BiggerPockets Real Estate Podcast - How to Make $5,000/Month with Rentals (Starting from Zero)

Episode Date: August 8, 2025

This is how to make $5,000 per month in passive income from rental properties on an average salary, starting with little money. You don’t need to have any real estate investing experience to follow this blueprint, but if you’ve already started investing, you could (and probably will) get there faster. How much money do you need? How long will it take? Which properties should you invest in? We’re sharing the complete blueprint in this episode. Financial freedom is the goal for almost every real estate investor; the way you get there is by having consistent cash flow that can pay for your life. Would $5,000 per month ($60,000 per year) in passive income make your financial freedom possible? If you’re like most Americans, there’s a good chance it would. Dave is walking through how to get there in less time than you’d think, so you can retire decades earlier and live life free from the pull of a paycheck. Want more than $5,000 per month? You can use this same blueprint and math to get to $10,000, $15,000, or $20,000 per month through real estate investing. In This Episode We Cover How to make $5,000 per month with rental properties (and retire much sooner) The simple calculation that will tell you how much money you’ll need to invest  Why you should not focus on cash flow first if you want to reach financial independence The types of investments that will multiply your money faster  How to switch from more active to passive investments so you can “harvest” your cash flow  And So Much More! Check out more resources from this show on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠BiggerPockets.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.biggerpockets.com/blog/real-estate-1158 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠[e-mail]⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about your ad choices. Visit megaphone.fm/adchoices

Would an extra $5,000 per month in passive income change your life? Of course it would. That covers car payments. It covers tuition payments. It could pay for really nice vacations. But if it was obvious how to make $5,000 a month in passive income, you'd probably already be doing it. But the good news is it's actually much easier to achieve this than you might think.

And today, I'm going to break down exactly how you can reach $5,000 a month in passive income from rental properties starting almost anywhere. Hey everyone, welcome to the Bigger Pockets podcast. I'm Dave Meyer, head of real estate investing at Bigger Pockets, and an investor for over 15 years. When you first get started in this business in real estate investing or even just hear about the idea of real estate investing, it could be really exciting, but it's also kind of daunting.

How do you go from wanting to build a portfolio to bringing in significant, amounts of passive income every month? What are the actual steps that you have to take? Today, I'm going to show you because even though it may sound complicated, earning $2,000 or $3,000, or even $5,000 or more in passive income isn't magic. It's simple math and execution. I happen to pick a number $5,000 a month that I think would be pretty life-changing for anyone. an extra 60 grand of income per year that is typically taxed at a lower rate, that's a huge win for any investor. And today, we are going to reverse engineer how you can do it too.

So how do you actually do this? How do you get $5,000 in passive income from rental properties? This concept just requires two numbers. That's all you need to know. Number one, the amount of equity that you have invested in your overall portfolio, And number two, your average rate of return. If you know just those two simple things, you can reverse engineer $5,000 in monthly cash flow. So we're going to start with our first number here, which was total equity invested.

So all you need to do, this is actually a really simple equation, is if you want to figure out your total equity invested, all you need to do is subtract your liabilities from your total number of assets. So assets is basically the total amount that your properties are worth. And I know that if you're just getting started in real estate, you don't have any properties. And that's okay. Remember, we're reverse engineering this. And so I'm trying to just explain to you the math equation that will help you figure out how many properties you're going to need to buy eventually. So assets equal basically your total property value. And then liabilities is super easy.

That's your total debt. And so for the context of this conversation, what we're talking about is how many mortgages you have. So this is how you get your total equity. Say you have five properties, you add them all up. They're worth $2 million, right? I'm just going to estimate that they're worth $2 million at the end of your portfolio. Again, I know that sounds like a big number, but if you follow the steps we're going to talk about today, over a period of time, if you're patient and you're diligent, you can achieve this. So $2 million of total property value.

But let's just say that you have mortgages. most people use mortgages to buy properties and say that your total liabilities are a million dollars. And that would leave you with total equity of $1 million, right? Two million dollars of property value. Those are your assets minus $1 million in debt. That is your total equity value. And remember, that is the first number that we need to reverse engineer. So I'm just going to number this number one. That was easy, right? If you own a portfolio of properties, you should be able to do this very simply. You can get estimates of your property value from an agent, from Zillow, from all sorts of places, and you'll know exactly what your debt is because every month on your mortgage statement,

they'll make sure to tell you how much debt you still owe them. So that's pretty easy to add up as well. Now, the second number that we need to figure out is something called our rate of return. For me, and for the purposes of this conversation, I'm going to use one of my personal favorite metrics, and I know I'm a giant nerd because I have favorite metrics, but I do. And one of my favorite metrics is return on equity. This is the one we're going to use today. And I might just be calling it ROE. That's what it stands for, return on equity.

And so return on equity, I think it's a really nice metric because it measures how efficiently your portfolio is generating passive income for you. And like we said, the goal of this whole conversation, the examples that I'm giving you today are how to generate $5,000 in passive income. And so we need a way to measure how efficiently we are getting $5,000 a month. So we're going to use return on equity

as our rate of return. And this one is it's super easy to calculate. All you need to do is understand your total amount of cash flow and you divide that by your total equity. and we just showed you how you can calculate total equity. So all you would need to know in this situation is what your cash flow is. So if you had $5,000 a month, you need to annualize that. So that equals 60K a year, right?

So if you have 60K a year, you divide that by 500,000, that equals 12%. That's your return on equity. That is a very strong, good return on equity. It's probably a target that you might want to be aiming for. Maybe we'll use that as our example for the rest of this episode here. But this is all you need to do. In fact, I actually just now sort of inadvertently reverse engineered how you can generate $5,000 a month in passive income.

If you can generate $500,000 in total equity and you can achieve performance of a 12% REOE, that's going to get you that $5,000 a month in passive income. And I know you probably have a lot of questions about how can I get $500,000 in equity? That's a great question. We're going to get to that. You probably want to know how do I generate 12% return on equity? Another great question. We're definitely going to get to that.

But I just want to show you at the simplest level, this is how you generate passive income. You need money to invest in your portfolio. I don't care how many people on social media or YouTube say that you could do this with no money down. You could do it with nothing. That's not true. You can absolutely get started with a little bit of money down. But to actually generate long term, truly passive income,

You need to build up equity in your portfolio, and you need to efficiently generate cash flow with that equity. That's the whole game. So that was just one example. But let's just imagine that you had instead of $500,000, you had $600,000 in equity, right? So that means you only need a 10% return on equity. So I want you to see that the more equity that you have in your portfolio, the easier it is to actually generate cash flow from it.

I know that doesn't sound intuitive because a lot of people, you have to pick either cash flow or equity. But that is not how this works. The more equity you have, the easier it is to generate. Because if you have 500 grand in equity, you needed to achieve a 12% REOE. It's not super easy to find deals like that on the market today. But if you had $600,000 in equity, now you only need a 10% ROE, which means deals are going to be easier to find.

It means you're going to have to take less risk. And your portfolio is just going to require less overall work. You're not going to have to do as many renovations. or renovations with as big of a scope as if you have less equity. And so your job as an investor and as you develop your strategy for how to go about this, need to sort of figure out what your targets are going to be. Again, there is no right answer here. It really depends on how you want to do it.

But I would say, just given some of the numbers that we're talking about here, you should target generating somewhere between $500,000 in equity, up to $1 million in equity in your properties, and generating somewhere between a 6% and 12% return on equity. Okay, so this is the simple formula you need to follow to reverse engineer cash flow. But of course, we need to figure out how do we get those great deals that produce ROE? And bigger question, probably for most people, how do you get that much equity to invest in your portfolio? We'll get into that right after this break.

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book your free demo at bill.com slash bigger pockets, and get a $100 Amazon gift card. That's bill.com slash bigger pockets. Real estate investors, the April 15th tax deadline is coming fast. If you own rental property and haven't done a cost segregation study yet, you could be handing thousands of dollars to the IRS that you don't have to. These studies let you write off as much as 25% of your building and generate huge tax deductions. Costsegregation.com

is an online self-guided software that makes cost segregation fast and affordable. So it finally makes sense for smaller rental properties purchased for as low as $100,000. With pricing under 500 bucks and an average savings of over 25,000, it's just a no-brainer. What's more, audit support is included by the number one cost segregation company in the U.S., but you must complete it before the tax deadline. Go to costsegregation.com and use code tax deadline to get 10% off your first report. Don't overpay the IRS. Head to costsegregation.com before April 15th. Welcome back to the Bigger Pockets podcast. I'm Dave Meyer talking today how you can reverse engineer $5,000 a month in passive income using a very simple formula that I outlined before the break.

Just as a quick reminder, basically you need to figure out how much equity you need to invest in your portfolio and the rate of return or your return on equity that you can realistically accomplish. We talked about that. Hopefully that math is pretty simple. Makes sense to everyone. But you're probably all wondering, how do you actually go about and do that? Dave recommended getting $500,000 to a million dollars in equity.

that is a ton of money that almost no one has lying around. So let's just talk about how you're going to go about getting that. So you're going to need to develop a strategy to get there. Because there are tradeoffs, right? You can't go out. It's not very easy, I should say, to go out and buy a property that both builds a lot of equity and throws off cash flow at the same time. And that's why for the vast majority of people out there, I recommend a strategy

where you've focused almost entirely on building equity at first. Now, I don't believe that you should buy deals that don't cash flow. So I want to caveat that. But I think if I were starting out right now today and was trying to reverse engineer this, and I didn't have just hundreds of thousands of dollars lying around, I would focus almost entirely on the types of deals that can help me build that equity as quickly as possible. Because that side of the equation to me is a lot harder, figuring out how to get that equity. Once you have $500,000 or $750,000 in equity value in your portfolio,

finding deals that can throw off a 10% return on equity, I think is relatively easier than the equity building part. So I would focus almost all of your attention on that. So let's just game this out a bit and talk about starting with $10,000 as your original savings. If you took a different strategy, right, and just went and pursued the highest return on equity, The second part of the equation first, it's going to slow you down and I'm actually going to show you this math. So we'll call this scenario one and I'll call this the ROE first approach, right? So let's just say you do this.

You have $10,000 in your starting and you manage to find something with a 20% ROE. These deals do exist, but the ones that cash flow like this are usually not in the best areas and they're usually not going to appreciate. So this is sort of the tradeoff that I was talking about earlier. where you can find this deal that throws off good cash flow, but it's not going to build your equity at the same rate. And even if you found this amazing deal that is really unique, sort of uncommonly great cash flow in today's day and age, you're still only making like $2,000 a year, right?

Because let's go back to our equation. If you take $10,000, the equity you have invested times your 20% ROE, that equals $2,000 a year, or $160 a month. That's good. It definitely helps, but you're not really even close to your goal at that point. And how do you go from this one to your next deal, right?

If you only had $10,000 saved up, you just invested all of it into this one deal and you're generating only $160 a month. If you do it that way, again, you can. That's your choice, but it's going to take you years to save up to buy a similar property. maybe it takes you four years, maybe it takes you five years, then you buy another similar deal, and then you're earning four grand a year. So if you did this times two, right, then you're equal to

$4,000 a year, which is great, but it's still a far cry from the $60,000 a year or $5,000 a month that we are trying to do it. And for me, honestly, I don't know if that's worth it. You just spent five years investing all of your money to earn an extra $4,000 a year. I mean, honestly, you can do a side hustle, you can do DoorDash, you can do consulting online businesses that will probably make you more money than just doing what I'm suggesting here. But what about if we go after equity first? If we go into scenario two, which I'm going to call equity building, then look how this can actually change.

If you focus on deals that build equity, these are deals like flipping houses, which is not for everyone, but is a great way to build equity, or just doing. heavy value add types of projects where you are doing the burr strategy, for example, these types of deals can build equity very quickly and allow you to reuse your capital to continue growing equity over time. So let's just imagine that we can find a deal that build our equity at 30%. And this isn't easy, right? This is going to take work. It's going to take time. If you're going to flip a house, if you're going to do a burr that earns this type of return, it is definitely possible. Even in today's day and age, even in 2025, you can find deals that

do this if you're willing to do the work. But let me just show you why I think this approach is actually worth it. So just to be clear, what I'm talking about here is let's say you buy a house that's $250,000 and you renovate it, you put some work into it. And then after that, it's worth $400,000. And after all of your expenses, you were able to grow the equity that you put into that property by 30% or more. So you put in $10,000, and I understand that with $10,000 to buy a house for $250,000, you could do that if you use an FHA loan, but you might need to partner. This still works with partnering, by the way. You don't have to buy the entire asset.

What you need is your $10,000 of equity that you put into that deal to grow to just $13,000 in equity. That is a 30% return on your investment. And when you think about it that way, it's not as complicated, right? You need to take $10,000 and turn it into $13,000. on your first deal. And again, you can do that if you buy a property outright. You can do that if you are partnering.

But to get that kind of return in a short period of time, you're gonna have to do a renovation. That's how you build equity as fast as possible in the real estate game. So again, all you need to do is take that $10,000 and turn it into $13,000 by getting that 30% return on equity. And the reason this is so great is because you can do this in a relatively short period of time.

If you are flipping a house, you can hopefully do this in six months. If you're doing a burr six months to nine months, you should be able to do this. And just as an example, let's just say that you can do this two times per year. This is realistic for flippers. Most flippers I know try to flip a house in nine weeks, ten weeks, twelve weeks, maybe 16 weeks. Then you obviously have to sell it. That can take some time. So six months, if you get good at this, is absolutely realistic.

That is what most experienced flippers look. look for. So these aren't just made up numbers pie in the sky. These are real things that you can do. Now let's just imagine that you do this two times per year for five years. Remember, that's the example I gave using scenario one. Remember, I said if you did this for five years, you would wind up with about $4,000 per year. But if you do the equity first option and you do two of these deals for year for five years, you would have, I know this sounds crazy, but you would have $138,000 in equity. That is a crazy difference, right? You go from having $10,000 in equity and make you $4,000 a month in cash flow to $138,000 in equity. That's incredible. Just as an example,

if you decided to take all that equity, let's just say you liquidate everything and you have $138,000 sitting in your bank account. Then you go out and find a deal with just a 10% return on equity. Remember, that's half of what I said in scenario one. We were using a 20% equity number in scenario one. But in scenario two, if you flipped houses or did burs for five years, then went out and repositioned your portfolio to get a 10% ROE, you'd be earning $14,000 per year. So just as an example, after five years, if you go after return on equity and get an absurdly great deal, after five years, you're making $4,000 a year in cash flow. It's not bad, but it's certainly not $14,000 a year that you would be earning an equity. And this is why I highly recommend to people

going after equity first. I'm of course just using simple examples here, but hopefully you can see the idea of focusing on that first half of the equation, building up your equity, then it's much easier to get cash flow in the long run, which is why I recommend you consider this. So let's turn now to talk about how long this will take. Because if you agree with me and you think this strategy might work for you. You're probably wondering, that sounds great. I want my $5,000 a month in passive income right now. Let's talk about how long it will realistically take for you to achieve something like this. I'm going to again pick some numbers here. This might not apply to you, but I could at least talk you through how you can do the math for yourself. So I'm going to do another example here,

and we are going to talk about someone who makes $60,000 a year. That's below the national average for household income. And we have 10K per year in savings. If you focus on the equity side, what you're going to need to do is 18 deals at a 25% ROI. So basically, if you can flip 18 houses and you do this, you know, every six months, you flip one house 18 times, you're going to have enough equity built up that you're going to be able to reverse engineer that cash flow that I was talking about. But, you know, realistically, flipping burrs is a little bit risky. So I always think that you should pad these numbers a little bit. You're going to miss. Even the best flippers in the world miss on some flips. So I'm going to say, rather than doing it 18 times, I'm going to add a

little bit of cushion. Let's just say you have like a 10, 20, let's just call it a 20% misrate. Let's say that you need to actually do 22 deals because some of them not going to earn you that 25% ROI, but what you need is over that 22 deals, if you average 25%, some of them you might get a 50% return, some of you might get a 70% return, but if you average that 25% ROI on those 22 deals, you are going to have enough money to then reposition your portfolio into cash-loving assets, and that's going to get you the 5 grand a month. So how long is that going to take? I think conservatively, it would take you 11 years, right? If you're going to do two of these a year, basically one at a time, because it takes six months. If you do one at a time, it's going to take

you 11 years to generate enough capital and to reposition it and go and get that passive income that you're looking for. Now, I know that's not as sexy as what some of the people on social media say and say that you can go out and start with no money and you can retire next year. I'm sorry, but that's just not true. It's just unrealistic. What I'm trying to share with you today is a realistic, actionable timeline that most Americans can do. Remember, we're talking about people who are making below the national house income here of 60 grand. And with only 10K of savings, that's nothing to sneeze at, but the average in America is

about 40K. So we're starting about talking at a below average financial starting point and realistically being able to get five grand a month in passive income in 11 years. You know, most people work for 45 years to be able to. to retire. And I'm saying you can make 60 grand a year in passive tax advantage to income in just 11 years. And that's only doing two of these a year. If you're willing to do four of them a year, start one every quarter, you're probably going to have two of them going at a time. So that does take more work. It does take more time. But if you want to be aggressive about this, you could probably

do this in five to six years if you're willing to do four of them a year. And that's not absurd. I was talking to a flipper the other day at a meetup. And she had done nine flip. last year just by herself. She doesn't have a team. She has children. She has other obligations and she did nine flips last year. Now, that's not for everyone. I'm personally never going to do nine flips in a year. But if you want to be aggressive about it, that just shows she might be able to accomplish this in two to three years. So that is really up to you, but I just kind of want to give you some general guidelines of how long, you know, on the super aggressive two to three years, but even at a conservative rate, if you get good at this, you could probably do this

in about 10 or 11 years. So that's my rant about how to build up equity and why I think you should focus on that first. But of course, at a certain point, we have to shift strategies. We can't just keep focusing on building equity. We need to turn this into cash flow if we want $5,000 a month in cash flow, right?

Because these kinds of deals aren't going to be earning the cash flow that we're looking for. We're going to get into that and I'll show you how you can reallocate and reposition your portfolio right after this quick break. When I bought my first rental, I thought collecting rent would be the hard part.

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Tax season reminder for all the real estate investors listening. If you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about cost-segment. It's an IRS compliance strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost segregation guys is the go-to firm, having done over 12,000 of these studies with 500 million in total depreciation identified. Head to Costsegregationguise.com slash BP to get a free proposal and see your potential tax savings. New Year, Clean Slate, and maybe a vacancy that needs to get filled fast, that's where a veil comes in. With Avail, rental listings can be published

to 24 top rental sites with one click, completely free. That includes places renters are already searching, like Realtor.com, apartments.com, redfin, and more. No copying and pasting. No juggling multiple platforms, just one listing that shows up everywhere. If getting rentals organized and filled fast is on the list this year, start with Avail. Sign up for free at Avail.co-Biggerpockets. That's A-V-A-I-L-C-O-Biggerpockets. Hey everyone, welcome back to the Bigger Pockets podcast. I'm Dave Meyer talking about how you can reverse engineer $5,000 a month in passive income to help you achieve financial freedom. Before the break, so far what we've talked about today is how you really just need two numbers.

You need to know how much equity you have invested and your return on equity. And that is how you reverse engineer your number. I've talked about how I think for most people, especially if you're not starting with a lot of capital, you need to focus on equity first. I should mention that if you are starting with $300,000 in equity or you have $500,000 to invest, this game is a little bit simpler and you can sort of fast forward to the part that I'm talking about now where you turn your equity into cash flow. But for the people who are starting with more modest amounts of savings, focusing on equity

first is really going to help you get to the point where you reposition your portfolio. There are different ways to think about this, but my friend Chad Carson, Coach Carson, you might know of him. He says there are three phases of being a real estate investor. There's sort of the starting phase where you do your first few deals and just figure things out. There's the growth stage, which is what I was just describing, where you are trying to build as much equity as possible because that gives you optionality later in your investing career. And then there's this third phase, which is sort of the harvest phase.

And that's the part where you take all the equity that you build up as an investor and start positioning it into properties that generate more cash flow. Because if you remember what I said earlier, certain properties are better for building equity, certain approaches like the burr and the flipping are better for building equity. Then there are other things like midterm rentals or rent by the room or just plain old boring cash flowing rentals. Those are better for generating the passive income that we're ultimately trying to get to. So let's just imagine that over, let's call it, eight to ten years of investing, you generate, let's call it $600,000 of equity.

That's amazing. Hopefully you are all able to do that. I have seen many people do this with flipping and burr and different types of real estate strategies. And I am optimistic that if you go and learn about this and execute it, you can do this too. By the way, I can't get into everything in this one episode. But if you want to learn more about burr and flipping, we have plenty of other resources on BiggerPockets, biggerpockets.com, that you can check out to learn how to actually tactically

go about these things. But let's just imagine that you succeed and you build up $600,000 in equity here. Now the math becomes really simple, right? Because as we said before, in order to get that 5K per month in passive income, which is equal to $60,000 per year, what we need to do is take our 600K and get a 10% return on equity, and that's it. That gets us our 5K a month. So the question becomes, after eight to 10 years of focusing on a buy box where you're looking at Burrs, and you're looking at flips, and you're looking at value ad investing, you move from this period of value ad that you were in for eight to 10 years,

and you need to move now to cash flow. This is how we get to that harvest stage of our investing career. And this requires you to reposition your resources and assets, which may sound hard. It may sound like this complicated thing, but it's really not. All you need to do is take the, the equity that you have, and that might be in different places. If you're just pure flipping, that might just be sitting in a bank account. If you've been doing burr investments, you may have

some properties that have equity in them. And so all you need to do is take these properties that you've been buying for years to build up equity and just sell them or refinance them, and put all of the equity that you have into cash flowing assets. Now, you might be able to have found a burr that got you this great ROI, but is only earning like a two or three percent return on equity or cash on cash return because it's just like I said, there's tradeoffs. Certain deals are better building equity. Certain deals are better at cash flow. And all you need to do is basically just shift your buy box, right? So if this was me, I would just sell some of these assets and then just buy new properties with a totally different buy box. And I'll share with you what I think my buybox would be. And I'll just be

honest with you, this is kind of what I'm doing in my portfolio right now. I still do look to do value ad, but certain properties that I have, I'm trying to take the equity that I've built up and start to be more efficient about building cash flow. And again, that is not a knock on the properties that I've bought. They've made me a lot of money by building tons of equity, but I didn't buy them because they were going to be these long-term cash-flowing assets for me. So I need to get rid of those and start buying those assets that are going to be long-term cash-flowing assets for me. So first things first, I still want great assets, and hopefully this is self-evident, but a lot of people who move into this phase, they go on Zillow or they talk to people and they just buy

something that produces the highest possible cash on cash return. And that is one option, but for me, the whole point in generating $5,000 a month in passive income is that I don't want to be working on this all the time. And if you go out and buy something that maybe produces a 15, 20% return on equity, typically, this is not always true, but typically those are going to be assets that aren't in great neighborhoods that have a lot of deferred maintenance and aren't going to be as passive as you probably want them to be. So I do recommend, even though you're sort of at this endgame point and you're trying to generate this income, still being disciplined and focusing on finding great assets in great neighborhoods. Because,

yes, this is going to help you build some equity over time, but it's also going to help you with the third criteria, which is to get great rents. And this means that you are going to need to pay a little bit more for these type of properties. And so instead of getting these 20 or 15% return on equity that you can get, if you bought a not great house in a not great neighborhood, I think you can realistically target a 8 to 10% return on equity. on these deals. I think those types of deals actually exist today in 2025 on market. And so I'm suggesting to you and telling you that I think realistically, if you have this $600,000 in equity that I was talking about earlier, and you can still go out and buy great assets in great neighborhoods

with great rents and target this number, an 8 to 10% return on equity, and you're going to be able to achieve exactly what I'm talking about. That really can be it, but so many investors get stuck in this stage. They either start by focusing on cash flow and they never build up enough of equity to really get their long-term cash flow goals. Or they go into value-add investing and they build up equity and then never actually transition from the value-ad equity-building stage of their investing career to the cash flow stage. And this is why reverse and engineering and understanding the equation is so important. Because if you didn't do what we started with up at the top here and know that what we needed to target was either $500,000 or $600,000 in

equity, if you never went through that exercise, you could get stuck doing these value-add deals for the rest of your investing career. And you'd probably build up a lot of equity, but you would never actually get to your goal, which in our example here today, and I think is an actual realistic goal for so many investors is to actually get that passive income. So this is the real final stage that you need to focus on and make sure that you're disciplined about. Once you hit that equity target that you need and you know that you can get this 8 to 10% return on equity, it's time to move from this growth stage of your investing career to the harvesting cash flow stage of your career. And that's how you do it. It really can be that simple. All right. So that's it,

Guys, that is how you reverse engineer $5,000 a month in passive income. I'll just wrap this up here just as a summary. Step one here is understand the equation, right? Remember, we talked that you needed two different numbers to understand this equation. It is your total equity and your return on equity. Those are the two things that you need to understand. And if I were you and just getting started, I would figure out what a realistic return on equity in my market is. Again, I think it's 8 to 10%.

Then you figure out how much equity they're going to need, and that's probably somewhere between $500,000 and $1 million. But figure out what's realistic in your market, give you your own risk tolerance and the amount of time you want to invest. Step two is build equity. Again, if you're starting with millions of dollars, you can skip this phase and you can go straight to the harvest stage.

But this is the growth stage that I think most people are going to get hung up on. And this is where you want to maximize equity growth. And you can again do this through different kinds of value ad investing. That can be flipping houses. That can be the burr method. That can be, you know, fixing up a short-term rental operating it for a year or two and then selling it off. But the goal here is to maximize equity growth. Then you get to step three, which is sort of this harvest phase and you move from value add to cash flow. I personally am sort of indifferent to what kind of deals that you do. But I think targeting eight to

10% return on equity is both realistic in today's market and we'll get you to that ultimate goal that we've been talking about in this episode of $5,000 a month in passive income. So that's it. Just follow these three steps and that's how you reverse engineer it. Of course, there are difficult tactics. There's going to be hard times. You're going to need to find great deals. We have tons of resources for you on bigger pockets.

But I just wanted to provide you all with a framework that helps you understand how to actually achieve this goal. It's not just going out and buying random deals or going to achieve some magical number of units that you think will all of a sudden get you to a certain amount of cash flow. You need to focus on these numbers. How do I maximize my equity? How do I maximize return on equity? And you might not need 50 units. You might not need 20 units. You might only need five units or 10 units to accomplish that. This is why you need to understand these metrics first before you go out and start buying deals. That's why I recommend. doing this reverse engineering. I should mention, too, if you have a different goal instead of

$5,000, if it's $10,000 or $2,000, you can follow the same exact steps here. I obviously just had to pick a number for our example today. So that's what we got for you guys. Thank you so much for listening to this episode of the Bigger Pockets podcast. If you have any questions at all about this, please feel free to reach out to me on Instagram where I'm at the day to Delhi or on BiggerPockets.com where I'm active in the direct messages and the forums as well. For BiggerPockets, I'm Dave Meyer. We'll see you next time. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform.

Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calicokech, content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk.

So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.