Guest Post – Eat Financial Elephant

Thank you for letting me share with you, fellow Elephant Eaters! When I first read about the concept of Dirtbag Millionaires, I knew I had found my people.  I’m happiest dressed in my camping pants, all-purpose shirt, a fleece, and hiking shoes or sandals.  I also love to accumulate money and retire early.  So it feels good to be in the right place!

I’m going to share the story of my climb towards financial independence.  Some of the strategies I’ll describe may sound familiar, and others may be a little uncommon.  I have been an entrepreneur and not an employee since I graduated from college. Real estate has been my primary vehicle for earning money, growing my wealth, and producing passive income.

Both of these make me a little different than the norm around here, but I hope you’ll find the differences interesting.

Even if real estate is not your thing, I challenge you to look for the core principles that can be applied to your situation. As Mr. EE often advises, the important skills are to ask questions, think critically, and translate the information you read here into a context that works for your life.

Now, let’s start at the beginning of my own climb towards financial independence.

The Allure of Entrepreneurship

My financial independence story started shortly after college. I was fortunate enough to earn a scholarship to play football at Clemson University in South Carolina.   My NFL ambitions were quickly deflated soon after I graduated, so I began considering other options.

I majored in Biology,  so that interest led me to take the MCAT exam and apply to medical schools.  But even though I loved science and the idea of practicing medicine, the entire path forward seemed too personally restrictive.  I would be studying for another 6-8 years, and then I would be stuck paying off student debt for a few years after that.

I also had some opportunities to work for investment banks on Wall Street.  They actively recruited successful college athletes because they could typically handle the high pressure and intense work environment. The big income and high stakes were interesting, but like medical school a little voice in my head said it wasn’t for me.

I think what bothered me about both paths was that they seemed too conventional. I had already climbed ladders. I got good grades. I worked hard. I earned my scholarship. I played a leadership role on my team.

What excited me, instead, were the ideas of freedom, exploration, and personal growth. I wanted to travel abroad, learn more languages, and get outside my comfort zone.  I wanted to read books I chose, think broadly, and have conversations with interesting people.

Like anyone else, I also wanted financial security to pay the bills, but I wanted to have my cake and eat it too.

The path that seemed to offer the most opportunity to embrace freedom while also building a financial base was entrepreneurship.  More specifically my father had owned rental properties for well over a decade, so becoming an entrepreneur who bought, sold, financed, and rented real estate made sense to me.

I could go into a lot of detail about the specifics of my business, but it might not be relevant to the point of my article. Click on these links if you’re curious about my sprint during the first 5 years of business, my strategy to finance real estate without a steady job, and how I started a real estate business on a shoestring budget.

In the rest of this article I want to focus on how my entrepreneurial venture and real estate fit into the overall goal of financial independence.  So let’s dig more into that.

Financial Independence & Free & Clear Real Estate

Even before I articulated it this way, financial independence was always my desired destination.

I realized that I live in an economically centered society where financial skills are valuable. Maybe hunting, farming, and survival skills were most valuable 500 years ago, but now the ability to thrive and survive depends upon being able to win with money.

So, freedom, autonomy, and flexibility were my goals, but real estate entrepreneurship and a mastery of personal finance were the means to that end.

My ultimate money goal was an investment portfolio that produced passive income to pay for my desired lifestyle.  This is similar to the concept of the 4% rule as a safe withdrawal rate, which many early retirees use with stock portfolios.  But instead of stocks, the core of my portfolio would be rental properties and notes secured by property.

So, my plan was simply to create regular, sustainable cash flow from those real estate sources to cover my family’s living expenses.   A clear explanation of the numbers behind my goal can be found in my free and clear real estate plan.

Three Financial Games (The Fundamentals)

Like any journey towards a lofty destination, I zig-zagged back and forth along the way. I also began reimagining the concept of retirement when I realized it wasn’t just about the peak of the mountain. Retirement also included the plateaus along the way (i.e. mini-retirements, semi-retirement, etc).

But, as I read books about money and personal finance, it became clear that I had to master three equally important fundamentals in order to reach any stages of financial independence. These three fundamentals were:

1. Earn as much money as possible
2. Save as much money as possible
3. Invest for maximum safety and return

If those sound familiar, it’s because they’re the basics. You already know them.  These are the games we all play.

The more difficult task for me was actually DOING whatever it took to win at each of the three. So let me outline the basic game plan I’ve used with real estate and other means to win each of these games.

Please remember as you read the details of my story that you don’t have to use real estate as heavily as I have.  My point in sharing with you is not to make you a full-time real estate investor, but to show you that just doing a deal or two can change your entire financial picture. And trust me, with just a little study and hustle, one or two deals is very achievable.

With that understood, let’s talk about earning more money!

1. Earn More Money

Saving money is essential, as I’ll discuss in the next section.  But the journey to financial independence (FI) begins with the engine of earning money.  During your growth years, the more money you can make, the better.

In the beginning, my core strategy to earn money and to pay my bills was finding and quickly reselling real estate deals. I was essentially a deal finder (i.e. a bird dog who sniffed out deals for others).  Other landlords and house flippers would buy the deals that I turned up, and I would make a small profit.

I had zero business experience, a tiny bit of real estate knowledge (from begrudgingly cleaning or painting my dad’s rentals over summer breaks in middle school), but a whole lot of hustle.  I also loved learning something new, and I studied marketing, negotiations, and real estate values voraciously until I began making progress.

At first I just scratched out a living. This is where the dirtbag, low-overhead mentality helped me out! I joined up with a business partner (who I still team up with today, 12 years later), and we started fixing and flipping houses together for bigger profits.

Both of these income streams, wholesaling and fix-and-flips, were just like earnings at a job. We were simply self-employed in the business of quick turning houses. This was fine up to a point, but profits on house flips are taxed at the highest rates (earned income rates + self-employment taxes).  This takes away a big chunk of my ability to save more money, which was the goal after all.

So, we decided to be in two different businesses.  The first was house flipping for current income, and the second was rental real estate for capital growth and long-term income.

Each year after doing a few flips to put food on the table, we started keeping a couple of rentals.  After a couple of years, we began selling some of these houses to our tenants.

Holding rentals was a very helpful move to increase our net earnings for a few reasons:

1. We sheltered some of our active income with depreciation from rental properties.
2. We netted a higher price selling to our tenants because they negotiated less, we paid no commissions, and we had no holding costs waiting for the house to sell.
3. We got the benefit of long-term capital gains on our profits.
4. We got rental income forever on the properties we kept.

The long term capital gains treatment turned out even better than we thought.  As many of you know from reading posts by really smart people like Jeremy at GoCurryCracker, capital gains for people in certain tax brackets has actually been ZERO over the last few years (as of October 2015).

So, many years we have legally been able to reduce our tax rates to very small percentages or even zero, and we’ve been able to invest those savings. Earning money is important, but HOW you earn your money can play just as big of a role in your long-term climb to financial independence.

2. Save More Money

Once I had income streams in place, the next fundamental was to start saving money. As you may know, the math to reach financial independence quickly is simple. You need a HUGE savings rate (thanks Mr. Money Mustache).

Luckily, I was all about frugality right out of college (by necessity since I made no money for a while).  And as a dirt bag and out-door lover, fancy stuff and expensive toys were too heavy anyway.   So keeping expenses low was not that difficult.

I was also fortunate that my wife was more of a dirt bag hiker than I was!  We even hiked and camped on our first dates:). Her frugality had more of an environmental motivation, but it blended well with my financially motivated frugality (although I share her environmental concerns).

In addition to watching our everyday spending and driving old cars, something called “house hacking” gave us a huge boost in lowering our expenses.

House hacking essentially means you rent other units or bedrooms in your primary residence.  In our case, we lived in one unit of a quadraplex we owned.  Our total payment (including taxes/insurance) was $1,089/month and the rent on the other 3 units was $1,200 total!

By house hacking we lived for free and in fact got paid over $100/month to live there! With 2 incomes and no kids, we really piled up some savings.

When we decided to have our first of two children, we bought a 1500 square foot single family fixer-upper house, but we kept the 4-unit as a rental. It has cash flowed nicely ever since and will be paid off in under 15 years if we stay with the minimum payment.

For those who are willing to live simply, nothing beats house hacking for cutting housing expenses to the bone and creating a long-term wealth-building machine at the same time.

Because of my real estate background, I also differ from other early financial independence writers who insist that your residence is a terrible investment. In fact, with an entrepreneurial mindset it can be one of your BEST investments.

Sure, it requires a little effort. Sure, it requires some knowledge. Sure, MOST people who own residences overpay and buy based on emotions, but are you normal? I think not!

You can house hack, as I’ve explained, or you can take advantage of the best tax law in the land by executing live-in flips. 

Live-in flips simply mean you purchase a residence that is under-valued, remodel it, and resell it after two years or more. Those profits are tax free up to $500,000 for a couple or up to $250,000 for an individual.

I’ll get off my real estate soap box shortly, but if you want to see a cool plan to use live-in flips three times and then own your residence free and clear, here it is.

Now that I had worked on a mastery of saving money, it was time to invest those hard-earned dollars for the long-term.

3. Invest Safely For Maximum Return

As I wrote before, my investment growth strategy has been mostly about real estate related investments (until recently when I started diversifying more into Vanguard index funds).

Our long-term rental holdings are all residential properties, including houses, small multi-units, and a few mobile homes.  About 50% are college student rentals, and the other 50% are regular families.  We also have a small portfolio of private mortgage contracts secured by real estate. These are relatively passive, are very secure, and produce great income.

The primary goal has been to safely grow our nest egg to the point where it would support us on its own.

I have used debt and other forms of leverage, but I subscribe to the Warren Buffett idea of only using smart leverage.  Smart leverage has allowed me to use rental income to amortize loans and build equity on a very consistent and predictable basis. While there are many viable paths to financial independence, this predictable method has suited my need to have more control over the process and timing of my journey.

The overall savings have been distributed both inside retirement vehicles (Roth IRA, traditional IRA, and TIAA-CREF annuity contracts) and outside retirement vehicles (our real estate company and some personal holdings).

The Joy of the Journey

I have probably given you more detail than you bargained for about my journey towards financial independence.  As you can tell, I love the process and the journey almost as much as the destination.

It has been a lot of fun to make this climb.  We are getting very close, but we’re not 100% at our final financial goal. But I’ve come to realize that the plateaus or resting places during my climb have been equally amazing.  We have taken a 4-month sabbatical to Spain and South America, we have taken month-long road trips out west, and we have taken countless smaller family trips in between.

That’s one of the things I love about being a full-time entrepreneur.  I didn’t have to wait for flexibility.  I’ve had it since the very beginning.

Yes, I have to hustle. Yes, income is less secure than in a job (especially early on).  Yes, I probably could have made more working on Wall Street or a more traditional profession for 10-15 years and then retired.

But my original goal was freedom, flexibility, and autonomy.  Why wait until retirement?

It’s been a pleasure to share with you.  I look forward to reading your comments below. I’m happy to explain more or answer questions if you have any.