Posted 7 months ago

How I achieved Financial Independence through real estate?

Read the full post here: https://open.substack.com/pub/ec007t/p/how-i-achieved-financ...

Cut expenses aggressively & MVL

The first thing I learned if I want to achieve FIRE, I need to figure out a way to live life as minimally as possible (and I know where most of the people fail). I read about Elon Musk’s $1/day living, Mark Cuban’s living like a student, Warren Buffett’s frugal living in a modest house, driving a used car even after becoming billionaire. My total income was $1500/month when I was a Grad student from 2011-2013 and even then I was able to save a few hundred bucks from month to month, and I was the happiest person both mentally & financially. After cutting my expenses aggressively, I calculated I can live by $3000/month ($36K/year) income in a decent US city and I call it MVL (Minimum Viable Living). Find your number and stick to your plan for at least 3 years if you want to achieve something great. Keep in mind you will need to give most of the things up temporarily because you want to achieve something that most people dream of.

Net-worth supporting MVL

Next logical step in the process, how much money do you need to support your minimum viable life? There was a lot of research about how much you can withdraw from your retirement accounts without running out of money. I would encourage you to look into the online materials here - Fidelity [1] & Schwab [2]. Rule of thumb is you can withdraw around 4%. If you think this way, calculation becomes pretty easy - you need $36K/0.04 = $900K worth of net worth. So my only goal became just to reach around $1M of net worth and move to a LCOL (low cost of living) area as soon as possible to figure out my next step. And we decided to move to Omaha, Nebraska in 2021 only because Warren Buffett had lived his whole life there amassing Billions of dollars while living as modestly as possible. My wife was always supportive about the move, without her full cooperation, it would be really hard for me to achieve what I have accomplished so far. So what happened from 2017 - 2021? That’s the most interesting part of the puzzle.

Second income source

I was lucky because my first income source was making enough money to pay the bills and helped me to invest aggressively. If you don’t have a primary income source, you will need to learn some skills which are valuable to other people (I will share those in the upcoming newsletter). My primary income source helped me to achieve FIRE in 5 years, but for most people it might take 10 years based on my research & study. Now the second step (based on priority) of the FIRE journey is to figure out what would be your second income source where you won’t need to trade time to earn money. People always get confused about learning the basics and earning passively. When you are learning something new, think of it as the preparation phase, not the income generation phase. I chose real estate (because it’s easier to learn and tied to tangible assets) as my second income source, but it does not need to be the same for you. You will need to be strategic about your second income source, which does not take too much of your time when you start earning. My current real estate investment only takes 1 hour/week to earn around $90K/year.

Skills I learned

For each of the new income sources, I needed to learn something new about the products/assets class. I love to learn new things/skills, which keep my brain sharp and give me some short-term purpose while moving towards the long-term goal. Based on my experiences, it would typically take me 2 years to become comfortable in any new field. So what did I learn during my FIRE journey after reading 100s of books and trying all sorts of things:

Real estate investment
Real estate agent’s work (I got my license in 2020)
Stock & Bond investment
Day trading & swing trading
Option trading
Started teaching in the College & University
Mentoring aspiring software engineers in career growth
Other small businesses like TURO, Airbnb for supplemental income
Finally, how TAX works in different states and the federal level (this will save you thousands of dollars if you learn all the legal steps & processes)

Do you need to learn all of these? Of course not, only a few will suffice. But just pick one that you are most comfortable working for the next few years, and start learning about how taxation works as early as possible. Real focus should be earning enough money to achieve financial independence, and then not to work on the things you don’t like spending time on. Your passive income needs to be in autopilot mode, so that it makes money while you sleep.

My Current Portfolio

I have almost evenly split between real estate (60%) and stocks/bonds(40%) portfolio currently. It might grow more towards a retirement portfolio in the future. And based on economic condition, I balance my stocks/bonds portfolio accordingly. Right now it’s more towards short-term treasuries than long-term stocks. But most of the time, it’s heavier on the stock side. If you are just getting started in the field, I would suggest dollar cost averaging into a low-cost index fund, should be your first goal until you learn how to control your emotions. My track record of ROI for real estate investment averaging 40% and the stocks/bonds portfolio in the low 20s.

I am a big fan of Charlie Munger and have learned a lot from his writings, advice & suggestions. Read his book “Poor Charlie’s Almanac” if you want to understand the common human misjudgments and their consequences. I am in the quest of worldly wisdom and try to understand all the basic parts of human life, including different investment fields. Some of you might not know Charlie’s first million dollars was from real estate development and he had significant investment in that field. My first million was from real estate (single family homes) and the next one will be from stocks & businesses.

How did I get to $1M?

There will be more followup posts about how I grew my net-worth from nothing to $1M in 5 years. The route I took might be different than yours, but here are the steps I followed:

We had a primary residence in Redmond, WA, which we bought with 5% down payment
I bought my first rental property in Seattle, WA (2017). It was making $300/month
I took out a HELOC on our primary residence, also received a signing bonus (from my new employer) and bought another rental property in Redmond, WA (2018). It was making around $200/month (I would say this was a risky move to take out HELOC, don’t do that if you are not as control freak as I am).
I shared with my friends what I was doing in real estate, received funds from 7 different investors, and bought 2 rental properties in Cleveland, OH
Then I came across a few $20K-$30K houses/duplexes in OH which I bought gleefully in 2019 (sold them in 2022 when prices reached around 3X)
By the end of 2019, I had 6 personal rental properties and 2 others with the investors
Next 2 years I did not have any money to invest in real estate. So I started learning day trading, swing trading & option trading, and also got my real estate agent license 🙂
Then finally 2021 came when I needed to do something extraordinary, leaving my very well-paid software engineering job to take a leap of faith
Remodeled our house, sold that for a million and moved to Omaha, NE. The return based on down payment was like 10X in 6 years and paid 0 tax due to primary residence capital gains exclusion [3]. If you know how tax works, you can save up to a few hundred thousand dollars in one transaction, which might take a couple of your earning years.
Next one is more interesting, I did a 1031 exchange of my second rental property in Seattle, WA. If you don’t know what a 1031 exchange is - it’s a way of delaying capital gains tax and move something bigger with the proceeds. Catch is you can’t touch the money, it needs to go through with the intermediary exchange. So I bought 3 rental properties in AL and 3 more in Omaha, NE using those proceeds, so I had 11 personal rental properties
I retired from my software engineering job (2021), started consulting after a couple of months break. That’s how I reached $1M net-worth in 5 years.

How can you get started?

If anything in this post inspires you to take control of your financial destiny, you can start with the following steps:

Please read my post about Personal Balance sheet [4]
Calculate your current net worth
Create a list of all expenses in the last 3 months
Figure out your MVL, talk to your spouse if you are married (you both need to be on the same page if you want to move forward with the journey)
Use MVL/0.04 formula to calculate your FIRE’d net-worth
Find your second income source, if you are interested in real estate - read [5]
If you are interested in trading, focus on value trades rather than momentum trades. Learn option trading ins & outs. But keep in mind, you don’t want to create a second full-time, stressful job for you - you are doing it to become financially free. Trading will not make you wealthy, don’t fall for the trap of financial gurus who sell courses to newbies.
This is the compound table (1072) you will need to understand to become very very wealthy in the future. Based on the compound rate of return in the first column, the second column is the number of years you will need to double (2X) your money and the third column represents 1000X. So the question is: How fast can you double your money both consistently & sustainably? Warren Buffett’s track record is around 20% in the last 60 years.

Congratulations, you are already in the top 1% of the people who will achieve FIRE in the next 10 years. Keep the momentum going; life might be unpredictable sometimes, but don’t lose hope. You will be on the other side of the lake soon.

If you like this newsletter or think someone in your circle would be beneficial, please share with your friends. If you are reading this on Substack app or website, you can add your comments too about your next step.

Reference

[1] Fidelity’s withdrawal rate: https://www.fidelity.com/viewpoints/retirement/how-long-will-savings-last

[2] Schwab’s beyond 4% rule: https://www.schwab.com/learn/story/beyond-4-rule-how-much-can-you-spend-retirement

[3] IRS site - sale of residence: https://www.irs.gov/businesses/small-businesses-self-employed/sale-of-residence-real-estate-tax-tips