Zero to financial freedom as quickly as possible

25 Replies

Goal: Generate at least $2,500 net per month outside of my job and my wife's job.

Current Location: I live in a suburb or Portland, Oregon, where SFRs and small multiplexes are currently going for around $300k. (Of course, this wildly varies with specific location, condition, etc. I'm just using this number to illustrate that homes aren't $80k here, nor are they $700k.)

Occupation: My wife works within minutes (on foot) of where we live and loves her job. I can work from anywhere with an Internet connection. Her telecommuting options are very limited, and she has no desire to leave her current job.

Current Financial State:

  • Saving $5k per month to put towards investments or extra debt payments
  • Have around $110k in fixed-rated debt (all 6.5% interest or less)
  • Have around $40k in variable-rate debt (currently at 7.95%)

The Million 2.5 Thousand Dollar Per Month Question: If you were in my shoes, how would you reach my goal as quickly as possible?

We started out following some advice from Scott Trench's book, Set For Life. We moved to within walking distance of my wife's office to eliminate a 75-minute one-way commute, along with about $400 per month in gas money. We've got one car that we paid for in cash that gets 35-ish mpg. We've always been frugal, so our non-debt expenses are pretty minimal.

We moved into an apartment so that we could start reaping the new location benefits as quickly as possible, but we're actively looking for a small multiplex to house hack in order to further reduce expenses and get started on our investment journey.

But after that, things get much less certain for me. We could focus on paying off consumer debt (either all or just the variable-rate stuff), we could house hack another multiplex, we could start looking for SFRs, we could invest out of state in turnkey properties. We could do any number of things.

So what would you do?

Just to clarify, I don’t intend for this to be a “tell me what to do so I don’t have to think about it” kind of post. I’m just interested in hearing what investors with more experience think about the options available.

Hopefully other new investors will be able to benefit from that input as well.

Can you elaborate more on the type of debts you have? Is that student loan debt or mortgage debt? I’m assuming the long term fixed is a mortgage. Depending on the amount I’d start paying down that variable debt that’s at 8 percent

No down or refinance the 8% debt.  That's a guaranteed, risk-free return.  Nice work on taking big steps towards financial freedom.

I would pay the variable rate debt first. The Federal Reserve has made it clear they are going to raise rates, and that will (eventually) cause your variable rates to rise.

Next, I would evaluate what the cash on cash return rate would be on any investment. If it’s lower than the fixed rate debt, that is an argument to pay it off first. If the investment returns are higher, invest (and consider using that cash flow to pay down the debt).

Paying off the variable-rate debt, then using cashflow to pay down the fixed-rate debt makes a lot of sense to me.

Suppose that my debts were paid off. Where would you go from there? In my area, 20% down on a SFR or small multiplex could be $60k, which is a year of saving at our current rate (not even including closing costs). Adding one or two units per year is slower than I’d like.

Slow, but steady.

Assuming you want to keep all the equity yourself (i.e. no partners or investors- both of which you might want/need a track record for first), you could look for financing that doesn’t require 20% down. From a bank if you can, or seller financing if you can negotiate it.

If you do have less equity, keep in mind that means slightly less cash flow since you have higher debt payments. Ultimately, that means less flexibility if things go wrong.

Originally posted by @Jacob Sowles :

Paying off the variable-rate debt, then using cashflow to pay down the fixed-rate debt makes a lot of sense to me.

Suppose that my debts were paid off. Where would you go from there? In my area, 20% down on a SFR or small multiplex could be $60k, which is a year of saving at our current rate (not even including closing costs). Adding one or two units per year is slower than I'd like.

It reads like you're not already buying your own home, right? Don't you want to start with that?

ie. 3.5% deposit gets you into a home of your own! [Hint: Always buy bargains!] 

"Slower than you like" can change, depending on those bargains (to enable BRRRR)! All the best!

@Brent Coombs - My next step is to save up for a 3.5% FHA down payment on a small multiplex to house hack. I want to convert my wasted rent into loan paydown ASAP.

Originally posted by @Jacob Sowles :

@Brent Coombs - My next step is to save up for a 3.5% FHA down payment on a small multiplex to house hack. I want to convert my wasted rent into loan paydown ASAP.

There you go! You already knew the right answer to your question!

You do know that Real Estate is not a get rich quick scheme, right?

[But it certainly would have been a bit quicker if you'd already done that 3.5% thing, earlier]...

This post has been removed.

@Brent Coombs - Yep, I'm convinced that the way to real, lasting wealth through real estate is buy-and-hold, which takes time. That said, I'm trying to apply some Grant Cardone 10X thinking to my situation to see what I can do to accelerate the process.

This is an interesting post. Thanks for the good questions Jacob.

I’ll be following almost an identical strategy.

@Jacob Sowles I'm in a similar boat as you and over the last couple of years made huge strides. I recently posted a blog titled 'Purchasing Our First Apartment Complex'. If it weren't for partnerships I wouldn't have been able to post that blog. So while you're studying here on BP, paying down that bad debt, and saving for your FHA loan down payment, there truly are some low money down options for you to achieve your goals, but the single best advice I can give you right now is start developing those relationships and looking for potential partners. Best of luck!

@Jay Helms - Thanks for the advice. When you were forming partnerships, what did you bring to the table? I currently have no real estate experience outside of research, so I'm trying to figure out what value I can provide to a potential partner.

Honestly, I would be fine with your $110k debt. The amount is small enough that I wouldn't worry about paying it off quickly unless you don't think you can beat that return on your REI (if you don't think you can beat 6.5% I would question why you're wanting to get into REI).

The $40k is fine too but I don't like the variable-rate. See if you can get that fixed but the rate on such a small amount is less important. Going from 8% to 6% or 8% to 10% on a 30-yr am is like a $4/month difference in payment amount (I'm being facetious but it's minimal). Better to keep that money out of the bank and into RE than to pay it off quicker at this point IMO.

House hack 3-4 plexes. Rent out the best units while living in the crappiest unit for 6 months while renovating it. Then move to the next crappiest unit (offer that tenant your newly updated unit) and repeat until fully updated. Then cash out your sweat equity (and principal paydown), find another small multi., wash, rinse, and repeat for 6 years...then take a much needed vacation and decide what you REALLY want to do with your life. You will be surprised at the options you'll have in front of you by then, sitting on 3 or 4 cash flowing multi family units with equity to boot.   

@Jacob Sowles this is awesome! Next time you make it to Denver, please hit me up for a beer. 

I'll chime in with my thoughts here:

First, you have made some decisions already that will give you an excellent chance at increasing your savings rate rapidly, great stuff! $5,000 per month is no joke, in fact, it's incredible. The fact that you aren't sure about whether to pay off debt or invest aggressively with this huge surplus of savings is a GOOD problem. Your goal should be to continue to give yourself good problems. This is Rich Dad's whole thing when he says that some people have the problem of having not enough money, while others have the problem of having too much money.

Second, as you can tell from the commenters, smart people have varying opinions about the best way to handle debts. Generally speaking, (and assuming as a matter of course that you are current on these debts, and that they are not impacting your credit score negatively) I'm of the opinion that debts in the 8-10% range  should probably be paid off, and debts with fixed rates below 5% can probably just be paid current. Debts in between are discretionary. A more gung-ho guy like yourself might find more motivation in immediately pursuing investments whereas a more passive person might want to just pay the debts and be done with them.

Third, it makes sense to me that a house-hack with 3.5% down is the right move after you (and your lender) are comfortable with your debt position. Depends on whether your analysis tells you that you are highly likely to net a financial positive (which is usually the case, in my experience) in a place that you will be happy living in.

Fourth, with a high savings rate, no commute, a rapidly optimizing lifestyle, diminishing debts, and a growing pool of capital, you are going to go through a transition. Right now, it may seem like there's not too much you can do, other than keep working hard, increase the savings rate bit by bit, and maybe take a few stabs at some unlikely or low wage ventures... Over the next 18 months, then the next 3-5 years, the opposite feeling may be the case. EVERYTHING will seem like an opportunity. There is simply not enough time in the day to take advantage of everything once you have a large amount of financial runway, very low expenses, and have invested a couple of years in learning everything you can about the business of your choosing (be it real estate or some other venture). This, again, is a good problem.

So, basically, I think that the way to get into real estate is probably through house-hacking and rapidly building out a rock-solid financial foundation and eliminating that variable debt. This will probably take you 12-18 months. At that point, you will probably be moving towards a really good position to begin to seriously consider alternatives to your job (if desired) that present risk but also opportunity to move towards your goals 10X faster. Invest in yourself if this is the goal, talk to your lender about possible ramifications (because lenders don't like self-employment income in the first few years!) and stack the odds in your favor as much as you can in the interim! Alternatively, you may be in position such that just by continuing to work your current job you are saving even MORE than the $5,000 per month you currently save. If that's the case, you'll continue to accelerate towards financial freedom at a very high rate, and be able to accumulate multiple significant investment properties each year. 

Keep on giving yourself good problems! 

Sounds like you are on the right track!  I just visited Portland in October - what a cool city!  I think paying off debt is the first priority, however, it sounds like you will be able to do some things quickly if you are able to save $5,000 per month.  I would start by making a list of all multifamily properties in the areas you are wanting to live.  I have a program called rebogateway that can scrub data including all multifamily properties within an area, including high equity, out of state owners, title info., mortgage info., etc.  I would try by sending yellow letters (starting by ones that have "for rent" signs or posted evictions - landlords do get tired) expressing an interest in the property and your desire to "house hack".  I would try to put together an owner finance deal (or lease option if there is still a mortgage) with a small down payment and a 5-10 year balloon payment.  I just purchased a duplex with owner financing and a 5 year balloon.  It will cashflow extremely well those 5 years.  Those deals are out there and if you are consistent you will find them.  Good luck!

Originally posted by @Jacob Sowles :

@Jay Helms - Thanks for the advice. When you were forming partnerships, what did you bring to the table? I currently have no real estate experience outside of research, so I'm trying to figure out what value I can provide to a potential partner.

 I brought the deal to the table. Secured the asset and started due diligence. In regards to experience, note the name of the blog post “Purchasing Our First Apartment Complex”. If you want to start with a duplex-quad, process is very similar, amounts are just different. 

Before you house hack, get a PT job managing apartments in exhange for rent.   Do this in addition to your current jobs.  You will be able to increase your monthly savings and get paid to learn property management and real estate.

@Jacob Sowles just to make sure, you asked for the quickest way correct? Not the safest or most secure way right?

This is what you do.

1. Pay off none of your debt. You will need this money.

2. Find a local bank. Talk with the person over commercial lending. Build a good relationship with him or her. You will need several loans from this person so this is vital. Give him or her all of your financials and get prequalified for loans for rental properties.

3. Partner up with a go-getter realtor. This will be your partner for several years so pick a good one with a similar work ethic who is honest. Preferably one who has done investment deals before.

4. Meet with hard money lenders. Find the lenders that have the best rates. Let them know that you are partnering with an experienced investor/realtor so that you can get better rates. Show them deals he has completed in the past.

5. Have your realtor partner find deals through his advertising or off the MLS or from wholesalers in your area (BTW get on about 20 or so wholesale lists).

6. When you find a property, run the numbers, make sure your all in to the property is 75% or less of the ARV.

7. Buy the property with hard money. Use your own money or credit cards to finance the rehab.

8. Go back to your local bank and get a loan on the property. Hopefully they will give you 75% of the ARV without it needing to be seasoned. If not, sell some promissory notes secured by the equity in the rental property to get your money out.

9. Sell the property on a 5-year lease option and get an option fee for between $3900 and $12,000 depending upon the price of the property. This should get you a lot of your money back out of the property.

10. Make sure your rent covers the property taxes, insurance, renters tax, mortgage and leaves you and your partner at least $200-$300 to split.

Then do this again as many times as the bank will let you. If you do this correctly, you can create $200k-$400k of net worth for your partner and you each in a years time along with between $1000 and $2000 of monthly cash flow. Do this for 3 years and you will have over 1 million dollars each.

This is the quickest way I know how.

Keep educating yourself and then make the decision to buy one little rental property at a time that gets you at lease $400.00 a month and at 10 little single family, you are at $4,000 a month and at 20 little rental properties you are at $8,000 a month cash flow.  Another route would be to save up at least $150,000-$200,000 and get yourself an apartment complex that if you do it right, gives you that same cash flow and has incredible appreciation potential by buying a value play that you can reduce expenses and increase the gross money coming in forcing incredible appreciation allowing you to refinance and take out all the money you invested in the deal and still cash flow.  Another route, you could force the appreciation and buy a much larger apartment complex that will be worth way more and throw off way more cash flow too and then force appreciation and do it again.

You need a lot of education and experience to go the true multifamily (5 units or more route).  While a bit more complicated and convoluted, the Mutifamily business model is the natural progression from single family originally.  That is the way I started.  If I could do it on a measly Catholic School wage, anyone can do it.  I have 109 front doors right now after 6 years of investing in RE.

@Scott Trench and @Brandon Turner featured my story on podcast 238.  Check it out!!!


@Scott Trench - I might just take you up on that beer offer sometime. ;) Thanks for your input (and thanks to everyone else who's chimed in as well!).

@Shiloh Lundahl - In fact I did ask for the fastest way possible. What you're describing sounds essentially like the BRRRR strategy, which I'm definitely considering.

@Jacob Sowles

Those are both odd debit lines as you stated you are renting. 

See if there is a way to restructure that debit with different financial tool. 

You want to check your credit score and start making that as strong as possible. Those interest rates seem little high depending on what they are for and why you have it. 

Restructuring the debit is #1. I would buy something ASAP, you probably need 20k that is really easy to save at your rate. get settled then worry about paying off debit lines. If you have any other debit credit card or anything like that pay them off first. 

@Jacob Sowles it is similar to the BRRRR method, but it isn't exactly because we are selling it on the lease option. That gives us more money up front and we don't need to save much for capital expenditures which maximizes the monthly cash flow.

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