Real Estate Investing: My Golden Ticket to Early Financial Freedom

by FI Fighter on March 9, 2016

in Real Estate Thoughts

Santa Clara Home

I like to give credit where credit is due — In my own case, early financial freedom at age 31 would not have been possible for me had I not decided to invest in real estate back in 2012. I am absolutely certain of that, which is why I’m fine with making such a declarative statement.

Yes, it’s true that there are many paths to early FI, and through the many blogs online, you’ll find folks who did it via: index funds, dividend stocks, self-employment/business, etc.

But I must say, in my everyday life, at least 90% of the people that I’ve met who retired before age 35, did it through real estate.

What is it about real estate that makes it so darn lucrative?

Leverage

Well, for starters, it’s the whole concept of leverage. As I’ve written before, leverage is a double-edged sword that cuts sharply in both directions, but for the risk-takers out there, if utilized correctly, it can shortcut your path to financial freedom by at least a decade… possibly more. Leverage is especially potent when used at the bottom of brutal bear markets. As I always like to emphasize, fortunes are made when investors are willing and able to back up the truck during the Depths of Despair.

Now, these wonderful buying opportunities don’t come around everyday, so when they do, you MUST have the conviction to load up aggressively! Otherwise, believe me, someone else will! And I’ll probably be in line myself…

Of course, this is way easier said than done… No one will ever ring the bell for you at rock bottom… which is why it’s important for all financial freedom fighters to ALWAYS pay close attention to market conditions and asset valuations.

 

Here’s a hint for you — Most homes out there are NOT cheap right now!

 

But like everything else is this world — Night follows day, summer break eventually ends, and the bear will come out of hibernation again…

 

When you hear the bear roar, you had better move decisively…

 

If you blink, you will miss it!

 

But if you’re fortunate enough to buy when there is blood in the streets, you’ll be able to ride that gravy train all the way back up to better days… And from my own experience, the greater the fall, the more explosive the move back up will be, no doubt!

Here’s an example of what a Santa Clara townhouse is selling for in today’s market, as of March 2016:

From Redfin:

Redfin SC

Prices

Current listing is $899,000.

 

Sold in 2011 for $610,000.

 

That’s $289,000 in appreciation… in just 5 years. An impressive 47% return on investment, unleveraged.

 

Let’s assume a typical, leveraged downpayment of 20%. That comes out to be $122,000. Debt service of $488,000. Neglecting all principal paydown over 5 years, that still produces a staggering return of 236%!

 

Now do you see the awesome power of leverage?!? Imagine if you owned MORE than 1 of these units!

 

In my own case, I first purchased Rental Property #2 in 2013 for $290,000. It is now worth $550,000. My initial leveraged downpayment was 20%, or $58,000. Had I not performed a cash out refi in 2015, today’s leveraged return would be 348% (again ignoring all principal paydown).

 

 

With leverage, you don’t need to walk every step of your way through the journey of a thousand miles… No! You walk 20% and then take the bullet train the rest of the way. 🙂

 

A single right move at the right time can change your life FOREVER!!!

 

Yes, I know that I’m focusing on appreciation here, but that’s only because it’s related to my own personal story…

 

If you live in more of a cash flow market, well, the gains are different, sort of, but not really… Instead of massive appreciation, what you’ll experience, instead, is massive cash flow… which is all really one and the same thing… The person who realizes the appreciation is going to have to convert those gains to cash flow, at some point if they want to maximize early FI… So, never discriminate! It’s foolish to fall into the trap of declaring yourself either an appreciation investor or cash flow investor.

Don’t be an idiot; take whatever the markets give you!

Appreciation is awesome… Cash flow is equally as awesome.

Anyway, back to cash flow… We’re talking about 20%+ Cash-on-Cash (CoC) returns in a down market. For a typical single family home (SFH), below $100,000, you should be able to score the following:

 

cash_flow

 

The cash flow deal highlighted above was a dime-a-dozen (nothing special at all), back in 2010-2013 timeframe. You could have picked something up like this all day long (or even better), in a really good neighborhood… I’m talking about at least Class B or possibly even Class A (although more challenging to find, no doubt). At $15,000/pop, ten of these babies would have set you back $150,000, to secure over $2,600/month, which exceeds my own current monthly cash flow!

 

Seriously, who needs a 401k, or traditional retirement account when you’ve got that?

 

Early FI, mission accomplished!

 

In either scenario, whether you were out hunting for appreciation, or cash flow, these opportunities did in fact exist… and someday, investors will probably get another crack at similar types of deals, if not better ones. Like every other asset class out there, real estate is cyclical.

 

Further, real estate investing is really easy to do, if you know what you are looking for in advance!

 

The trick is to not settle for less… It’s a game of patience (which is why so many investors fail), but believe me it’s worth the wait!

 

I can’t overstate the potency of leveraged real estate at the right time in the cycle… The gains an investor will make will be life-changing. There’s a reason I’m holding onto $500,000 in liquid funds right now… You’re damn right I want to take another swing at it!

 

Again, leverage is risky business, which is why my philosophy with real estate investing is quite simple — Unless there are an abundance of: REOs, foreclosures, short-sales, etc., I am NOT interested in buying.

 

Period.

 

Trust me, investors who get too greedy at the top of the market and leverage themselves up to the hilt will get decimated.

 

And yes, there will be those investors sitting patiently on the sidelines, ready, willing, and able to pick up the pieces when that happens…

 

 

The first time around, I got lucky. The next time around, it will be because of skill.

 

But without a shadow of a doubt, I owe my early retirement to real estate. Without it, none of this would have ever been possible.

 

Fight On!

{ 17 comments… read them below or add one }

1 Tawcan March 10, 2016 at 7:40 am

Have wanted to get into real estate investing but the Vancouver housing price is extremely high. One option is to invest somewhere geographically but that perhaps means spending more time to deal with the investment as you can’t “see” it. What’s your thought on investing in an area that the price is extremely high?

Reply

2 FI Fighter March 10, 2016 at 7:50 am

Tawcan,

Wait for the next cycle… Otherwise, try to find something within driving distance, slightly further out. If you want to go further beyond that, you will need to spend a lot of time getting acclimated with the location and building a strong team; you’ll need boots on the ground if you’re going to be managing remotely.

In either case, I think real estate (overall) is extremely overheated, so I wouldn’t try to force fit a square peg into a round hole at this time.

Mediocre investments produce mediocre returns. If you score just a handful of spectacular investments, you’re set for life.

That’s something that I didn’t grasp fully when I first started out, but it’s a realization that I came to sometime last year.

All the best!

Reply

3 Tawcan March 10, 2016 at 10:26 am

I thought Seattle might be a good option since it’s relatively close to Vancouver BC. But Seattle seems quite overheated too. It’s pretty crazy here in Vancouver, our property value assessment jumped by about 20% this year. 😐

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4 FI Fighter March 10, 2016 at 2:19 pm

There are affordable areas in Washington, but I wouldn’t put Seattle on that list. It’s a wonderful location though, and one of my favorites.

Yeah, Vancouver is beyond ludicrous right now… from the above ask sales I’ve seen out there, it’s even more nuts than here.

Don’t know how you guys do it…

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5 Brian - Rental Mindset March 10, 2016 at 6:28 pm

This is the one area of personal finance that just isn’t talked about. I love your quote about the 90% of people that retired early. I would guess most people with $3M+ as well.

I wish I had some money back then to invest in these expensive properties. I’m going low cost homes in the south for $20k down. One at a time and I’ll get there!

Also those cheap areas don’t crash nearly as bad, plus recover quicker. So I’m not as worried about buying constantly. You can win in boring markets without timing in my view.

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6 FI Fighter March 11, 2016 at 5:50 am

Brian,

Thanks for stopping by.

There are many ways to get to FI; if low cost homes work for you, keep at it!

That’s the one great thing about cash flow markets, the properties are affordable to begin with so spikes in asset values aren’t as volatile. Further, your focus is on cash flow, so as long as that keeps flowing in, you’ll do just fine.

With low cost homes, it’s a more slow and steady approach. You really have to grind it out. Nothing wrong with that, I just prefer to make quantum leaps, which are only possible during market downturns. This could be through the form of lots of appreciation upside, or 20%+ cash on cash returns to boost the cash flow, in very good locations.

If I get another chance, great. If not, oh well, I’ve already got skin in the game.

But at my stage of the game, no need to force anything.

All the best!

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7 John March 10, 2016 at 11:27 pm

FI Fighter, the last RE downturn was in the 80s prior to the 2007-2008 crisis. Even when the tech bubble crashed bay area housing did not dip a lot.
So with that said; how long would you anticipate waiting for the crash again?

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8 FI Fighter March 11, 2016 at 5:55 am

John,

Yeah, it might require a lot of patience to get another real crack at it. I’ll wait as long as I have to…

In my situation, you don’t have to chase and I believe it’s more prudent to take a hedged position.

If prices keep going up, great. If for some reason, we get a substantial correction/crash, that works just as well, because I’ll have the funds to do something about it.

With early FI, I think too much emphasis is placed on squeezing out every last drop of “progress” that you can make all at once. It’s important to also factor in downside risks…

You want to put yourself in a win, win position…. Leveraging up to the MAX during upmarkets is not a good strategy for long-term success in my view.

All the best!

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9 Peter March 11, 2016 at 9:45 am

I live in Bay Area as well and bought a town home in the summer of 2014 as my primary residence. The house has appreciated ok and with prices of homes being absolutely ludicrous here, what are your thoughts on a cash out refi to hold the cash and wait for the right time to deploy? Thanks!

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10 FI Fighter March 11, 2016 at 11:18 am

Peter,

That’s exactly what I did, and I performed 2 separate cash out refis last year. For now, I’m just holding cash, awaiting better opportunities.

To answer your question, though, it really depends on your own situation and equity involved. The additional mortgage payment may or may not be worth it to you. In my own case, my refis were done on rental properties that each still cash flow today, despite the increase in monthly payments.

Hope that helps.

Cheers!

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11 Midwestern Landlord March 11, 2016 at 9:53 am

You can still win in real estate “cash flow” markets today because prices in these areas have not moved up much since the last downturn. It is a lot better though to actually live in these markets and manage the properties yourself.

Keep in mind what $500 / Mo in cash flow actually represents. It represents $150,000 in capital based upon the 4% rule. $2,000 / Mo represents $600,000.
That does not include principal reductions or tax advantages. Appreciation will probably be minimal, but it should still keep up with inflation.

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12 FI Fighter March 11, 2016 at 11:20 am

Midwestern Landlord,

Yup, it’s definitely still doable, and the insiders who work the grounds have the edge. For out of state retail investors, it’s a bit tougher b/c without a downturn, there isn’t enough distressed inventory out there. This means less margin for everyone, particularly someone who is from out of state and reliant on a local team, who will for sure take their big cut of the pie.

Out of state investing, just as with local investing, works best in downmarket. That’s the main reason why I’ve backed off from real estate and will try the waiting game.

No guarantees I’ll be able to get back in on my terms, but if not, oh well…

Take care!

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13 Ton March 11, 2016 at 1:21 pm

I definitely agree with you on real estate being hard to find deals on. I live in Chicago and just close on my first duplex as house hacking. I got a good deal through FSBO by negotiating (just give myself $60k initial equity minus down payment).

I definitely see its so much harder to find any good MF anymore. Do you think gold miner companies right now is the “old RE downturn” ? If yes, what would you recommend amount of NW be in gold miners (10,20 or 30%)? Is it too late to invest now? Do you also think oil is good investment?

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14 Joe March 13, 2016 at 1:09 pm

Real estate is the most potent vehicle for achieving financial independence. I think its funny when people say that the real estate market is good or bad right now as if its all one thing. The state of real estate is far different in Muncie, Indiana than it is in San Francisco, Ca. Real estate is local and every submarket is its own conditions. One thing to remember is no matter what macro trends are happening there are always opportunities available if you look for them.

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15 No Nonsense Landlord March 13, 2016 at 6:52 pm

Appreciation, and cash flow, and big wins in real estate. I am looking forward to no longer working in the cube farm. Only 113 days to independence day, 7/5/16.

My income is a bit higher than yours, but you should have more years to enjoy your freedom.

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16 Mrs. SimplyFinanciallyFree March 16, 2016 at 8:52 am

Real estate has certainly made a huge difference in our financial plan and I definitely saw this when I recently reran our FI numbers. In January after saving money for a few years we purchased a duplex. Prior to this purchase my estimates showed we had approx 7 years to our goal but now with this purchase and with the income we should be generating it is more like 4 years. Obviously like anything else this is not guaranteed but it will certainly helps to give us an alt income stream to save now and then to cover our expenses in a few year.

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17 Eric Bowlin April 6, 2016 at 8:14 am

Great article. I can say definitively that real estate is the reason I reached FI by age 30. I have a very similar story…as I started in 2011-2012 time-frame as well.

Keep it up!

Reply

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