Reader Story: Reach FI with the Power of Real Estate Cash Flow

NeilToday we’re very lucky to have a guest post by one of our fellow Mustachians. It is all about real estate investing and real estate cash flow.

The other day, I shared our story in the Mustachians on Facebook Facebook group and one guy called Neil sent us this reply:

My friend and i did it with rental property. We worked 10 years at a large engineering company, a great job by many standards, but after about 3 years I no longer enjoyed the corporate world and bought my first property in 2007. Over the next 3 years we bought as many homes as we could (at one point reaching 50), using loans from 401ks, investors, and credit cards. Eventually after working to the bone during the day as engineers and at night to renovate the homes for 2 full years, they were all finished and rented. For the next 2 years we paid off our investors and loans with the real estate cash flow and selling some homes. During this time we painfully stayed at our jobs. We quit our jobs in 2014 with 30 homes left and enough rental income to cover our expenses. Everyone said we were crazy to leave such a good job, especially since I had just gotten promoted. But they didn’t see that life isn’t only about making more money. I have enough to support my family and that was enough to leave a job that was unfulfilling. Best decision ever! Now that we FI, we are planning to move to Taiwan for a year just like the Gocurrycracker.com folks. On to our next adventure!

I thought….hold on a second…that is H.U.G.E! This is not a story we should just leave in a facebook group to disappear. The approach to reaching FI was familiar. One thing came immediately to my mind: the book Rich Dad Poor Dad by Robert Kiyosaki which we read a few years a go. It definitely helped us completely change our minds about our lives, what we want to achieve, how we want to live and how we want to raise our children. It turned out that that was the book that inspired him as well.

I reached out to Neil and asked him whether he’d like to share his story in more detail on our blog. Fortunately, he said yes! And what a story that was! I didn’t realise how many similarities it had with our journey to financial independence and I believe and hope that the story will inspire many many others and help them get out of the rat race by harnessing the power of real estate cash flow.

Here you go:

“My story begins in India, where my Dad and Mom were both born and raised. Dad had studied hard to become an engineer, but there wasn’t much of his salary left after taking the train to work and back. Both Mom and Dad decided in order to earn more and have more opportunities for their future kids, they needed to move to the United States.

Being the first generation here in America, my sister and I saw first hand how hard our parents had to work and save to provide for us. Somehow while raising us my Mom was also able to obtain her degree and became a research scientist. They taught me to follow in their footsteps: Do well in school, get good grades, and get a good job until I could afford to raise a family. This was the American dream and this is what my goal in life became. Furthermore, we were all told that if you take care of your employer, they will in turn take care of you. You’d move up the corporate ladder and retire wealthy. I had no reason to question this logic.

Only as I got older and went to college to pursue Engineering did I begin to realize there were other paths. My first hint was during a summer visit to my friend’s house in 2003 after a very exhausting semester in school. During our visit I came across a bookshelf with all kinds of business books. One of them was Rich Dad Poor Dad, by Robert Kiyosaki. After a quick flip through, I understood it was attempting to explain an alternative to working at a job, but the diagrams just seemed too abstract to me. I didn’t have time to properly read it so I put it back on the shelf. The weeks and months went by and I eventually graduated from school and started my career at a large aerospace engineering company.

A few years into my career I remember staying late in the office one day and just wondering what the point of it all was. None of my ideas mattered to my managers. I began to feel the full weight of basically working at an unfulfilling job for the rest of my life. It was then that the Rich Dad Poor Dad book came to mind again. I quickly did a search online and saw that a used copy was selling for $3 on Amazon.com. So I thought what the hell, and ordered it. To this day, I think if it were a $20 book I probably wouldn’t have bothered to buy it!

The main concept that sold me was the concept of residual income. I believe the example in the book was about a small village that could only get water by hiring workers to haul buckets back and forth from the nearby lake. In this analogy, the flow of water to the village stops when the workers go home for the day. This also meant that if you wanted water after hours, you were out of luck. The better way to solve this problem is to construct a pipeline, which would technically cost more up front than manual labor, but would provide water to the village 24 hours a day and be cheaper in the long run.

It’s not about net worth. It’s all about real estate cash flow.

Similarly, it meant I didn’t have to work at a job for the rest of my life as long as I created a “pipeline” to provide at least enough to pay my bills. Then, I could technically live forever and never run out of money! The golden takeaway for me was that retiring early wasn’t about hitting a certain net worth like you hear on television; it is instead about cash flow. My mind was blown!

For my personality type, real estate seemed to be the better vehicle to create this pipeline, just as Kiyosaki charted out in the book. This seemed better to me than stocks and mutual funds because I just didn’t understand when they would go up or down. For example, if a company reported record profits but narrowly missed their earnings target, the stock would still take a nosedive. At least with real estate I had something tangible that could be protected with insurance and the value could never drop to absolute zero.

What followed was an all out obsession with learning about real estate. I couldn’t stop talking about the book to everyone I knew and I also joined a local real estate club. After learning the business for a year with my friend Xiao, we created our first LLC in 2007 and bought a rental property. We found an investor to put up all the money (about $52,000) and hired a friend from the real estate club to renovate it. Then, we refinanced it at 80% of the new $75,000 valuation, paid the investor back, and had $8,000 left for an emergency repair fund. We were making $200 cash flow per month without any of our own money! We felt so good that we bought out next house within 6 months and before we knew it we had $400 in real estate cash flow.

These homes didn’t come without their fair share of problems. I got calls at 3 in the morning from tenants complaining that sewage had backed up in their basement. Not to mention numerous issues with police, drugs, and evictions. It soon became clear that I didn’t know what I was doing. But the best way to learn is to jump in head first, and that’s what I did. Before I knew it, I was handling all kinds of maintenance issues without getting too worked up.

Eventually I became friends at work with Amit and Lino, and they became my business partners. I also met Ben, who taught us how to buy real estate directly from an auctioneer without dealing with any other buyers. He also showed us how to buy delinquent notes from a small bank. These were essentially mortgages that the original owners had defaulted on and the bank didn’t want to deal with handling the foreclosure process themselves. We partnered up and before I knew it we had 50 properties under our belt by 2011. How did we come up with all the money? We borrowed heavily from our 401ks, took loans from investors, cash advances on credit cards, etc. We found money we didn’t even know we had. We even considered taking a loan out on our cars. We were so sure of this business that we were willing to risk it all in order to maximize our future benefit. It got so hard financially at one point that I was ordering off the dollar menu at Taco Bell and wondering how I was going to pay our upcoming personal house mortgage payment.

Late one night we were working on a house and everyone had gone home except Amit and I. I remember just looking at the empty house and seeing all the stuff that still needed to be done. In that instant, having spent all my resources, it felt insurmountable and I broke down. Amit quickly took me aside and reminded me how much I really had and how in reality I was nowhere near rock bottom. I forgot how lucky I actually was; I still had a car, a job, and a place to live. All I was looking at was my bank account going negative and I lost sight of everything else. If I missed my mortgage payment, would I lose my house tomorrow? Well, no. Would I have time to catch up before ending up on the street? Sure. Could I sell my car if I had to and car pool to work? Well, yes I could! These were just a few examples of how we are actually capable of needing very little to survive.

When the real estate cash flow kicks in

With my renewed confidence, we continued to work to the bone. The typical schedule was 8 hours during the day as engineers and 8 hours during the evenings renovating our properties. This went on for 2-3 years until we were physically and mentally drained. Eventually, the milestone came that we were both yearning for: The real estate cashflow from our rentals finally surpassed our labor and material expenses. That was an amazing moment for us because it meant no longer spending money out of pocket. After selling some of the homes and paying off our loans for another year, we were finally able to quit our jobs for good in 2014.

During the months before leaving our jobs we kept feeling like it was too soon. My friends and family always supported my real estate endeavors, but even they worried that I may be throwing my career away. My justification was that I no longer believed in the concept of working for a wage, let alone at an unfulfilling job. In hindsight it’s clear that all we were looking at was the income that we would lose and not the freedom we would gain. In addition, the decision became easier when we realized the concept of retirement is really about doing what you love and not necessarily about making the most money possible to live lavishly. Ironically within about 6 months after leaving, Amit and I partnered with my old college roommate Ed to develop a 41 home subdivision. It was completely new for me and has been a very rewarding experience thus far. It’s a great example of what can be accomplished when you follow what intrigues you.

So far, life without a “job” has been great. I have the time in the morning to take my daughter to school, focus on my businesses during the day, or I’m able to just take the day off altogether. The only advice I have is to do what you love and try to start a business that can be your “pipeline”. Your credentials are never going away and if you leave your work place on good terms, no employer will say no to good help in the future.”

What I make of this:

So many people in the personal finance / financial independence community talk about net worth, stock market investing, bonds, etc. but the power of real estate and real estate cash flow is often hidden in the background (apart from in blogs dedicated specifically to the topic). I find this story inspiring bacause it shows there’s another way to FI as well, the way through (and it doesn’t have to be exclusive) real estate cash flow.

It’s maybe not the easiest one, but it is for sure a way by which, once you reach a critical point, you have a very strong FI situation which is fairly independent of stockmarket fluctuations.

I believe, this strategy can be applied in most places on Earth but local tax laws have to be taken into consideration and you have to make sure you know what your are buying and why!

What do you think? Can this be applied in your country? Do you have any questions to Neil?

  • Love your story Neil! Especially the “if it were a $20 book” part. Sometimes it’s those extremely small things in life that make a change. Real estate is on my roadmap to FI.

    • Neil G.

      Really glad you enjoyed it! It’s indeed funny how quickly our life direction can change. Good luck on your road to FI and let me know if I can help in any way! Any business that forms a pipeline should do do the trick.

  • Neil G.

    Really glad you enjoyed it! It’s indeed funny how quickly our life direction can change. Good luck on your road to FI and let me know if I can help in any way!

  • Very interesting. Thanks for sharing