4 Easy Steps to Make Extra Money ($3-5K Every Month!)

Looking to build an investment portfolio in order to bring in passive income and reach financial independence?

Me, too. And if there’s one thing I’ve learned, it’s that financial independence and retiring early (FIRE) can be achieved faster than the average person thinks–if you have the discipline to devote money and time to it.

Whether you’re looking to reach financial freedom in your 20s or getting started with real estate investing later in life, follow these four steps to earn $3,000 to $5,000 a month in passive income ASAP.

Step 1: Maximize Your Savings Rate

Captain Obvious, here: it takes money to invest in, well, anything. Sure, there are dozens of tricks you can use to minimize your down payment, but forget about tricks for the moment. On a more fundamental level, you will never build wealth if you spend everything you earn.

The higher your savings rate, the faster you will build wealth. Period.

Yes, I’m going to break down a strategy for $0 net real estate investing in the next step, but without mastering your spending, it won’t matter how much you earn. Your wealth and passive income are a direct result of your earnings minus your spending—because that’s how much money you funnel back into your investments.

To build passive income quickly, aim for a bare minimum of a 25 percent savings rate. Ideally, build it up to be over 50 percent of your income.

Sound impossible? Here are a few tips and tricks to help you get there.

Live for Free by House Hacking

Housing makes up 25 to 50 percent of most Americans’ incomes, and the average American has a 5 to 10 percent savings rate. That means that by eliminating this one expense, the average American can catapult themselves to a 30 to 60 percent savings rate.

You have plenty of options for house hacking. The traditional strategy involves buying a small multifamily property, moving into one unit, and renting out the other(s) to cover your expenses. Here’s an example of how a 27-year-old with no experience house hacked a duplex to live for free.

But multifamily house hacking is not your only option. My partner and co-founder has used no fewer than three different tactics to house hack suburban single-family homes.

Get creative with it by renting out storage space, renting rooms or units on Airbnb, creating a basement or garage apartment, building a casita, bringing in a foreign exchange student, or any number of other clever ways to get someone else to pay your housing.

My wife and I moved abroad, where her employer pays not only for our housing, but provides furniture and gives us both roundtrip flight money home every year! We get to visit ten countries a year on average, and avoid most US income taxes.

Focus on Transportation & Food Next

The second and third highest expenses for the average American are transportation and food. That makes them the next most important expenses to reduce.

Per AAA, the average car costs nearly $9,000 a year to maintain, insure, park, fuel, and own. That’s a lot of money.

As you explore ways to house hack, look for ways to move somewhere that you can get around by foot, bike, scooter, carpool, metro, or anything other than owning a car. Not only does it save you money, but walking and biking more will lead to better health and create a feedback loop for greater wealth.

Mr. Money Mustache once quipped, “Biking saves you money and runs on fat. Driving costs you money and makes you fat.”

Instead of dismissing the idea as impossible, suspend disbelief and brainstorm ways you could get rid of a car.

As for food, the solution is simple, even if no one likes hearing it. Stop eating meals not prepared by you personally. Cook every dinner, pack every lunch, eat every breakfast at home.

When you want a meal out, that’s your prerogative, but remember that it’s an entertainment expense, not a food expense. Only groceries should come out of your food budget.

Better Budgeting Elsewhere

From cutting cable to buying clothes and electronics used, you have endless opportunities to cut your spending and save more money. Those are beyond the scope of this article. But get inspired with these extreme budgeting tips to save investing capital faster.

Pay Off High-Interest Debt

Before you invest a cent in real estate, stocks, bonds, or anything else, you need to ditch all high-interest debt.

By “high-interest” I mean debts that charge more in interest than you’re likely to earn from a conservative investment. In today’s market, I draw the line around 7 percent interest. If it’s higher than that, pay it off before you invest.

You’ll get a guaranteed return on investment at the debt’s interest rate, rather than a possible return on some other investment. Credit cards are the worst offenders to pay off first, but personal loans, student loans, and other unsecured debts should all be in your crosshairs.

Step 2: Invest Using the BRRRR Method

Since we’re after speed here, and you want to produce the maximum monthly income using the minimum amount of cash, there’s nothing more effective than the BRRRR method.

It’s not without its drawbacks and risks, but used effectively it’s incredibly powerful.

What It Is

The acronym BRRRR stands for buy, renovate, rent, refinance, repeat. Think of it like flipping houses, except you keep the house as a rental at the end of it.

What makes BRRRR so effective is that you can pull your initial down payment back out when you refinance, leaving you with a cash-flowing rental property with $0 of your own money invested in it.

Note that you still need cash for the down payment in the first place—plus cash to cover the first draw’s worth of renovations, plus cash to cover carrying costs (like the mortgage payment), plus cash reserves. This is one reason why you need a high savings rate–to set aside some serious cash for investing.

But once you’ve finished the renovation and you refinance to a 30-year fixed mortgage, you can pull all that initial cash right back out. That is assuming that you accomplished two goals:

You forced sufficient equity with your renovation to justify the cash-out refinance.
The renovated property will now rent for enough money to still cashflow well, even after the cash-out refinance.

If you achieve those two goals, then you can recycle the same cash indefinitely to keep stacking up income-producing properties in your portfolio.

Sample Math for BRRRR

Eleanor slims her spending down to a 50 percent savings rate and sets aside $40,000 in cash.

She takes $30,000 of that and uses it as a down payment for a $150,000 fixer-upper, taking out a hard money loan that includes financing for $50,000 in renovation costs. Her loan amount: $170,000.

Before being reimbursed by the lender for the renovation draws, she needs to complete each phase of the work. So she uses $8,000 of her remaining cash to complete the first set of renovations on the draw schedule, then the lender reimburses her, and she proceeds to the next draw’s worth of rehab work, and so on until the renovation is complete.

She immediately rents out the property and refinances for a long-term mortgage. The property is now worth $250,000, and she borrows $200,000.

That covers her original loan of $170,000, plus her $30,000 down payment. It doesn’t cover her closing costs or carrying costs during the renovation.

Alternatively, say the property is worth $260,000 after renovation. Eleanor takes out $208,000 (80 percent)–which is enough to cover her closing costs and carrying costs.

This leaves her free to rinse and repeat the process with all of her original $40,000 operating capital.

Step 3: Avoid Lifestyle Inflation & Compound Your Investments

Let’s say Eleanor’s new property generates $300 a month in net cash flow.

If she’s like most people, she’ll spend it on a fancier car or a bigger house or clothes or jewelry. It’s called lifestyle inflation, and it’s exactly why most people never climb the ladder from middle-class to wealthy.

But Eleanor isn’t like most people. She’s dedicated to creating $5,000 a month in passive income in only five years. So instead of spending that newfound $3,600 per year, she puts it towards her operating capital.

In her first year, Eleanor buys three properties, recycling her original investing capital. Assuming all three have similar numbers as the example above, that gives her $900 a month in additional monthly income or annual revenue generation of $10,800.

With that extra money, she can buy larger properties or multiple properties simultaneously, accelerating her passive income growth. She quickly goes from $40,000 in investing capital to $50,000, then to $60,000 within 18 months. Within two years of starting, Eleanor is buying and renovating two properties simultaneously.

By the end of her third year, she owns 12 rental properties, each producing $300/month, for a monthly income of $3,600. See how quickly you can snowball your rental income, if you reinvest it to compound your returns?

Step 4: Diversify

Now is a good time to mention that nothing ever looks as neat and tidy in real life as it does on paper. Eleanor could invest poorly and lose money or have a contractor take her money and run off to Vegas to put it all on black. Nightmare tenants could ruin her returns for the year.

Granted, there are ways to mitigate all of those risks, from accurate cash flow forecasting to hands-on contractor screening and management to thorough tenant screening. But if Eleanor’s new to investing, she’s likely to make some mistakes.

This is one reason why no one should put all their eggs in one basket. I love real estate, but every investor should also build a strong stock portfolio to complement their property portfolio.

Use dollar cost averaging to buy commission-free, low-cost index funds, every single month. Not sure what any of that meant? It means you should pick a couple funds that track popular stock indexes like the S&P 500 that don’t charge a commission to buy or sell, and you should commit to investing the same amount in those funds every single month.

I recommend opening an account with Charles Schwab and starting with buying shares in the these three funds every month: SCHX, SCHA, and SCHF. All are commission-free, all diversified. If you don’t like Schwab, try Vanguard, which also offers commission-free index funds.

You can get fancier later, but start there.

Finally, make sure your real estate holdings aren’t all in the same market—not the same neighborhood, not the same city, and ideally not the same state. Eggs, baskets. You know the drill for diversification.

Final Thoughts

You don’t need a million dollars to generate $3-5,000/month in passive income—not if you invest in rental properties and use leverage wisely.

But you do need to be careful with leverage. It’s all too easy to underestimate your rental expenses, underestimate repair costs, or overestimate the after repair value or rent. And when you get those numbers wrong, you’re in for an expensive lesson.

Trust me, I learned that expensive lesson the hard way. Too many new investors do.

Yes, using the BRRRR strategy is fast and effective. But when you’re first starting out, go easy on the leverage and the renovations. Start with light, cosmetic rehabs, and don’t leverage each property to the hilt.

You’ll make mistakes when you first start investing, and the key is to minimize the costs of those mistakes. Think of them as the cost of education. Aim to develop the skills of real estate investing on a smaller, safer scale before going on to tackle bigger projects with more leverage.

Start low, go slow, and scale gradually, because the journey to FIRE is a marathon, not a sprint.

What’s your plan for reaching financial independence and generating passive income? What obstacles have you faced along the way?

Tell me in a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.