Here's a recent conversation with a friend. Let's pretend you're that friend.
Me: Are you where you want to be right now?
You: What do you mean? Geographically? Professionally? Personally?
You: Geographically I'd rather be in Maui. I need a few months off to clear my head. Professionally, I'm dying to start a business rather than reporting to a cubicle. Personally, I need more time for my family and personal health. I haven't been to a gym in weeks. I really just need more time.
Me: How can you get more time?
You: I'd have to quit my job. But I don't have enough money to do that.
I call this the Time-Money Paradox. Americans trade time for money. The promotion and pay raise means longer hours in the office. Staying ahead of the competition means weekend emails. We trade time for money.
So how do we break the Time-Money Paradox?
Passive income! Passive income will set you free. Imagine a $6K check arrives at your doorstep each month. And imagine you cut your spending below $5K per month ( very easy, Mr. Money Mustache breaks it down). You are now financially free! Take that 6-month sabbatical! Coach your kid's soccer team! Start that dream company!
So how do you get a $6K check each month? There are many paths but the easiest one is real estate. I'll use my local numbers because I know Boston real estate best.
Step 1: Find a great cashflowing neighborhood
The basic rule of real estate: the fancier the neighborhood, the lower you get for cashflow. Cashflow = rent minus ALL expenses (mortgage, tax, insurance, maintenance, etc). The rougher the neighborhood, the higher the cashflow. We buy houses in middle-class neighborhoods that are safe, close to Boston, and walking distance to the subway because access to public transportation always appreciates faster.
Step 2: Learn your numbers
Research "cap rates" so you can compare apples to apples when looking at investments. But more importantly, learn about cashflow because your investments MUST CASHFLOW. My typical two-family costs $400K and cashflows about $2K per month. I'd make more if I went to rougher neighborhoods and less if I went to fancier neighborhoods.
Step 3: Get money to invest
Local banks are usually best for financing investment properties and they'll fund 75% of the purchase and 100% of the construction. So to buy a $400K two-family you'll need $100K. Where the hell can you get $100K? Before I had a track record, I co-invested with friends: they put in the money, I did all the work, we split profits 50/50 and we both got fantastic returns.
Step 4: Buy a multi-family that needs a little work
Condos and single families rarely cashflow. Your first purchase should require a little work (paint, carpets, etc.) so that you can create value, but not so much work that you get in over your head. And never-ever swing a hammer yourself otherwise you'll become a professional handyman instead of a professional investor.
How long will it take you to be financially free? If you need $6K and each one cashflows $2K, then three multi-family properties will set you free. Buy one every six months and you're free in eighteen months. If you're splitting profits with your investor(s) then double your pace or double your time to freedom.
Where do you get the money for this? Find friends/family who believe in you and say, "you bring the money, I'll bring the hustle, and we split profits 50/50." It's a standard model. Then, once you improve your properties, you create value and can pull out equity to buy another house. Wash, rinse, repeat.
The first most important thing is to get the right education
Who not to learn from:
- Realtors: 98% specialize in selling houses to homeowners and know next-to-nothing about investing. 2% specialize in investment properties but are hard to find.
- Gurus: if they make so much money in real estate, why are they selling content?
- Realtor Courses: are useless for investing. Spend that time elsewhere.
Who to learn from:
- Podcasts. My favorite is Tucker Merrihew's Real Dealz
- Books: My favorite is Dave Lindahl's Multi-Family Millions
- Blogs: My favorite is Bigger Pockets
- Other investors and developers through your personal network
The second most important thing is that you don't get paralyzed
So many investors don't cross the start line because they keep studying and studying and get analysis paralysis. If you find a house that's in a safe neighborhood that meets your cashflow criteria then buy it. Now.
Poet Eric Hanson explains real estate investing best:
"There is freedom waiting for you,
On the breezes of the sky,
And you ask "What if I fall?"
Oh but my darling,
What if you fly?"