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!
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