How many units do you need to become financially free?
Knowing your financial freedom number will make your efforts in real estate investing much more targeted and focused. When you're diving into multifamily investing, there are four ways to make money with a syndication:
- Acquisition fees that you charge at closing
- Asset management fees, which are typically one or 1.5% of rents collected
- Cash flow from the equity that you have as a general partner
- The profits at resale
So, you know those are the four ways to make money and you ask, how many units do I need? But that’s not actually the best question to ask because typically, it’s based on the size of the deal.
In other words, what are you paying for it?
I found that estimating asset management fees based on what the properties are valued is much more meaningful and easier to work with than the number of units. The cash flow from a $600 per month unit could be vastly different than something that's $1200. So the per unit is not really an accurate measure of assumptions.
I've looked across ten different properties at the performer projections versus actual. I looked at the actual money that we made on acquisition fees, asset management fees, cash flow for the GPs, and profits at the resale. And I'm going to share that with you – a spreadsheet that you can download and tinker around with it yourself.
Watch the video and let’s look at the spreadsheet together: click here to access the spreadsheet
The first tab of the spreadsheet is how much multifamily to make $100,000.
So for example, let’s say I want to make $100,000. This particular year, how much multifamily would I have to buy? The short answer is $1.7 million. In multifamily that's not so much it's not a very big building.
Here's how this breaks down: You have the acquisition fees. The property value is 1.7. The acquisition fee here is 3%. Therefore, you can see that 52,000 of that 100,000 is actually made up of acquisition fees – over half.
We have found that the asset management fees are .3% of the property value. Again, this is not on a per unit basis, and this comes from looking at about 10 of our properties. That's $5200 cash flow.
We're assuming that the ratio of price of the capital raised to the value of 40%. So in other words, if you're buying $1.7 million, you're going to raise about $700,000. And that typically includes closing costs, acquisition fees, renovations. So simply, 40% is a median that we have seen.
The cash flow is about 3.2% of capital raised an average per year to $22,000 an average per year over the five year hold. Now again, this very important, the cash flow is going to be lower in the beginning, and it's going to ramp up to what your target is. And then it's going to keep going slightly higher. So the average of that is 3.2% per year on that deal.
We're assuming that the GPs get 20%. So it's a 80/20 split with the LPs profits from sale again measured as capital percent 3% of capital raised. And that is annualized per year – typically what the GP will make every single year.
So if you add all these things together, you have $52,000 in acquisition fees, $5200 in asset management fees, $22,000 in cash flow average per year, and then $21,000 profit from the sale. And again, it's a five year hold, so the total number is going to be $100,000 profit at sale, and then the total cash flow is gonna be over $100,000 as well.
So on average, I have to buy $1.7 million of real estate to make $100,000 per year.
Now, there’s a convenient tab on the spreadsheet that tells me how much income I will have from $5 million In real estate, so it does the same thing but backwards. You can put in whatever you want, you can put in $2 million, $3 million 10 million, and you can see how much you can make and the breakdown of that.
But I want to talk to you about the third tab on the spreadsheet.
This is really to show me what is the cash flow over the next 10 years because the profit sale doesn't come till you well sell it. So calculating an average, to me right now is useful from an academic perspective, but not me putting money in my pocket.
Let's just say you're going to purchase a million dollar property in that first year, $3 million, the second year, five years and so forth. It breaks down what you're making here in acquisition fees. So it's 3%, you're making off that you're making $3,000 in management fees, and you're making $64 in distributions.
You can look at the property details and see exactly how it breaks down. So looking at property number one, you're making $30,000 in year one, because you're getting at a closing, you're making the asset management fees, point 3% of value every single year $3,000.
You can look at the cash flow and see how it ramps up. Remember, the average was 12,800, but in the first year, not getting 12,800. So I'm assuming that you're only making one half of your target, point seven 5% of your target your full target 1.25 times your target 1.5 times your target.
So this shows you a more accurate projection of what your cash flows are going to be. And then of course, you get your profit at sale, which is 3% of capital raise, but times five.
You can look at what this deal looks like and this is now repeated, year two, where I'm buying a $3 million property. You can see very quickly, after buying that, with the second deal, we're jumping from $40,000 a year to easily in the six figures. And you really only have $4 million of cumulative multifamily, which is why so many people are able to quit their job with just two or three deals, because they start with a small deal, and move up.
This is so powerful.
I want you to use these assumptions. I had these vetted with a couple of my peers, they said, “I never thought of it that way,” but the numbers came on very similarly. I think you can make some reasonable projections based on the spreadsheet and the assumptions that I'm giving you here with regards to the acquisition fees, the asset management fees, cash flow distributions, and profits from sale.
You don't need a lot of multifamily real estate to reach your financial freedom number.
The other thing to notice around this is, the numbers go up in a staggering fashion. You can even play around and say, “Well, what if I stop in year five?”
You'll see the numbers maintain and slowly drop down, but you're making $1,000,00 – 1.5 million a year for the GP. That is an amazing amount of income, right? It really helps you create a legacy and a business you can pass on to your to your children.
So play with this a little bit, use the assumptions. We did a lot of analysis in our portfolio to give you meaningful numbers. You can do some financial planning around this. We don't guarantee results, we don't guarantee that you're going to get the results we have here, but these numbers are fairly reliable. Again, not guaranteed, but hopefully you find this super useful in your own investing.