Thanksgiving Week (A Time for Reflection…)

The week of Thanksgiving has got to be my favorite time of year. Although I don’t partake much in Black Friday shopping, it’s all the other things about Thanksgiving week that I love: getting away from work, spending time with family, eating well, relaxing, watching football, and finding time to reflect back on everything that’s happened this year.

It was 3 years ago when my journey to early FI first began! During Thanksgiving week of 2011, I stumbled upon the Early Retirement Extreme website for the first time, and things have never been the same since. I gobbled up all the information that I could, and very quickly realized that there was another life that I desperately wanted.

A life detached from the grind. A life filled with limitless possibilities and experiences… A life that would take me in a completely different direction from the path I was currently on. Even back then, I knew that if I was to embark on this journey to early FI, things would never be the same again.

And they haven’t been. Although I’m still dancing with shadows (spending most of my days in a darkened lab), I can say with full conviction, that I feel like the early FI plan is working… Slowly, but surely, I’m taking the steps needed to get me to where I ought to be in life.

We All Start From Somewhere

Most of us on the journey to early FI had to start from somewhere. Unless you were born into nobility, I’m guessing you also started from humble beginnings.

I know that I did.

Back in 2011, I realized that the only way one would ever achieve something as glorious as financial freedom would be to commit full-heartedly into income investing. So, I started purchasing dividend stocks, tried to save 70%+ of my net income, and persistently invested and re-invested back into buying more shares.

It worked. I was building an income stream, slowly but steadily.

Around that same time, I started researching into real estate in the Bay Area. Due to the most recent market crash, I quickly discovered that prices were more than just a little depressed, and a lot of opportunity existed in that domain. With luck, I was able to snatch up two properties, which have since become core holdings in my investment portfolio.

The first property, I overbid $65,000 above listing price. Yup, it was listed at $250,000, and I went all the way up to $315,000… and still barely etched out a victory. I didn’t even have the winning bid! Fortunately, the winner couldn’t secure bank financing, so my agent and I sneaked in at the 11th hour. At the time, everyone around me was telling me how insane I was for partaking in a crazy bidding war, but as we look back today, Rental Property #1 is now worth around $460,000…

The next deal, Rental Property #2, was purchased for $290,000. Just this week, I’ve been working on doing a cash out refinance to pull out $110,000. Even with the cash out, my equity stake of 25% still totals up to $112,500. My original downpayment was only $58,000…

Luck Helps A LOT!

So, without question you can say I got very lucky with my early investment decisions. In my case, lightning did strike twice and I made out like a bandit with those two Bay Area rental properties. To this day, those first two deals are still by far the best investment decisions I have ever made in my life.

However, to get to early FI, I knew that I must continue traversing through the cash flow path. Although the total return from the first two rentals were tremendous, I immediately shifted my focus from appreciation to cash flow. To be more specific, it was cash-on-cash returns that I now coveted.

Out-of-State Investing

I didn’t know the first thing about out-of-state investing, but in 2013, I was determined more than ever to invest for cash flow. I left behind the rising Bay Area market, and settled into Chicago and Indianapolis… two vastly different real estate markets, as I would soon learn.

Just to be clear, I’m very much generalizing when I say ‘out-of-state’ investing. What it really means is just my OWN personal experience with investing in rentals outside of my own immediate area. In particular, buying properties located in Class C/C-, working class communities. My own experiences most likely won’t mirror your own!

As I was getting started, I penned the “Can $100,000 Invested in Rental Property Retire Me RIGHT NOW?” post, which has become the most popular article on this site. You could say this out-of-state venture was my own thought experiment, and something I was volunteering to try out for other investors…

Not content with just winning one deal, I picked up two out-of-state properties in 2013. By February of this year, I closed my third out-of-state property, and second one in Chicago.

And just like that, I gave my cash flow a good shot-in-the-arm (at least on paper). With the fifth rental property secure, I soon saw my cash flow statements rising to $3,000/month in net income, when all units were firing on all cylinders.

The Shift Back Home

Firing on all cylinders… how sweet that feeling is when it happens… but how unstable, and unreliable it can turn out to be.

It’s still early in the game, so the jury is still out on whether or not out-of-state investing can work over the long haul (I’m still cautiously optimistic). At this point, all I can say from my own experiences is that when it works, it works really well! When it doesn’t work, it can look like the worst investment decision you’ve ever made…

In short, out-of-state investing isn’t for everyone. For one, it isn’t easy. Two, it isn’t close to being anywhere near hands off, or “passive investing”. Problems will happen… Your property management (PM) will nickel and dime you here and there. You will have vacancies. You will pay too much for a maintenance item. You will probably have to pay a tenant sourcing fee, rent-ready fee, and maybe even attorney fees if you have to go through an eviction like me. So, you will have to spend a lot of time staying on top of EVERYTHING, or things will slip through the cracks and end up costing you a lot of money.

And all of this really isn’t avoidable when you yourself are investing from thousands of miles away… But even with all the headaches… If you can stomach the inevitable roller coaster ride, you still might cash flow better than in your own local market!

For myself, I’ve decide to go back home… In 2013, I essentially closed the door on investing in the Bay Area, assuming that the cash flow numbers no longer worked.

How wrong I was…

What I failed to account for in my analysis was the surging rents in the local area! So, even though property values were eclipsing all-time highs, the rents were rising in conjunction to make the numbers still work, somewhat.

Since I now had strong immediate cash flow from out-of-state, I reasoned that I could justify investing back into the Bay Area for the long haul.

Diversify But Focus On Your Strengths

So, my strategy has shifted yet again. In two years, I went from being a local investor to an out-of-state investor, to a local investor again. As always, stay fluid and adapt as the market dynamics change.

One thing I’ve realized in the midst of all this change is to focus on your strengths.

Although Bay Area rental properties don’t cash flow so well today (that’s what the out-of-state properties are for!), I ultimately believe that they are my best path to financial freedom in the long run.

It’s sort of like the tortoise vs. hare approach. The out-of-state stuff accelerates right out of the gate, but can’t keep up the pace. The Bay Area properties will needs time to ramp up production, but within 5-10 years, the returns should blow the out-of-state numbers out of the water. Not only in terms of price appreciation, but rents will catch up and overtake the out-of-state numbers as well. So, if you can win on both the cash flow front and the appreciation front, it becomes a no-brainer, right?

By investing in the Bay Area, you get the following huge pluses:

  • Low maintenance, high-income, well-qualified (700+ credit score) tenants.
  • Extremely strong jobs market (particularly high-tech in the South Bay).
  • High demand, low supply (no land) housing market.
  • Strong annual property appreciation (as mentioned above).
  • Strong annual rent appreciation (as mentioned above).

Granted, even with all the plusses, it can be tough to invest in the Bay Area because the barrier to entry is so high. In other words, you will need a very sizable downpayment and have to compete in bidding wars to secure a property. I realize that this opportunity isn’t available to everyone, which is another reason why out-of-state investing has become so popular amongst California investors…

But if you do have the opportunity, the immediate returns can still work out. By partnering up with other local investors (by any means necessary!), I was able to win two additional side-hustle properties this past summer. I now have an ownership stake in 4 Bay Area properties.

Here are the cash flow numbers for Rental Property SH#2:

Side_Hustle2_Cash_Flow

In actuality, we were able to fetch $3,100/month in rent. So, not the greatest cash flow returns, but not bad for starting out on Day 1 in the Bay Area.

Perhaps you think I’m too bullish on the Bay Area market? Here are some reasons why I remain so:

Recap

It’s been a wild, somewhat unpredictable year of investing. When 2014 first arrived, I had no idea that I would be getting back into buying properties in the Bay Area. As 2015 rolls around, my focus will be to pick up at least one more rental in the Bay with the cash-out money from Rental Property #2. This may very well be the final chess move that gets me to early FI!

Overall, it’s been a wonderful year. From my round-the-world expedition in August, to the new job in September, a lot has happened! I’m very thankful for all the great experiences and memories. 🙂

Also, I’m most appreciative and humbled by all the support I’ve received from readers on this site. From comments, to e-mails, to even meet ups in person, I’ve been inspired and learned so much from all of you. The early FI community is tremendously supportive, and I’m very thankful to be a part of that.

2014 is just about in the books! I hope everyone enjoys their Thanksgiving holiday and doesn’t go too crazy with the Black Friday shopping. For myself, I’m going to use my spare Black Friday money to buy more stocks… and then I’m going to sleep some more. 🙂

Fight On!

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theFIREstarterMr. FrugalwoodsFI FighterJamesNo Nonsense Landlord Recent comment authors
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Jason @ Islands of Investing
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What an amazing ride you’ve had in only 3 years FI Fighter – can’t believe all that you’ve accomplished in that time! It’s inspiring.

Hope you enjoy this time of reflection and relaxation with your family and friends, and hope you manage to snap up a few nice stock bargains following the holidays!

Cheers,

Jason

Luke
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Luke

Congrats on a very successful three years of investing! I think the hardest thing for a lot of people is their unwillingness to take action, either through fear of a bad outcome or sheer laziness. You, clearly, are subject to neither! And your timing happened to be great.

That said, the way you talk about your recent Bay Area investments brings to mind the very entertaining series of “Friday Flashback” blog posts by ‘The Tim’ (an employee of real estate website Redfin), where he recalls blog posts and newspaper articles from the bubble era and pokes fun at the unbridled optimism of those writing them. I hope none of your blog posts ever ends up featured in that series! Here’s the URL if you’re curious – http://seattlebubble.com/blog/tag/friday-flashback/

Don’t misunderstand – I’m a fan, but I wonder if you’re starting to swim a bit far from shore with the new purchases. (OTOH I’m an overly conservative CPA who has had to prepare far too many tax returns with foreclosed rental properties on them – no doubt that’s skewed my perspective.)

No Nonsense Landlord
Guest

Good job so far. Keep going and you will be cash flowing. The only hard part is knowing when to stop. Now that my cash flow (after maintenance, vacancy and management) is well over $10K a month, I am on the down hill side of working, only 19 month’s left.

But I still have the fever to make it $15K a month… All the cash flow in the world does not buy time on the planet though.

James
Guest

I love your real estate posts!

I hope that I can follow something close to your path in a 3 year timeframe. Heck, I’d take that progress in 6 years.

Mr. Frugalwoods
Guest

I really appreciate your words on how luck has played a part in your success. You certainly provided the hard work and smart decisions… but luck always plays a part.

Meditating on the role luck has played in my life has helped me be more empathetic to others. It’s nice to see it here too!

theFIREstarter
Guest

Great update/summary FIF!

Haven’t checked in for a while but glad to see you are still keeping things fresh with the cash out refinance, new rentals, and as near to FI as ever.

Happy belated thanksgiving!

theFIREstarter

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