$100K/Year Passive Income with Cheap, Small, Repeatable Rentals

This investor is making $100,000 per year with small, affordable, repeatable rental propertiesThis investor buys the same $80,000 house over and over again. He had only $30,000 in the bank in his early thirties despite a successful career, and at that point, retirement looked like a pipe dream. Then he discovered real estate investing and started slowly building a better financial future, one affordable property at a time. Now he owns 22 properties. Cashflow is almost a hundred thousand dollars per year and will have the option for a stable retirement well ahead of schedule. Let’s find out exactly how he did it. Hey everyone, I’m Dave Meyer, head of real Estate Investing at BiggerPockets. Today’s guest on the podcast is investor Nathan Nicholson from Louisville, Kentucky. Nathan didn’t buy his first investment property until he had a realization about needing to take control of his financial future in his early thirties, but he’s since then built an incredibly impressive portfolio all at very affordable price points.Today we’re going to hear how he was able to embark on a path to financial freedom with only a handful of properties in his first few years of investing. Why he recommends being very careful with leverage even as a loan officer and why? Unlike a lot of investors, he always wants to buy the smallest possible house for his money. There is a ton of actionable advice in this conversation, especially for investors looking for houses at a price point around a hundred thousand dollars. So let’s get into it. Nathan, welcome to the show. Thanks for being here.Yeah, thank you for having me.It’s a pleasure. Tell us a little bit about yourself. How do you find yourself on this podcast? What do you do in the real estate industry?Well, in the real estate industry, currently I’m a growth leader at Success Mortgage Partners have had a long career there from Supreme lending lower.com and Sierra Pacific. I saw a lot of my friends in the mortgage industry buying real estate, and I just was wondering how are they doing this? And that’s kind of what projected me into buying real estate and looking into it a little bit more,What year were you starting? What was the timeframe for all this?Yeah, so I mean basically I’ve been buying real estate for right around 15 years, give or take 14 years roughly. And so at that point I was in origination. Of course the market was very, very interesting to say the least, just like it kind of is now to this day. I mean ironically. But anyway, with that being the case, obviously I was looking at different ways to try to afford retirement, try to find ways to make more money down the road. And in all honesty with you, when I looked at my savings account, I think I had $32,000 in it. And when I looked at it and I’m going, I got to be 60 years old to have 60At the rate this is going, and looking at my friends telling me over and over again to buy real estate, at that point it kind of signaled that I needed to do something a little bit different. A lot of people would tell you never to cash out your 401k, but the reality is I was like, well, I have no money to work with. And I was kind of scared to take hard money, which a lot of people are in the very beginning. And so I looked at my 401k as an option and I kind of went that route with cashing it out and I had about 85 to a hundred grand in there and just immediately was like, what can I do? How can I buy properties?So tell us about your first deal. You cashed out your 401k, did you have a very specific buy box or something you wanted to pursue first?I got with a property manager my mother knew and he basically was trying to show me the ropes a little bit and he said, just go out and buy a deal. It doesn’t matter what it is, we’ll figure it out. Well, of course I found a foreclosure and obviously this was in a estate kind of situation where they were losing it, but it was in a state. It’s kind of weird scenario. I bought that house for $32,000 cash in Louisville, Kentucky at the time, and I thought it was very expensive and I thought it was really risky. And my property manager that is still my property manager today after 14, 15 years.Oh wow.He said, this will be the best deal you ever buy in your entire existence. He’s not wrong.Well, it’s pretty great. You had 32 grand in your bank account, like you said, that you were able to buy this property for three, two grand.So this is around 2013, somewhere around there. But basically it was $32,000 and I bought it cash. And so it was more for me looking at it from a mentality of playing with it like being a cat and a ball of yarn is let me buy cash, let me make sure that I don’t have any debts. Let me be safe. And so as I went into the house, I realized that $32,000 in my rent of like seven 50 a month or whatever it was, cash flowing really good. And I’m like, man, I really don’t want to refinance out of this. So at that point I decided just to keep that 30 2K in there. That was my first house was a free and clear house and that’s really what set the tone. But then after that I domino into three other ones. So I bought four back to back to back out of my 401k. I mean literally I bought within a period of eight months of each other just to domino it so that way the cashflow would carry it forward. So that way if someone didn’t pay, I would be able to afford that.Wow. Well, I’m sure everyone listening is just salivating at the idea of buying a property, a cashflow seven 50 for 32 grand. So then did you buy similar deals, I assume just trying to do the math of how much cash you had on hand buying four of these deals?Yes.You bought some of them with leverage after that?That’s correct, yeah, I had about 50 to $60,000 left out of my 401k. I fully pulled that out, all a hundred percent of it.Wow. IWas looking around semi semi-pro areas, stuff like that, just the outskirts that were getting better and I really focused on small footprints. I really like 1, 2, 1 3 ones 900 square feet, one story on crawl and so I really focused there, but my second deal was a 2 0 3 K renovation loan on Wheeler and that was a house that was $60,000 brick, very nice and needed full rehab. So I used a 2 0 3 K loan for that and from there refinanced out of that obviously at the end, and then just kept moving into the same similar footprint houses.Alright, so you said you like a small footprint that’s kind of unusual.Yes.The traditional wisdom is get yourself a big house, get a four two, get a five three. When I say that, I mean four bedroom, two bath, five bedroom, three bath. Why do you like a small footprint?Smaller footprints to me just costs less, right? You could buy ’em cheaper. Now they may not rent for as much, but in all honesty with the price of goods right now as far as contract work, painting, repairs, so if you do the math on a small footprint house, say it’s a 700 square foot house, say the average renovation cost is going to be $30 to $40 a square foot, you fully do that. I mean you’re what, $20,000 in on that house? Now think of it this way, if you buy a very large house and it’s 1500 square feet, it’s got a second story in a basement instead of a crawl, I like crawls or slabs. But if you got three parts of this house that are all 1200 square feet a piece, if you do the math on your square footage there, if a tenant destroys your house and it’s 30 to $40 a square foot and you got two levels that you got to do minus the basement, right, you’re looking at a major rehab cost there. So even if the rent is $300 more a month, I’m looking at this from a cycle of how cheap can I make it over a long period of time? My cashflow may not be as big, but my costs to repair are going to be much lower. So in the long run I actually make more money how I do it. So there’s two different ways to look at it, but that’s why I do it.That makes a lot of sense. And if you have a more complex build structure, like you said, if there’s a basement or something like that, it might go up from 30 to 40 bucks per square foot up to 40 or 50 bucks a square footSoYou’re paying a higher rate and more per square foot as well. So that’s an interesting approach. We do have to take a quick break, but we’ll have more with Nathan right after this. This segment is brought to you by simply the all in one CRM built for real estate investors. Automate your marketing skip trace for free, send direct mail and connect with your leads all in one place. Head over to reim.com/biggerpockets now to start your free trial and get 50% off your first month. Welcome back to the BiggerPockets podcast. I’m here with investor Nathan Nicholson talking about how he’s scaled up his successful rental property portfolio. So you bought those first couple of houses because you cashed out your 401k. How were you able to keep on scaling after that?So I mean really just looking at my first house, I bought it free and clear. So I was saving that 700 plus dollars a month in a year. That’s seven to $9,000. And so as I bought the second, the third and the fourth one, and that was all within the same year, I put all my 401k in, it went all in. I was netting about three 50 a door at that point. So I was saving probably about 14 to $16,000 a year off of those houses. And so anyway, what I did is I would just snowball it, so worked my W2 job and take that $16,000 in income and if I found it property that I could afford at that point I might put 10 or 12 grand into it, buy it, keep the four back for reserve and then buy again. But really my progress is really based on rules of 72, which in all reality is just the compounding approach here is that I’ve never used my real estate income for myself. I’ve always put it back into the business. And so one year I’ve got $15,000 while I could buy one property when three years I’m buying a property every eight months and six years, I’m buying a property every six months.And so now I’m at year 15 ish and I’m buying three to four properties a year on average. And if I had the opportunity to have better rates in this marketplace, I would actually be able to bird probably four or five right before the market kind of got worse. I bird five houses in the same year.It’s brilliant. I love it. I absolutely support when possible to reinvest as much as you absolutely can at least early in your career and you don’t have to. That is one of the cool parts about real estate investing is for a little while I actually stopped because I decided to go back to grad school and I used some of my cashflow to just pay down my tuition so I didn’t have to take out loans, that kind of thing. But I do think when possible the more you can reinvest early in your career makes a lot of sense because as Nathan just really articulately explained, that means, yeah, first you’re taking a couple years. It took me four years between my first deal and my second deal, then two years after that, now I’m buying multiple deals a year. It just really escalates if you could be patient and sort of have the discipline to keep constantly reinvesting.I just closed on our property this morning, funny enough.Oh, congrats.In Louisville, Kentucky closing on one on Longfield Avenue, which is a little two one back to my 0.21 700 square foot crawlspace. I mean I speak it as it is. It’s true facts is what you preach. I like it. Yeah, so I bought it for $87,000 and I paid a little bit over. I mean again, I would’ve loved to have had it at 82, but once I update it, I’m going to put about 15 into it. It’ll be a 1.3 DSCR after the fact. So a lot of people use the 1% rule. I really look at A-D-S-C-R number as my 1% rule. If it’s not 1.2 or higher, I will not buy it. So this property with the increase in rents, once I move the tenant out, we’ll be at a rough 1.3 and if I raise it an extra 60 bucks, it’ll be at a 1.42, which is very, very good.Tell me a little bit about this EL. So you’re buying another two one, what are the prices now? You bought it for 30 2K, but what are they today?Yeah, so I mean 30 2K in great moving condition back then compared to 87,000 and needing easily 13 to 15,000MinimumTo get it rent ready. That’s really the reality of the situation. You’re buying two one houses specifically for my market, Louisville, Kentucky is right around, you see them listed at 120, but they’re all dropping to 105. You’re getting two ones in semi-decent condition for 90 to $110,000 around here.That’s still pretty good. I mean obviously triple what you paid, so it’s a different era, but man, I think in most parts of the country that would be a screaming deal right now. So what does that rent for?So yeah, that house at this moment, so a lot of houses are in the 1200 range at a two one for a small footprint like that. And usually those are a little bit more updated, but if you have it semi updated, you could probably pull 1,050 to 1125 give or take in that range. And if it’s actually not really updated at all, you could probably rent it for 9 95 and get away with it pretty quickly. And I mean these properties go very quickly because a rental shortage in Louisville, Kentucky right now, it’s very hard to find properties to rent.And tell me a little bit just mentally how you’ve had to adjust to this new era. I do think we hear a lot of people who maybe started before the pandemic and they’re like, oh my god, it used to be so easy to get these deals or prices are crazy. And all that’s true. It is true, but I guess my point has always been that you shouldn’t let historical performance change your opinion on what the best investment is today. It’s like about what you spend with your money now. It kind of doesn’t matter what deals we’re doing in 2017, if real estate’s still the best use of your money, then you should be buying real estate. And if it’s not, then you should buy some other asset classes. So you should be evaluating things that way, but at least for me it does take some adjustments. So I’m just curious how that’s gone for you starting in an era of super cheap housing, moving to an era of very expensive housing that we’re in right now. How have you had to adjust your strategy but also just your mentality about investing?So what I’ve done is I’ve really focused on over the last 10 years and how things have been changing is how do I get my debt service paid off? How do I become more free and clear? How do I get rid of my leverageAnd how do I use that cashflow in order for me to create instead of a debt snowball, more of an income snowball, which is what everyone talks about with their cashflow. And so really my focus now is actually buying properties, finding a way to pay them off as quickly as possible through refinancing them and leveraging a little bit. But the other thing is, is that what I found recently for the marketplace is it’s very hard to buy even today. Like that deal I just told you the $87,000 deal, that $87,000 deal, if you were using hard money trying to bur it, it would be very hard to cashflow it. You’d probably be in a negative cashflow in all honesty with you or losing money. And so what I found and what I’ve been doing is I’ve been looking at properties that don’t need as much all the time, but I’ve been having to put more money down 10% down 20% down on a purchase.If I’m buying a cash, I may leave 10 if I’m financing it right out the gate, I generally will go in at 20% with lower terms, like a 20 year ram, stuff like that to pay it off quicker. And so that’s kind of what I’ve been doing to get around it, is putting more money into it. And I think a of people would agree with me, it’s getting a little bit harder now to do that, but what I will say is that if your dollar cost averaging, especially now I’m still buying, a lot of people are still buying and there’s a reason for that because the prices only keep going up and it’s going to keep going up. And if you’re not dollar cost averaging and you’re finding ways to put money into the deals or you’re finding ways to bur out of them properly, you’re going to be stuck because three years from now that $87,000 house is going to be $115,000 for the same house, so you got to buy now.Yeah, absolutely. Well, I want to talk to you a little bit more about that because you’ve said a couple things that I think are really important. One is you said that you’re able to get some good deals right now, but long-term things absolutely go up. So I want to turn our attention to how to sort of navigate the situation right now to make sure you’re not taking on too much risk, but you are enjoying the upside potential that could be coming over the next couple of years. We do though, have to take one more quick break, so we’ll be right back. Welcome back to the BiggerPockets podcast. I’m here with investor and Nathan Nicholson. Before the break we were talking about how buying now makes a lot of sense because prices keep going up over time. Nathan, you also said these two ones are being posted for one 15, but you’re getting ’em for 1 0 5. Is that because market dynamics are changing or prices falling in Louisville? What’s going on there?The market is stagnating a little bit to a point where you’re starting to see a little bit of pullback, which funny enough, there was an article today about it talking about how the seller market is ending and the buyer market is here and it will be here for the next six to eight months. And so I do see that happening in Louisville.And how do you sort of square that with the idea that you said prices go up, we’re seeing prices stagnate, you said six to eight months, you’re just feeling confident because you’re believe prices will just get back on the normal appreciation train later this year or sometime in the near future.That’s exactly right. I feel like right now it is just maxed out when rates start dropping as we both know. I mean the question mark is the economics in the market currently with tariffs and everything else? The minute the market changes, I think the rates will actually start coming down and you’re going to see a lot more opportunity. You’re going to see a lot of investors jump back into the market very quickly. I would say that will probably occur within the next six to eight months, obviously once they get all the world economic issues worked out. But rates drop, it will be a bi party for a lot of investors. And I think that dollar cost averaging is really the best way to get through this at this point, especially for the Louisville market. Anyway,I’m with you. And listen, there’s a lot of uncertainty in the economy right now. A rate’s going to drop in three months, I don’t know, six months, I don’t know a year. The trend is probably down over time. And so even if there is a longer period of price declines in softness, I don’t necessarily think that’s a bad thing. If you just sort of buy deals that still work today, then all you’re going to do is get upside if and when the market does turn around,As you said, the buyer market’s now. And that’s kind of what that article said in Louisville. That’s exactly right. If you go from a one 20 house and I basically come in and say, I’ll give you a hundred for, and they go 105, I mean they just drop at a huge percentage almost in one shot to an investor. So what’s happening, I mean it’s turning and all these houses that are sitting there, to your point, you could get deals like that. That’s where this $87,000 deal came from. I mean they had it listed originally for sale by owner, a wholesaler that I knew scooped it up before I did. I mean it’s okay Kevin, but it’s all good. He got it and I bought it from him this morning. So it all worked out. I know him, he knows me. It all worked out. And the thing is, is that I got it at a good price that worksEven a year ago, it was hard to negotiate properties. Were still flying off the board and no one knows how long this will last. And so it’s hard to time the market precisely. But if you find good deals, that makes sense. And if you’re buying for under what you think you could have bought for or six months ago and you see the intrinsic value, think it was going to go back up. It’s a pretty good time.I agree fully.So catch us up to today, Nathan. How many properties do you have?Yeah, I mean currently as of today with my closing, I’m at 22 properties. I’ve got 10 paid off ring clear at this point. And the cashflow, I think my rents are about $280,000 a year. And I’m netting with vacancy and repair about 126,000 and true net is about 98,000 to a hundred thousand a year, which by the way, I write it all off. So that’s straight in my pocket.Awesome, amazing.That’s why they call this podcast BiggerPockets, right? Because of that. That’s right. Yeah, exactly.So all that being said, Nathan, what’s next for you? It sounds like you kind of just do the same thing, bread and butter over and over. Is that the plan going forward?So I’m in that process of do I buy three to four more houses this year or do I take the cash that I have and I leverage out that line of credit and I go buy a three or $4 million property. So that’s kind of what I’m looking at now or building duplexes. I’m in a mindset of maybe buying land and building spec homes just for cash because the margin on that’s really, really good. Or a building at a duplex or quad and the margin on that’s really good too. So I mean I’m looking at a lot of these things, but it really depends on the land that I could buy at the time, right, because it all matters with the deal. It’s either you get to deal or you don’t. And so whatever comes to me first, I’m kind of looking at those avenues.It’s interesting. So you were saying doing development, but paying for it in cash and not paying a construction loan.Correct. That’s exactly why I’m leveraging my lines right now. I’m actually, it’s something that I’ve always wanted to do. I’ve done a lot of burrs,So I’m pretty versed there. I’ve got some really good contractors and I know some that are builders and in my mind, I know a lot of builders too because I’ve been in the real estate and the mortgage game for a long time. I know their margin sets and so yeah, the line of credit is a lot better there because obviously not taking out hard money at 13 to 15% right now and paying a point or two on that, I can maybe leverage a line at eight, eight and a quarter. That’s really helpful over the long term, especially if you’re building something out over six months, buying the land, owning it, cash, building out all the sewer and so forth, and then building to spec on top of that, having a line of credit to do that of your own money or having cash to do that is definitely very helpful, especially now.And I want to sort of clarify for people, when Nathan is saying cash, it doesn’t mean he has that money in the bank. You have a line of credit. So he is borrowing against assets that he has. For example, if you had a $200,000 paid off property and say you can rent 75 LTV, you could take out a hundred, $150,000 and use that to finance development of a new property. And obviously not everyone could do that, but it’s great because if you were to just go get a construction loan that might be 12% and paying two points or it could be higher. I don’t even know, but so just that level of doing a little bit of arbitrage here and figuring out that you can develop at a lower cost than someone else might be able to because you have these paid off properties, can be really beneficial. And I think it’s interesting, Nathan, because you’re a mortgage professional, but it seems like a lot of your strategy has been around low debt trying to not over-leverage yourself and trying to pay off properties quickly. It seems a little counterintuitive. You hear a lot of people wanting to max leverage. So how did you arrive at that strategy?I’ve seen a lot of people lose everything they have is the best way to put it. In all honesty with you, I know four people personally that have done strategies where they over leveraged and they’ve been burned on it.And so my strategy really came from their experience and them telling me not to do it is the best way to put it. And so I started my career path out exactly on that as far as my investing pages as to not over-leverage too much, but to your point now I am looking to over-leverage. But that’s also because, and the tortoise concept, right? I mean the tortoise is slow, but again, a lot of people don’t realize the shell is what is there to protect you. And so in bad times, if you got good cashflow, that’s your shell. And if you pay off your properties, that’s your retirement and that’s your cashflow. And the bigger your cashflow is, the bigger your shell is,And so you could leverage out. And so being safe is very smart. So I try to buy these cheaper properties because if you put 20% down on an $87,000 house, you only owe 65 grand on it. That’s half my net in a year. I could pay that house off in one single year and it gets me to that point a lot quicker. And so anyway, that’s definitely a format that I still will continue to use. I think paying off debt is very smart because it creates that shell. It allows you to have a larger income snowball to be able to leverage if you need it in good or bad times to buy or to try to play defense. And so it’s a really good strategy, I think.Awesome. Well, I think that’s really wise advice. People listen to the show. I’m all for the tourist approach. I think this is what real estate is all about. It is a get rich, slowly kind of scheme and it’s not really that slow. When people say that it’s like 10 or 15 years, you’re going to be doing great and just trying to make wise, low risk, high upside decisions. It’s just the name of the game. And there are times where you want to leverage. To be honest, in 20 15, 20 16 or even 2020 when rates were so low, it was a good time to leverage now, to my opinion, not as good time to leverage. So you need to just adapt. There’s no one size fits all thing where it’s like you should always be putting the least amount down so you can buy more properties. I don’t know if that makes that much sense these days. So Nathan, thank you for sharing some of those insights with us. Any last thoughts or advice for our audience here before we get out of here?It’s really smart to be secure if you know it’s not a quick game. People think it is, it’s not. First thing we will tell you as an investor that is experienced and I’m at about 15 just like you, is that it is not easy. It takes a long time,But if you’re methodical with it and you’re smart with it and you listen to BiggerPockets, you listen to these stories, you listen to other people’s pros and cons that they’ve had their experiences, take all of that information and try to figure out where you are economically as far as your family, your income, your savings, where you want to be, your wants, needs and aspirations, and leverage an approach that works for you. And if you can do that and do it methodically, you’ll always win. Just don’t over leverage. Don’t over leverage. Don’t over leverage. Don’t always say it over and over and over again. Be smart. You can leverage justWell, that’s a great way to get out of here. Nathan, thank you so much for joining us today. It was a good time.Yes, it’s definitely a pleasure. Thank you again for having me. It’s always a privilege and a pleasure to be on the top real estate podcast in the world, in my opinion. So thank you so much for allowing me to do this. I appreciate it.Yeah, thank you and thank you all so much for listening. Before we get out of here, I just want to remind everyone to make sure to follow the BiggerPockets Real Estate podcast wherever you get your podcast, or make sure to subscribe on YouTube as well. We have a lot of great content going up there. And if you think other investors could learn from your story and you want a chance to appear on the BiggerPockets podcast like Nathan, make sure to go to biggerpockets.com/guest and apply to be on the show. Thanks again so much for listening. We’ll see you next time.