Ready to own your schedule? To have financial independence and security? Yes please! As the band Queen rocked it, “I’ve got to break free…”
This is Part 2 in a five part series written to help anyone trying to break free from the cycle of paycheck to paycheck living – or working for “the man.” Find article #1 here
So… How does Real Estate Investing help me break free from a day-job, or a night shift? Put simply – cash flow. And not just your average run of the mill cash flow – cash flow that is tied to the cost of living. This is cash flow that goes up over time – without eroding your capital – with tax bennies.
When you own a rental property – and your income exceeds your expenses – you have positive cash flow. When you pay off a mortgage – your cash flow is likely to double, triple, or even 10x. This is very simple. Buying a great property – is not. You can get sunk before your ship leaves the harbor by unwisely picking up a property without sound research and reasoning. Yet, this is still a simple business.
So a scenario: purchase a fourplex, roll the income towards a second and then a third. Use cash flows to pay them off sooner. Have all three paid off in 27.5 years – see cash flow of about $15,000 a month and a net worth approaching $3,000,000. This is of course simplified, but doable.
The Takeaway: get educated, find mentors, and invest and you are on the road to F.I.R.E. (Financial Independence, Retire Early)
The above scenario assumes you use no additional income from your day job or other sources to increase your investing activities. If you can save other income and invest more – you can get to early retirement much sooner!
Want more detail – here’s a deeper dive into the above scenario:
You purchase a fourplex with 3.5% down FHA loan (having saved up your pfd’s), it cash flows today $500 a month (say in May 2020). You save that $6,000 a year and in three years you purchase another (in May 2023). Then in three more years you purchase your last one (May 2026). For simplicity let’s say you bought all three for $500,000 each.
So, now you move out into your dream single family home. Your investment properties are paying you $1,500 a month in free cash flow ($18,000/year). This doesn’t retire you today (of course you could keep investing…). But instead you focus on paying those mortgages off starting with the first one with this extra cash flow. Doing this from 2026 moving forward you are able to payoff that first fourplex in 2038, then the second in 2043, and the last in 2048.
What has happened in the Anchorage and Mat-Su Valley areas is that rents have about doubled in the last twenty years – and that type of cost doubling is true for most things – a gallon of milk, a candybar, a pizza…
So when you’ve paid your investment property off in 20 or 30 years two things have likely happened – your expenses have gone down (no more mortgage), and your income has gone up (rents have doubled). Of course – some expenses have risen too – property taxes, maintenance costs, utilities… but the overall effect is your income is much greater than your expenses.
That first fourplex probably provides you with free cash flow of around five thousand dollars, as does the second and the third. You only had to save the first down payment to get this started. You bought the rest just re-using your cash flow. In that time you’ve created $15,000 in free cash flow. You also own free and clear three properties that are valued ~$900,000 to $1.1 million, and have the enviably net worth growth of $3,000,000.
Let that sink in again. Some hard work along the way no doubt – some discipline to not just spend more money because you can – some networking to build a good real estate team (Investors Realtor, Accountant, Handyman, Plumber…) – but from a single down payment of $15,000 in 2020 – you have an incredible lifestyle. If you have the ability to add in savings along the way – you can achieve this a lot sooner as well.
How can this be? Too good to be true? Nope. The truth is – most people aren’t willing to start something small – buying a single fourplex today – and then follow it up with saving and re-investing the extra cash flow. Instead – they use it to go on vacation – or buy a new truck – or… you fill in the blank.
Also – that first month of getting $500 – doesn’t seem like world changing money. So people stop there. Or worse, they don’t even get to that point. Or the idea of managing property doesn’t seem worth it. Yet, this opportunity is hidden in plain sight. You can do this! But will you?
Lookout for article #3: The 101 of running the business (financing, property management, financial management). (…the How do I do this?)
Interested in Real Estate Investing some of your savings, but want someone else to manage the entire process? We do that too. Contact us today to inquire.
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