Our guest today is a fellow Gen Y Freedom Fighter. Brian successfully broke away from the traditional day job to run his own business and now has set his sights on financial freedom. He plans to get there by investing in cash flow rental properties located thousands of miles away.
Let’s turn it over to Brian…
I’ve always looked at things a bit differently than most, somehow devoid of the fear of looking stupid by going against the crowd.
Five years ago, at the age of 25, I quit my well-paying Silicon Valley tech job and blasted out this email to everyone I knew:
Have you ever been to a wild and crazy retirement party? Well this Friday night is your chance – we are celebrating the fact that it is my last day of work and throwing an ABBA themed retirement bash.
That’s right – a party featuring all ABBA music. Gems like Dancing Queen, Take a Chance on Me, Fernando, and Waterloo (you can look forward to both the English and Swedish versions).
It was a good time, although I could tell by the 2nd hour of ABBA not everyone was as into the music as I was…
That one action (leaving my job, not throwing an ABBA retirement party) put me on the path to financial freedom. I’m not there yet, but getting started is the hardest part.
Today I am a small business owner in an area I’m passionate about and building passive income through investing in out-of-state rental properties.
Where My Journey Began
“Some people are born on third base and go through life thinking they hit a triple”
This quote struck me the first time I heard it. And not just because I love baseball.
Across the landscape of financial blogs there are people in many different positions, from broke to rich. If you are signed up for the Gen Y email list (you can subscribe to it in the right side bar) you know the hardships he had to overcome to get where he is today. Others are riddled with student loan debt that will take decades to repay. Then there are a few with millions in net worth.
I feel very fortunate to start my journey in an excellent position – I won the genetic lottery with a loving upper-middle class family in California suburbia. You could say I was born on third base.
Rather, I prefer to think of it this way: the ball was hit to the deepest part of the ballpark for me, all I had to do was hustle my way around the bases to get to third. There are many people who have the same advantages and decide to coast into second base.
The goal is to make it all the way to home plate though: financial freedom. Reaching third base is worth zero runs.
The Working World
I entered the workforce in 2008 with an engineering degree from Stanford and no student loans. Terrific starting position.
Silicon Valley is the place to be for tech jobs and I landed a role at an enterprise software company. Making pretty decent money too.
I just couldn’t imagine staying there forever. Or any company really. It’s so slow! I just don’t enjoy small talk around the water cooler. Keep doing this another thirty to forty years? No thank you.
After three years I knew the gig was up – it was time for me to move on to the next thing.
The 4 Hour Workweek has a chapter about mini-retirements. It challenges the idea of waiting until 65 for a traditional retirement and proposes an alternative. Some call it a sabbatical – every few years taking several months off.
I knew if I was going to be finding a new job anyway, this would be a perfect opportunity to see the world.
So I quit, threw an ABBA party, moved out of my apartment, and started a new journey.
The Second Chapter
After traveling for 5 months, mostly in New Zealand, it was back to reality. I would have to work again eventually. The first retirement wasn’t meant to last.
But I got to thinking – if I don’t like the traditional workplace, it should be a fall back option, not the primary goal. This employment gap might be the best chance I have to start my own small business and work for myself in an area I’m passionate about.
It would mean going through a tough period with very little income, but if successful, I’d be in a much better position in the long run.
And if it didn’t work, at least I’d be able to go back to traditional employment knowing that I’d given it my all. No second guessing, wondering if there was a better way to make a living.
The business I started is 1-on-1 mentoring for kids who are learning to code. I’m able to make decisions to go about it the right way, not simply the easiest way to make money. I’m able to fit work around my life, not the other way around.
But What About Financial Freedom?
If I’m currently on third base, how do I reach home plate? My plan to get there is through passive income.
There is more than one path to financial freedom. Some recommend cutting expenses by doing things like making your own deodorant or getting your ketchup from the free packets at McDonald’s. Most advocate saving a huge chunk of money and reaching a certain account balance before retiring and living off a small percentage per year.
I want money to keep coming in and to be able to spend. I know I haven’t reached my peak spending years yet and don’t want to sit at home hoarding pennies.
Passive income sounds great. Everyone wants it. You just sit there and money keeps coming in? Sign me up!
Unfortunately there isn’t exactly a clear path that works for everyone. It is hard – you have to invest either time or money up front. It is also uncertain – your plan for riches might be a complete bust. Most people suck at rebounding from failure and never try again.
I believe it’s easiest to start earning passive income by investing both your money and your time.
Put your money to work because there is less competition – everyone wants passive income streams that require $0, so those methods are highly competitive. Instead invest your time in finding a better way to put your money to work and learn how to do it.
Which Led Me to Rental Property Investing
Rental properties are a proven way to build both wealth and passive income. You purchase a property and a tenant pays you every month – if you do it right, substantially more than your expenses. Meanwhile the property is appreciating, the tenant is paying down the mortgage, and you get tax benefits. Most people don’t consider all 5 components of return for rental properties.
The world of real estate is huge. There are thousands of gurus preaching hundreds of different ways to do things. There are expensive courses, workshops, and conferences. It is all very intimidating.
Yet the majority of failures are those who don’t get started at all. They worry over details and worst case scenarios “my cousin’s next door neighbor has a rental property where the tenant didn’t pay rent and used the bathtub as a toilet”.
They over analyze rather than taking a less than 100% perfect step 1. So how do you simplify step 1?
I am starting with turnkey rental properties on the other side of the country. I live in San Francisco, which is too expensive for rental numbers to work. You want the rent each month to be at least 1/100th of the purchase price. In San Francisco it is closer to 1/300th.
Turnkey is when a company does a lot of the work for you. They buy distressed properties, fix them up, put a tenant in place, then sell the property to an investor. In the end you own the property and the turnkey company makes a profit for their work – their model is flipping homes, mine is holding for the long term benefits.
I hire professional property managers to take care of most the on-going work. That allows it to be passive income, not a second job as a landlord.
Right now my typical deal might have a $100k purchase price, requiring 20% down plus closing costs for an initial investment of $23k. The property rents for $1k per month, and after all projected expenses, it will provide $150 per month in cash flow.
And remember, cash flow is just one aspect of the overall return. Over the last four and a half years, my properties have produced a 29% annual return. This is possible even with conservative investments thanks to low-risk leverage, which most people don’t understand.
Research rental property investing and consider if it will help you reach financial freedom. It’s not for everyone and there are always risks when doing something different. I write about my own personal journey and how I reduce my risk at Rental Mindset.
The number one book to for motivation is Rich Dad, Poor Dad. It will drive home the goal of passive income through rental properties. Don’t expect to ever find a perfect how-to guide, there are some things you will have to figure out on your own.
For more on turnkey rental properties, I recommend a couple podcasts. The earliest episodes from Passive Real Estate Investing and Turnkey Real Estate Investing will provide a nice overview.
Even if rental properties aren’t your thing, find a way to add passive income streams that you control. There are many ways to go about it and as you level-up your game, you will recognize more and more opportunities around you.
Put your money to work. Start simple. Don’t let fear of failure stop you.
Very interesting path and approach to passive income. You mention low risk leverage though and I’m not sure what you mean. Leverage by nature is risky and you haven’t owned properties through a downturn yet to experience it. Just curious what makes you feel so comfortable about it?
Thanks for the introduction, I look forward to checking out your site!
The Green Swan
Great question. I’m comfortable with the leverage because it is easy to pay by having a tenant. Having a tenant is easy because housing is something people need, not a want that can be cast aside during a downturn.
Cash flow is the most important thing to provide a cushion. It is risky to just barely be able to cover expenses each month. This gives me flexibility to lower the rent if needed to get a tenant – I can lower it as much as 20% and still break even including all major cap ex (like replacing the roof, water heater, every X years).
The market is also very important to look at for what happens in a potential downturn. Somewhere like Atlanta drops 30% from the peak and rebounds faster. Los Angeles might drop 40% and take longer to recover (another year or three). Not too huge of a difference. BUT – the Atlanta market during a downturn will hit the point where the price of the home is below the cost it would take to build a new home. That can keep it from falling too far as long as people want to live there for jobs.
Finally the rent drop in a downturn isn’t as significant as the price drop. There are usually more people looking to rent then, which holds the rents up pretty well – maybe a 10% drop can be expected.
All these reasons make me believe I can wait out a downturn!
GYFG, I love the picture – pretty accurate representation of me. Only thing that could make it better is roller blades…
Thanks for your contribution to the blog!!!
An ABBA party! Great agree… and yes, not everybody will like it.
Generating passive income via rentals is a very often used approach. Thx for sharing your story. Finding out when the numbers match is a hard part for me to do. So, good that you give here some guidelines.
Great that you teach kids to code. I hope to teach my kids some coding as well… Any suggestions on how to get them interested in the subject?
Those numbers are definitely a starting place. I have heard there is a lot of international money flowing in the US rental market these days because the numbers are way better here.
No real insights into how to initially get a kid interested in coding (since kids come to us already interested and I’m not a parent yet). Most kids we work with enjoy computer or video games. Developing a curiosity about how things work or how they were created could help. Encouraging creativity. The first introduction doesn’t have to be too ambitions, there are plenty of great options online – Hour of Code, Tynker, CodeCombat.
Thx, i will look into these Resources over the Summer
Nice post Brian, we’ll have to check out your blog!
Are you buying these properties while in SF or do you make a cross country trip to make the actual purchase?
I buy the properties from SF. Research is done online and by phone (especially for building relationships). Contracts are signed and notarized from here. In fact, I haven’t even seen my properties yet!
Wow, that seems a little scary. I guess you have a system that is working for you though.
How do you recommend determining if a rental property is safe for the long haul and won’t end up becoming part of a bad neighborhood 10-20 years down the road? I guess you could always sell it but maybe by the time you know it’s a bad neighborhood it’s too late to come out ahead.
Sure, it is definitely unusual. But does flying out for a weekend and checking it out in person really change anything? I don’t know that you’d have any better luck identifying a ‘bad neighborhood’ that way. I think it’s about talking to the locals – property managers, people who live in those neighborhoods. That can be done on the phone. Google Street View and other tools help.
It is definitely a little uncomfortable at first though!
Sorry. I think my question was unclear.
I was asking how you prevent that sort of issue from happening even if you’re investing in your own market. I wasn’t implying you wouldn’t know that because the market was across the country. I really don’t know if there’s a good way to protect yourself from that or not and was just curious.
I see now, apologies for misinterpreting. Exactly – there are some things you won’t know for sure. Overall being in an area with job growth will help.
But I think housing is more predictable over 20 years than companies, and that’s what the alternative is for your money!
Very interesting. I’ll have to check out your blog. I bought my first turnkey property last year. I live in NYC and thought real estate investor was impossible. However, it is still tough to come up with capital to invest when you live in a high cost of living area. I have heard of the strategy of buying a distressed property, renovating and then refinancing. I’ll have to see if that would work with my property.
Excellent, I’m excited to check out your blog as well and follow your journey into out of state rental investing.
Finding the money to invest is tough. I remind myself that it is a longterm goal and journey that I’m on, there isn’t any speed that I need to maintain. I’ve only purchased 2 properties in 5 years! But as the snowball effect takes hold, things will speed up from here.
I believe it is possible to have less capital requirements if you do the work yourself to find the property and rehab it with hard money loans (followed by a refi). But you also really have to know your numbers and in my mind the risk is much greater with more work. So I tell myself to be patient.
Thanks for sharing your story. How much does a property manager cost usually for out-of-state properties you buy? My biggest fear is having to manage the manager. So how do you choose the right one and will they really take care of everything and you just have to cut them a check for the repairs and maintenance?
If you were to do it over again, would you still go to Stanford since you left corporate at the age of 25? I’m assuming it wasn’t cheap. Could you have built your rental property portfolio while still having a job?
A property manager is roughly 15% of the rent when including their monthly retainer and additional expenses for placing a new tenant. They collect the rent and take their cut before depositing it in my bank account. Yes, they take care of pretty much everything but for large expenses the investor is still usually somewhat involved, having them gather 3 quotes, and deciding which company to go with.
The fear of managing someone who will do a worse job than you is completely rational, but ultimately limiting. Do you want your results will always be proportional to the time you put in? I want to be the CEO of my life, willing to get hands on, but not the only person doing the work.
Great question about doing it all over again. In short, I wouldn’t change anything, but could discuss this at length. With Stanford (or any top 5 or 10 college) you get way more than just a degree. I was surrounded by top performers and because I have many lifelong friends out of it, I am still regularly inspired by them. On the learning side, I think pushing my comfort zone is important and have an excellent degree as a fall-back option. I doubt I would have taken as many risks without knowing I can always go back to the corporate world if things don’t work out.
I could have built my rental portfolio while still at my job, and that would have been the smart thing to do! There were so many good deals in 2011 when I was getting started, I would be in a much much better position financially today if I kept getting a paycheck and plowing it into more rentals. But would I have ever left to start my own thing? Would I be happier? I doubt it. I chose to put my life first and don’t regret it for a second.