Rules were made to be broken. Life is just more fun that way… Not only that, but who really wants to operate with a closed mind, anyway? Whether we are talking about investing, or life in general, I think we will all agree that life does NOT follow a linear script — There will always be twists and turns, ups and downs, and a whole lot of degree of uncertainty. As Darwin said, it’s not the strongest or smartest who survive; those who succeed, do so because they remain highly adaptable, ALWAYS.
As readers may be well aware, I’m not exactly a huge fan of academia. For one, I feel like “higher education” is overrated and there’s way too much brainwashing that goes on in our school systems. If we didn’t know any better, we would follow the recommendations of our career counselors and advisers blindly, and be content with working the 9-5 gig until 65…
In school, they teach you that you must follow procedures and protocol, and work, work, work until you can’t work no more!
In engineering, they drilled us repeatedly with problems sets where you would have 10 known variables, and 1 unknown variable, and you would have to shuffle and rearrange equations until you could isolate and solve for that missing piece.
Does the real world work that way? Hell no! I can’t remember the last time I even wrote down an equation at work and tried to solve for a missing variable. If I really needed to solve for something, I would either use a fancy software program to do it for me, or figure out the answer empirically (go into the lab and tweak some knobs or dials, or swap component values until you got your goldilocks solution).
Now I’m not saying the skills they are teaching you in school are useless, but I learned early on that just because someone says you are supposed to do something a certain way doesn’t mean that it’s the only way to go…
In college, I took interest in a very obscure software program that no one else was studying. Whereas all the other engineers were fixated on mastering: Matlab, Mathcad, Mathematica, Solidworks, ProE, PSPICE, Cadence, C++, etc., I spent the bulk of my time tinkering around on some other platform. When it finally came time to apply for a real job in industry, guess which software program helped me secure the job?
It wasn’t the software that everyone else was using… 8 years later, my entire engineering career has revolved around using that esoteric piece of software that no one else in academia ever cared to learn…
Real Estate Investing
From my own experiences as an investor, some of the best deals that I ever made were ones that occurred on a whim, or outside the confines of your “pre-defined rules and regulations”.
For instance, when I won Rental Property #1, I overpaid $65,000 above listing, and won at $315,000. At the time, market rents were only about $2,100, so if you were to use some fancy gross rent/purchase price rule, you would get:
Rental Property #1:
$2,100/$315,000 = 0.67%
FAIL! Rental Property #1 fails the 1% Rule, so it should have been a deal breaker from the start. At the time of purchase, I had never even heard of the 1% Rule, so luckily, I wasn’t able to nix the deal in fear of breaking some arbitrary rule.
As I progressed as an investor, there was a period of time in 2013 when I made the mistake of adhering too strongly to rules, thinking that I was actually educating myself in the process by following the herd mentality.
I’ll admit, I did get caught up in all the rules: 1% Rule, 2% Rule, 50% Rule, etc.
It was around 2014 when I smartened up again and realized that those rules were bogus and not applicable to every real estate market. For sure, those rules were absolutely meaningless as it pertained to my own local market, the Bay Area.
In 2014, I continued breaking more rules…
I partnered up and purchased 2 more Bay Area rentals. Here are the numbers for those properties:
Rental Property SH #1:
$2,850/$490,000 = 0.58%
Rental Property SH #2:
$3,100/$521,000 = 0.595%
To add insult to injury, Rental Property SH #1 doesn’t even cash flow and is still NEGATIVE today.
But looking back, I still believe that these two side hustle deals rank as some of the best investment decisions that I have ever made in my life. Lost in the “rules” are many of the wonderful benefits I get with these properties: Class A location, extremely strong rental demand, outstanding tenants, low turnover, large principal paydown every month, etc.
Not to mention, the latest comp to Rental Property SH #1 recently sold for $630,000. That’s $140,000 more than what we paid for, in a span of less than a year!
At this point, I might as well go ahead and break another rule — Appreciation matters! Although it’s possible to build wealth without relying on appreciation, one cannot dismiss how potent and powerful this force really is. Just earlier this year, I completed two separate cash out refis to pull out ~$200,000 in tax-free CASH!
Many will argue that appreciation is just speculation and that it won’t put any food on the table… I would argue otherwise. Because if you can complete a cash out refi, that’s cold hard cash back into your pockets without you having to incur any capital gains taxes! Really, how can you beat that? Again, tax free! And no, the cash out refi will not impact the cost basis on your property tax bill…
Do you realize how much DRIP cash flow I would need, and for how many years to accumulate up to $200,000, after taxes?
When you are identifying investments, sometimes the real gems won’t adhere to any hard and fast rules… What attracted and lured me to invest in these side hustles were growth and stability factors that cannot be ascertained from a simple pro forma or Excel spreadsheet.
Once again, breaking the rules was the right thing to do…
With stock investing, I treat it very much the same as real estate investing. I’ll admit, I’m probably more conservative as a stock investor, but these days, that’s mainly due to necessity because of the debt load I have taken on with rental properties.
I’ll freely admit that I’m not very good with stocks… Whether it’s trading or with Buy and Hold, I have no ability to time the market, and I typically tend to overpay into any positions…
With that said, the most success that I’ve had with stocks up to this point was through breaking rules, again. My single best stock investment was buying shares of Tesla Motors (TSLA) prior to the Q2 earnings report in 2013. Now, if I had followed rules, I never would have entertained the prospect of purchasing such a stock (at the time of purchase in 2013, TSLA had an undefined P/E… negative EPS will do that to you!)…
Many stock investors will follow rules such as: Never buy a stock that is priced higher than 20 P/E, never buy stocks that have negative EPS, dividend yield must be a minimum of 3.0%, etc.
There is a ton of emphasis placed on charts, graphs, historical data, etc.!
Now, I’m not saying to go buy blindly and chase after high flying momentum stocks. That’s not my point at all! It’s wonderful to follow a disciplined and stoic approach, of course, but I do feel like exceptions can always be made. As investors, regardless of your style and philosophy, I just think you do yourself a disservice if you acquire tunnel vision and can only invest using the same lens, over and over again.
The markets are emotional and irrational. There will always be a time and place for breaking the rules! Again, I’m not advocating this is something you have to do regularly, but it’s important to remain open to wonderful opportunities when they present themselves.
For myself, I mostly track, follow, and purchase dividend growth stocks, but you can be certain that I have a watchlist full of hyper-growth stocks as well…
These days, I feel like the market is overheated and my own preference is to mostly hold cash. Although I would still like to earn passive income in the form of dividends, I’m more comfortable with sitting on the sidelines. So, instead of just giving up on the market, I’ve started to day trade a bit… Yup, right now I would say that I am a Dividend Growth Trader (DGT). Never heard of it before? Me neither… But, I’m breaking rules and doing something different again…
I’ll expand with details in a future post… Dividend growth trading… Maybe it will catch on? 😉
Investing In General
I’ve alluded to in the past that I am NOT a real estate investor. And I am NOT a stock investor. My allegiance is to financial freedom only, so I am purely a financial independence investor.
What does this mean? Again, it means that I don’t follow any hard and fast rules. I invest in Buy and Hold properties… for now. But I may flip them in the future. I haven’t flipped properties yet, but I am more than interested in learning someday. Perhaps I’ll even have the opportunity to become a lender too? That would be awesome! With stocks, I Buy and Hold dividend growth stocks, primarily. But I also trade stocks and options…
Basically, when it comes down to it, I like to keep my options open. I’m open-minded, constantly learning, and reworking my strategy as market dynamics change.
Perhaps this type of philosophy is too erratic for many people? Fair enough. I just happen to believe that there’s a time and place for all investment strategies. For instance, I loaded up on Buy and Hold rentals between 2012-2014, but no longer find that strategy compelling for my own situation… Similarly, I have very little desire to tie up a large portion of my capital in equities right now…
But the market will turn, it always does…
When it does, I will simply adapt with the times, again. I can’t say for certain, but maybe I’ll load up on equities at that time and look into flipping properties…
Situations change. Where I am today is not where I was 3 years ago… I wouldn’t expect my philosophy to resonate with those who are just starting out and focused on the Rapid Asset Accumulation Phase. I was there once before, but that was then, and this is now…
I’m sure what I’m doing now won’t make sense or apply to my needs 3 years from now either… So, it’s important to adapt, ALWAYS.
When it comes to life, most people follow the same prescribed rules that society tells you to obey: go to college, graduate, get a good job, get married, have kids, buy a house, work until you’re 65 so that you can pay off the mortgage, retire, the end…
*Yawn*… That’s kind of boring and entirely too predictable, isn’t it?
Not the type of lifestyle suitable for an early financial freedom fighter, that’s for sure!
Those of us on the journey to early financial independence have already realized that working until you’re 65 is an impossible sell (life is too precious to waste working!)… So, we’ve decided to break the rules and attempt something entirely different.
So far, without a doubt, I can see that my life has NOT gone the path of the tried-and-true. Let’s see what we’ve got so far: go to college, graduate, get a good job, buy 8 properties…
What’s next for me? Become a millionaire, retire… and then get married and have kids?!?
I’m deviating from the script, no doubt, but I’m having the time of my life in doing so! Perhaps I will retire later this year at 30, or 31 at the latest…
I can see a lot of this in the future: indulging in wanderlust, exploring, new adventures, sleeping in, naps during the afternoon, helping other freedom fighters achieve their hopes and dreams, writing some ebooks, volunteering, lots of beach time, couch surfing, learning new skills, learning a new language, lots of reading, continual learning and evolving…
But who really knows for certain? I’ve learned that life is unpredictable and anything can happen… If I just so happen to go off on another tangent and break free from that list completely, no worries at all.
Rules were made to be broken, after all… 🙂