Real Estate, Financial Freedom, and Living the Dream

Over the last year or two, if you’ve ever spoken to me in person, chances are you know I ABSOLUTELY LOVE talking about real estate. I could talk to anyone on the subject for hours. But it’s not because I love houses, or architecture, or physical assets you can hold in your hand, or distrust the stock market – it’s because real estate is a vehicle, and I believe the best vehicle, to financial freedom.

What does that mean? Simply put, it’s the point at which you no longer have to work. Where if you lost your job, you could shrug and say ‘so what’? It means never having to set an alarm clock again.

To me, that’s the ultimate dream. To have more time in life for what’s important – family, friends, kids,  travelling, volunteering, skiing, hiking, adventuring….. whatever is important to you.

But isn’t that what retirement is for? Don’t you have to slog it out at a career for 40 years and then get to relax when you’re old and rich? Not. At. All.

In high school business class, we read a book called Rich Dad Poor Dad (thank you Mr. Laurie!). In it, Robert Kiyosaki argues that people should build ‘passive income streams’ (checks that show up regularly even if you’re sleeping) to the point where they equal or surpass their regular expenses, thus freeing them from the ‘rat race’ of having to work for money. To my 17 year old self, who had no experience with money, or working, or the real word, this made sense on an abstract, theoretical level. The book found its way to the shelf, I found my way to college, and then found myself at a computer desk for the next 40 years.

Or at least, that almost happened.

Somewhere around two(ish) years ago, I became interested in the FIRE (Financial Independence, Retire Early) community – where young people are bucking the conventional career path, and actually retiring in their 30s and 40s (sometimes even later 20s! but that ship sailed a year ago…). Ground zero for this movement was, you guessed it, Rich Dad Poor Dad. Off the shelf it came, and a lot more sense it made the second time around. Ever since then I’ve been obsessed and read every book I could get my hands on and listed to every podcast on the planet about the subject.

Cool, so where do you even start?

Passive income can take many forms, whether dividends from stocks, interest from bonds or private loans, or distributions from fund investments. Typical investment advisors will guide you towards a balanced portfolio of stocks and bonds, with the allocation shifting more towards bonds the older you get (to reduce volatility as you approach conventional retirement). Many people in the FIRE 

community take this path as well, and there’s nothing wrong with it. The rule of thumb is that once your portfolio  reaches 25x your desired passive income, you’ve reached FI (also known as the 4% rule). For example, let’s say I could live off of $50,000 per year, then once my investment portfolio reaches $1.25 million, you’re all set. YIKES! $1.25 mil is a lot of money! That could take forever! Even if you scrimped and saved and lived like Friar Tuck, that would take a long time for most people. There has to be an easier way.

Enter, Real Estate. As luck would have it, I stumbled on real estate indirectly, got super excited, and almost bought a trailer park in 2015 (that’s a story for another day). When I say Real Estate here, I mean residential rental properties – ie. single family houses, small multi-family properties, and larger apartment buildings. I find real estate to be far more attractive than the investment portfolio described above for several reasons:

1.     You can use other people’s money: Whether it’s the bank, or private capital, you can buy real estate with less of your own money, meaning you can scale faster. By using a mortgage, seller financing, private notes or anything else, you can acquire properties faster than you can save.

2.       You have control: with a stock or a bond, you have no input or control with how the company who’s paying you performs. With real estate, you make decisions that can control the outcome of your investment. As an added benefit, you can go out and actually touch the building. Some people take comfort in this.

3.       Higher returns: A stock or a bond will pay you around 1-5% in dividends/interest if you’re lucky. With real estate, you can easily make a 10%+ cash-on-cash return (meaning your investment will pay you $1,000 a year for every $10,000 you invest).

4.       Other people pay down your debt: Also known as Building Equity, the people living in your buildings will pay down your mortgage balance for you. As the mortgage balance declines, you build up equity, which you can realize when you sell the property, or borrow against to acquire more.

5.       Appreciation: as an added bonus, and I don’t count on this at all, it’s possible the value of the property could increase over time.

6.       Tax Advantages: The best part about any rental income you receive is that you can pay lower taxes on it than if you received the same amount from your job. Rental properties can be depreciated over 27.5 years, which means you take (approximately), your purchase price of the building, divide it by 27.5, and deduct that amount from your income each year.

a.       For example: Let’s say I buy a house for $100,000 ($75k mortgage, $25k down payment). I’m making a 15% cash-on-cash return, meaning I receive $3,750 in profit the first year. My tax rate on my normal income is 30%.

b.       At a regular job: At a regular job, I’d make $3,750, pay $1,125 in taxes, and keep $2,625.

c.       Real Estate: I’d make the same $3,750 in cash, but I’d subtract a depreciation expense of $3,636 ($100k/27.5). This is not a cash expense, but it reduces my taxable income to only $113. Incredibly, I’d pay only $34 in taxes, and keep $3,715.

7.       It’s Simple!: There’s really not much to it – when you have a house, tenants pay rent, you pay expenses and the mortgage, and keep what’s left over. That’s it.

Actually doing it – terrifying first step

After about a year of self-education, I figured it was finally time to pull the trigger. In 2017 I was sitting on my couch, browsing properties in Scranton, Pennsylvania (Yes, ‘The Office’ Scranton – where properties are WAY cheaper than NYC), when my roommate, who’s from there, said “Hey, the listing agent there is my high school basketball buddy”. So I got in touch with him, he walked me through the home buying process, and I ended up purchasing a four-unit apartment building for $85k two months later.

For the first purchase, this was absolutely terrifying. It felt like I was about to jump over a cliff and had no idea if the parachute would open. From the time the offer was accepted, it took about a month to get a mortgage, inspect the property, review the financial info, get insurance, find a lawyer to do the title work and actually close the deal. This seemed like so much work just to buy a damn house! I almost thought it was too much, but then as soon as the first month of rent checks hit I was hooked for life.

Fast forward a year and a half, and this has now become routine. My partner and I formed Husky Properties (like the dog), have grown to 13 cash-flowing rental units in the Scranton area, and have outside investors trusting us to invest their money. Within five years the goal is to have 100 units and reach full financial independence - leaving the computer desk and routine behind forever.

What I’ve learned from this is that I absolutely love this subject, and wish more people were as excited about it as I am so I could nerd out with them. If any of this interests you or you want to learn how to do it for yourself, please reach out!

Beer Math

In the beginning God created beer. This has made a lot of people very happy and been widely regarded as a good move. In fact, I’m having some right now while watching football, and couldn’t agree more.  I’d bet my life savings that Future Me will hold a similar opinion. Which got me thinking (dangerous activity, I know), if beer were like money, and you could save it and grow it over time, how many beers am I costing Future Me by drinking this one right now? Let’s find out.

So, there you are with a crisp $5 bill. You have two choices: 

1. Buy a delicious beer. Be happy now. 

2. Save it. Be happy later.

As much as we’d rather not, let’s be boring and save it. Since we already have the $5 in our hands, we’ve (presumably) already been taxed on that income we can deposit it into an after-tax ROTH account (401k or IRA), which means we won’t have to pay taxes on any gains when we withdraw it later on (hooray!!).

Now, we sit in sobriety, and wait. And wait. For 40 years, until we’re 65.

What’s become of our original $5? Assuming 10% annual returns (approximate long term stock market avg.), that $5 has turned into $226.30 [ = $5*((1+10%)^40)].

So does that mean Future You can now go and buy 45 ($226.3/$5) beers right now with the money Past You saved instead of drinking that one beer 40 years ago? Hmm…not quite. In the years that your $5 was growing, things in general have gotten more expensive thanks to inflation and hopefully stable monetary policy. So, to find out how much a beer costs at the time we take our money out, let’s assume 2.5% for inflation.

Cost of beer in 40 years = $5 x (1+2.5%)^40 = $13.43.

So, the next time you’re at a bar, you can think to yourself “For every beer I’m drinking here, I’m taking away 17 ($226.3/$13.43) beers from Future Me”. Conversely, for every $5 you save today, you’re buying yourself a whole night of happily tipsy retirement.

Crazy people

Yes, I know, I know. I may very well be one myself, but I can't help but comment on the fact that most of us encounter them every once in a while; the heroin addict in the subway, the micromanaging boss, the uptight housewife.... I could go on. Most of the time they probably are nuts, but sometimes it's merely a facade.

Case in point: this evening I took the train home from work (car is still suffering post pothole stress disorder), and I could have sworn I sat across from one of the craziest. It was only myself in the car, and no sooner had she sat down directly opposite me, she started singing, quite audibly mind you, a song about death. And no somber song at that. No. This was the happiest, jolliest old tribute the reaper ever heard. "Death is fun, and soon I will be dead", and save for the lyrics you would have thought spring had brought a banner year as far as the mockingbird population is concerned.

This frightened me greatly.

And so I sat, unsure of what to do, but determined not to move or put my headphones in while the refrain of repose abounded. Many possibilities went through my mind: 1) this girl could actually be suicidal, in which case the authorities ought to be contacted 2) she's playing a game and trying to get me to move. Not a chance.  3) it's a filmed sociology experiment on how people react to unusual circumstances.

"Excuse me miss, you have a voice an angel would envy, are you practicing for a morbid musical?"

"That's the first time someone has actually asked me anything! I was expecting you to get up and move like people usually do."

And thus we started talking - it turns out she had been having a rough go of it as far as love and finances were concerned, and actually relished the opportunity to talk to a stranger.

"I bet you're from Midwest, why the hell are you so nice?"

"Guilty as charged. Kansas."

"Well Kansas, you've really brightened my day and cheered me up. Thanks for talking."

I have to say, that was by far one of the best moments of the year, and it was something so simple. It's amazing where a "hello", or "why are you singing this crazy song?" (Diplomatically couched, of course) can lead. In this case, what I thought was a crazy person turned out to be totally sane and simply going through a turbulent time. If I ever lose it, I hope people think the same.

My Gripe with Running

Good evening, able-bodied readers. Yet again, I’ve been delinquent in writing, and since it seems like I say that every time, I offer no apology. In keeping with my Lenten resolution to ‘do more’, I figured writing fell under that broad umbrella, and so here I am. Granted, it’s much easier to sit down to write, or think, or do anything when you’re cooped up in bed or on the couch with some mysterious illness, which is where I find myself this evening. The truth is, I felt as though I had been under-appreciating my excellent health as of late, and decided I should get sick just so I wouldn’t go on taking it for granted. Mission accomplished, and the fact that today consisted of hours upon hours of NCAA basketball is, of course, mere coincidence.

Which brings me to my main point; If I had been my usual bright-eyed, chipper self today, I shouldn’t be stuck on the couch but instead out for a run (see: Lenten resolution). I’ve been thinking a good deal about running lately, mostly because it’s painful and I don’t like it. And I think I’ve figured out why. Not because it makes you breathe heavily, or turns your legs to jelly, or makes you get up at the crack of dawn. No, it’s because it’s extremely inefficient.

Running is peculiar in that the more you do it, the less effective it becomes (I suppose the same could be said of alcohol tolerance, but that’s besides the point). I refer you now to the following chart:

 If you are in terrible shape, running a mile will do you a lot more good than it would to someone in decent shapre. Your heart will work like an ox, you’ll be sweating to high heaven, and likely cursing like a sailor. And you will have gotten a good workout. Whereas the person in decent shape would only be getting warmed up. Indeed, as the chart above clearly illustrates, by the time a person in decent shape were to get a ‘good workout’, someone in terrible shape would be, most likely, dead.

This is what has been bothering me: the more I run, the better shape I get in, and the farther I have to run next time to feel as good about myself. What I want from a run is to feel exhausted and be able to congratulate myself on working so hard, but the harder I work, the harder that result is to achieve! What. The. Hell.

Still, and I’m literally speaking from the heart here, I’d rather be in better shape than worse. It just takes so long to get there, but I guess that’s what those inconvenient Lenten resolutions are for: make you run (and write) even when you don’t want to.

That’s all folks, until next time.

Ian

The best prank my Grandpa ever pulled

Well Hello! Comes now another semi-annual installment of blogging drivel, courtesy of yours truly. First and foremost, seeing as it’s Christmas and there is snow on the ground and cheer in the air, I’d like to wish everyone and then some (just to be safe) the Merriest of Christmases!

On that note, it’s always incredibly relaxing being back home and surrounded by family. So relaxing in fact, that today I dug out one of the old Gnusletter books and read it on the couch for hours. To those who are unfamiliar, which I’m guessing the vast majority are, the Gnusletters started circa 1975, when my grandfather began writing regular letters to all of his offspring (Seven, to be approximate) keeping them abreast of the various goings-on in the family. They were, if he may say so himself ‘a witty, cogent, comprehensive, brilliantly worded, precise yet all-encompassing narrative which brilliantly placed the entire ouvre in context.’

This tradition continued with gusto until 2007, when God decided he needed a few more side-splitting laughs up in heaven and summoned the old geezer to join him. Thankfully, in what is widely regarded as one of the best gifts ever, he digitized all of the old letters, had them published in multiple volumes, and gave copies to all of his progeny. It occupies an entire bookshelf.

This then, is what I was reading this afternoon, when I came across the following entry. It is, with no close second, the greatest prank ever pulled on me, and pulled off by none other than my loving grandfather. I still remember this incident as if it were yesterday. It is reproduced below [with my own commentary in brackets]:

March 20, 2004 [I was 15]

Here are the results of the greatest hoax I have EVER perpetrated.

THE BACKGROUND

Last week, Sean Andrew [My dad] emailed me a story about how Ian, in a Catholic Youth Organization basketball game, slam dunked the ball and claimed his first broken backboard. Yes! Shattered glass, limply hanging rim, the works. This is what gave me my opening. I created the attached invoice ostensibly from the Archdiocese of Manhattan (There IS no archdiocese of Manhattan) to Ian Fox in the amount of $2,476.37. I thought it was sufficiently enormous to evoke immediate suspicion by Ian. Turns out that was a very bad assumption.

After mailing the invoice, I e-mailed Sean Andrew and alerted him to what I was doing. He, in turn, alerted Eileen [my mom] who turned out to be more of a culprit than I. Poor Ian.

According to Eileen, who was in the kitchen when Ian, who was near the dining room table and talking on the telephone with his friend Robert, opened the letter. He froze as he read it, blurted out “I’ll talk to you later, Robert,” and hung up.

“Is that about your weekend trip, Ian?”, asked Eileen innocently.

“No”, was all the response she got.

She watched as he held the letter out at arm’s length, dropped it on the table, and maintained his arm in extended position. STUNNED.

Eileen went into the dining room to see the invoice lying on the table and a speechless eldest son staring at it. Reading it Eileen exclaimed “$161 just for cleaning up? You could have done that and saved all that money.”

“They wouldn’t let us! It was all glass!” he replied in an anguished voice.

Handing him the letter, Eileen asked innocently, “And to whom do you have to send the money?”

“To Monsignor Arthur (Shorty) Snively,” he replied

“That’s your Grandpa,” said Eileen

“WHAT?!”, he asked, evidently refusing to believe that his sweet old grandpa could do such a nefarious thing to his own grandchild. Well, he not only could, but he DID. On the other hand, if a lad can’t trust his own grandfather, whom CAN he trust, I ask you? This is undoubtedly the best one I have ever pulled off, Gang. Sort of sets a standard, dontcha know?

A(musing) on Lent

“And what did you give up for Lent?” If I had a nickel for every time I heard this string of words lately. . . I’d be perhaps a candy bar richer.  As is customary this time of year, lots of my friends have chosen to give something up for Lent, whether it be chocolate, drinking, TV etc. And inevitably, I am asked what I ‘gave up’. Having gone to Catholic school for the better part of 10 years, I get the drill and the reasoning behind it – I just don’t think it’s a good way to effect lasting change or long-term altered behavior.

As a child, I would give something up (typically candy/sweets) and then consume in excess the previously forbidden fruit the second Easter arrived. I was even happier when I discovered the alleged ‘loophole’ that you are allowed to violate your resolution on Sundays. Even now, as a mostly adult, I feel like lots of people go through the motions for 40 days, and then totally forget about whatever it was they had given up. Much like a new year’s resolution gone stale by February.

So, I ask you, what lasting changes have been made? Are you a better person for having sacrificed something temporarily? Maybe, maybe not. Who’s to say? This year I’m going to try something different. Instead of giving something up, I’m going to try to proactively alter my fundamental behavior such that it lasts beyond the 40 days of Lent. I’ve tried this before with little success, but for every weekday, I’m going to get up at 6AM and do something productive for 45 minutes before getting ready for work. Whether it’s working out, practicing piano, reading a book, cleaning my room, or writing on here, something will be done.

The idea is that hopefully this will become something I look forward to, and will be able to build into my routine going forward. Now, I tend to wake up at 6, and press the snooze button 3 times. This feels good in the short run, but let's do a little math, shall we?

0.75 hrs/day x 5 days/week = 3.75 hrs/week x 52 weeks/year = 195 hrs/year x 100 years of life remaining  = 19,500 hours

19,500 hours. According to Malcom Gladwell, that’s enough time to become a world-class expert in TWO subjects. Now, this is extraordinarily unlikely to happen, but it just serves to illustrate the point how a small change now can have a massive impact down the road. Like compound interest.

Alternatively, and this may be an idea for next year: have one new experience/go someplace new every week. I'm lucky enough to live in New York City, where potential abounds, but sometimes the impetus is lacking. Now if you'll excuse me, this paragraph was thrown in here because I just though of the idea and don't trust myself to remember it a year from now.

Anyway, now that I’ve wasted several precious minutes of your life with this drivel, I get to ask you: What are YOU giving up for Lent?

Until next time,

Ian

Learning to Read

Do you remember, way back when you were a child, what it was like learning to read? First, you had to learn the building blocks of language, letters, which are really just squiggly lines jotted down on some flat surface. Then, once you thought you were doing well and had a solid grasp on their appearance, somebody (a teacher, I reckon) told you that the shapes were associated with sounds, so you had to go back and learn the sound that was joined at the hip to each squiggly line.

The next layer of complication arose when the individual letters were mashed together to create words. And to make matters worse, there were a bunch of crazy rules you had to learn too! Like people, these letters behaved differently depending who their neighbors were! The Mr. S at the beginning of the word ‘session’ has quite a different attitude and sound from the same sss (esses?) residing in the middle. Once you had those down, you threw the words together to create sentences. Add a touch of grammar and some punctuation for good measure, and voila! So easy a child can learn it! Thus the entire of world of literature was opened before you, and now, as an adult, reading seems like the most natural thing in the world.

So where, exactly, am I going with this? Good question. Tonight, I felt a little bit like the incompetent child sitting in front of his flashcards all over again. I had the first piano lesson of my life.  When I first sat down, I may as well have been a German code breaker listening to the Navajo. The expanse of white keys, interrupted on occasion by black ones, extending as far as the eye could see in either direction was enough to start my head spinning. We started out by reading music, and I was introduced to the bass clef. We sat for 20 minutes as I tried to read aloud the name of each note in several little pieces, and draw the mental line to the key on the instrument. Easier said than done. Next week it will be Chopstix and Chopin.

The goal of all of this is, of course, to be able to read music as fluently and easily as you’re reading this right now. I suppose at some point it will click, become second nature, and I will look back at these struggles with an amused chuckle and slight shake of the head.

Well, that’s it for tonight folks! Until next time, rest easy and illegitimi non carborundum!