaways

There are thousands of scenarios and possibilities that this model can show you. Play around with it and see which inputs best represent your ideal scenario. Understand your goals and use this model as a tool to guide you. If you only want to acquire two properties, so be it! If you want to amass a 50-property empire, that’s fine too!

I hope that this real estate wealth accumulation model helps you to understand how certain investments will affect your cash flows and net worth. Real estate is an extremely powerful tool for wealth generation if properties are vetted carefully and acquired strategically. Good luck!

If you have any questions or concerns about the model please email me at flytofi@gmail.com.


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Note: I am not a financial advisor or fiduciary. All of the information presented in this article reflects my opinion. I am not liable for any financial losses incurred related to this content. My content is always written with the readers’ best interests in mind. I believe that my content is helpful and well-researched, but it is not professional financial advice. For more information, read our Privacy Policy.

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