Do you love your current job? My guess is that you probably don’t. According to Forbes, nearly two-thirds of Americans are not happy at work. I know I’ve been there. I once worked for a large national bank and hated it. I loved the bank and loved my coworkers, but I hated the job itself—the pressure to sell, the pressure to please, and the pressure to perform. Ugh. I don’t like pressure.
So I quit my job and went full-time into real estate investing. It wasn’t always easy, but it was much better than working at the bank. Later, after I had stabilized much of my rental portfolio and had enough passive income to pay the bills, I actually went back into the work world, but for different reasons. I no longer had to work; I was choosing to work, to help build something amazing (BiggerPockets) with people I love and respect.
Allow me to share some thoughts on how you can quit your miserable (or not so miserable) job and embark on a career in real estate investing, whether you plan to quit in 20 days or 20 years. Remember, it won’t be easy.
Rental property investing is not a get-rich-quick strategy. It takes commitment, persistence, and maybe even a little bit of luck. However, before you put in your two-weeks’ notice, we should get a few things straight.
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4 Serious Points to Consider Before Quitting Your Miserable Job to Invest
1. Quitting your job soon through rental properties will be tough.
You can make money relatively quickly in real estate in a lot of ways, but rental property investing is not one of them. Wealth is built in the long run, and as a result, you’ll probably not quit your job next week unless you already have a large amount of investment capital with which to start or you want to make rental property investing a job, which brings me to my second point.
2. Real estate investing can be a job or an investment. Which do you want?
A job is something that earns you money today, to live on. You put in the hours, and cash is deposited into your checking account. An investment, however, is money earned from mostly passive sources. House flipping and real estate wholesaling, for example, are “jobs.” Owning rentals is an investment (hopefully!).
Which one do you want?
This might seem to be a strange question, and there is no universal right or wrong answer, but I believe that thinking this one through all the way is fundamentally important. You see, there are a lot of other options if you don’t love your current job. Going into full-time real estate investing should not be your only alternative to a bad job. Why? Because real estate investing for income is a job.
Know that jerk from work you don’t like and want to get away from? Yep, he’ll be part of your real estate investing job, too, in some form. Know that pressure you felt at your job to perform? Yep, that will be there as well. The grass is not necessarily greener on the other side.
There is one essential truth that I harp on all the time: Find what you love to do in life more than anything else, and do that for a career. If that means teaching high school math, teach high school math. If that means traveling the world, then find a job that lets you travel the world. And if that means investing in real estate for income, then invest in real estate for income.
Now let me clarify something important here: I’m not suggesting that you should only invest in real estate if you love investing in real estate. I’m saying you should only invest in real estate as a career if you love investing in real estate. Do you see the subtle difference?
I believe everyone can—and should—include real estate investing as part of their strategy for retirement and wealth building. However, that doesn’t always include doing it full-time and making a steady income from it. The beauty of owning rental properties is found in the flexibility to make the investment what you want, and if that for you means “passive,” then you can make it (mostly) passive.
3. Even if you can quit, should you?
The third point I want to make is this: even if you can quit your job because of your real estate activities, should you? To be able to quit your job and find “financial freedom” through rental properties, you have to be able to live off your cash flow. If your investment properties provide $3,000 per month in cash flow, and you need $3,000 per month to live, you might think that quitting your job is the next logical step.
This was my thought process when I quit my job the last time. I had enough cash flow from my rental properties to cover all my bills, so I quit. Then, when I sat down and spent some time working on my plan to build wealth, I realized a very important fact: I was eating my financial potential alive by destroying the greatest wealth-building device on earth: compound interest.
Compound interest is the profit earned by reinvesting profits. To quickly simplify this concept, I’ll use a story. Let’s pretend that your bank account has $1,000 in it. That account is special and automatically earns 10% interest every year. So, at the end of the first year, it has $1,100 in it, meaning that you made yourself $100. (because 10% of $1,000 is $100). If it earns 10% interest again the next year, you will not have earned $100, but rather $110, because the 10% is now calculated on the $1,100 you had in the account at the beginning of that second year (10% of $1,100 = $110).
In other words, your previous interest positioned you to earn additional interest. Following this pattern, after 30 years, that account would have more than $18,000 in it.
Now, compare that with a similar scenario: what would happen to that bank account if you withdrew the $100 in interest you earned the first year and hid it under your mattress? You’d still have $1,100 total after that year (the $1,000 in the bank plus the $100 under your mattress), but at the end of year two, you will have earned just $100 in interest, because the 10% is calculated only on the money in the bank account—the money under your mattress earns nothing. You could keep doing this every year for 30 years at 10%, and the most you’ll ever make is $100 per year, or $3,000 in interest total, and you’ll have $1,000 in the account at the end (if you add nothing else to it).
So what’s my point? Trust me, I’m getting somewhere, and if you can understand this entire concept, you can build an absurd amount of wealth in the coming years. Hang with me a little longer while I explain.
The graph above, which shows what your total net worth would be over 30 years using both of the scenarios I just outlined and with no additional money being deposited into the account. The curved line represents the “compound interest” scenario, in which the money is continually reinvested. The straight line represents the “simple interest” scenario, in which the profit is withdrawn and spent each year rather than reinvested.
Sure, at the beginning, the two lines are almost indistinguishable. However, after a while, the compound interest line begins to take on a life of its own. This mathematical phenomenon is known as exponential growth, and it is exactly how wealth is built.
Let’s now bring the focus back to real estate and your job. When you own a rental property and use all the profits from that investment to live on, you severely hurt your ability to build wealth through compound interest. Although you may still build wealth through the loan paydown, tax savings, and appreciation, you can do better. By reinvesting your cash flow into your
business, you’ll be able to earn additional interest on the previous interest, just as my example with the $1,000 bank account shows.
Taking the cash flow and enjoying your profits may be tempting, but don’t do so without first considering the long-term ramifications. Perhaps you don’t want to build massive additional wealth. If that’s the case, then by all means, live on your cash flow! But if you are looking to grow your net worth exponentially, consider keeping your job or finding another way to make income.
When you invest for the future (largely with buy-and-hold investing), you are reinvesting your profits back into your business and thinking for the long term. You cannot simply rely on the money you earn from your investments to sustain you and pay your bills. You must have another source of income. This is why many rental property investors also flip houses or get into wholesaling. These options help them pay the bills and save up additional cash to support their rental property business.
Related: What I Learned by Quitting My Job to Start a Real Estate Business 24 Years Ago
4. If you want to quit your job, you’ll need to know what cash flow you’re aiming for.
OK, so I just spent the past few pointers trying to convince you to not quit your job, or at least to not live off your cash flow yet. However, I know some of you are further along this path or maybe don’t want to build a massive rental property empire, so let me explore the idea of quitting your job through rental properties.
If you want to quit using rental property cash flow, common sense would dictate that you need a significant amount of cash flow coming in. There are two ways you can accomplish this: the “cash flow per door” method and the “return on investment” method. I’ll explain both.
Cash Flow Per Door: One easy way to think about financial freedom from your job through rental properties is by looking at “cash flow per door.” In other words, after all the bills are paid each month, how much money is left over per unit? Let’s say you want to see a minimum of $100 per month, per unit in cash flow after all the expenses are paid. So how many units would you need to have to quit your job?
If you need $2,000 per month to survive, you’d need 20 units. (Be careful, though. Real estate always has ups and downs, with unforeseen expenses that could occur at any time, so make sure that if you are following this strategy, you have significant cash reserves.)
Additionally, do you want just enough income to “survive?” How much income do you need to thrive? A good friend of mine advises investors that “your business should bring in at least 3X of your current job before thinking of quitting your job: 1X for tax, 1X to survive, and 1X for reinvestment and unexpected events.” I think his advice isn’t too far off.
Return on Investment: The more “math-minded” investors out there can get a lot more technical by looking at return on investment and the amount of cash invested. For example, let’s say that you only buy rental properties that produce a 10% return on investment for your money; we’ll also assume you want to “retire” with $100,000 per year in passive cash flow from your rental properties. You would then use these two figures to determine how much cash you’d need to invest. To do this, use the following simple formula:
Annual Cash Flow / Interest Rate = Cash Invested
$100,000 / .1 = Cash Invested
$100,000 / .1 = $1,000,000
Therefore, at a 10% return on investment, you would need to invest $1,000,000 of your cash to achieve $100,000 in cash flow from your properties.
When I had less capital to invest, I generally used the “cash flow per door” method, simply because I was investing with creativity. After all, when I used $0 to buy a property, my return on investment was infinite, so the return on investment calculation didn’t make much sense. As I grow my wealth and get into more and more boring traditional real estate investments, I’ll likely shift my process to use the return on investment calculation to determine how much I need to retire. Depending on how much money you plan to use when getting started, you may want to use either option, or even both.
Is your plan to quit your 9-5 to invest in real estate? Why or why not? Where are you on your journey?
Give us some input!