Part 2: Continued Evolution (A Shift In Philosophy)

by FI Fighter on December 13, 2013

in Thoughts

yosemite

At the conclusion of 2012, the passive income streams were bringing in $777/month combined (including retirement accounts), and life was good. I was thrilled with all the progress made in Year 1 and was looking forward to an even more successful Year 2.

Shortly after Year 2 began, I put together a list of goals I wanted to get accomplished in 2013. Most important of them all, I wanted my passive income streams to bring in $1000/month (excluding retirement accounts). I reasoned that this should be possible because Rental Property #1 was already helping me generate ~$400/month in passive income. In addition, the Fall season had tamed down the local real estate market, so I was able to secure a short-sale contract for Rental Property #2 in early January 2013.

Lady Luck

Rental Property #2 was discovered by my real estate agent in November 2012. He noticed an excellent property located in a fabulous area that had just recently hit the MLS. So, he pinged me to see if I would be interested. I typed in the address on Google Maps, and as soon as I saw where it was located, I immediately shot him back an e-mail and enthusiastically shouted, “All in. Let’s win this!” I didn’t think the odds of winning were very good, but to my surprise, there were only like three other competing bids. Luck is when opportunity meets preparation. Thanks to consistent investing with dividend stocks throughout the course of 2012, I had enough funds at my disposal to purchase another rental property.

Cash Flow Baby!

I’ll be honest, even though I owned one property and was getting into contract for a second one, I had no idea how to properly run cash flow numbers for a rental property. During the early days, I didn’t take into account for things like vacancy and maintenance. I simply added up the mortgage, interest, property taxes, and insurance (PITI) and checked to make sure I was still cash flow positive. Luckily, with both properties, I had enough cushion, that even after you accounted for the extra costs (vacancy, maintenance, property manager, etc.) they both still cash flowed. Not great, but thank the heavens they weren’t coming out negative!

In early 2013, I was still heavily invested in dividend stocks. I loved dividend investing! It was completely passive, the companies I invested in typically gave me pay raises every year, and it was fun seeing the portfolio increase in value. However, the cash flow of my portfolio always left a lot to be desired. I calculated my forward dividend yield to be around 3.69%, which was not terrible, but lower than what I was getting with Rental Property #1.

As I did more research on rental properties, I learned about things like principal paydown, using other people’s money (leverage), depreciation/tax breaks, and a slew of other things that make it so enticing. My agent said this to me once and it always stuck in my head: “Come tax season, there are many tricks you can utilize to help you keep all of your rental income. If you’re good, the government will actually end up owing YOU money.”

Man, that was music to my ears! As an investor in stocks, I’ve always been on the hook for capital gains taxes, or dividend taxes. This was something different, and I was intrigued to learn much more!

In the Swing of Things

I closed Rental Property #2 at the end of February. I had gotten a bargain of a deal, but like most things in life, it came with a catch. The property was a short-sale and sold AS IS. It wasn’t a complete dump, but there was lots of work that needed to be done. By early March, the renovation was in full swing! The whole rehab took about a month, and was completed in mid-April. I was able to lease it out to a tenant just in time for the start of May.

I purchased the property for $290,000. When I checked out nearby sales in May, the comps were selling for around $400,000. I’m not one to believe in the hocus pocus of appreciation, but seeing that sharp rise in prices did feel good. It was kind of like a foreshadow of things to come. Everyone around me was getting caught up in the buying frenzy, and you could kind of tell that the market was about to pick up the pace.

Not one to want to miss out on a market surge, I started looking into other markets to invest in. Bay Area prices were getting ridiculous, and I wanted to catch other markets just in time before they rebounded as well. Around this time, I also dumped a ton of ESPP/RSU money into Tesla Motors (TSLA) as a pure speculation play. As dumb luck would have it, TSLA exploded after Q2 earnings report, so I had extra ammo to work with.

And just like that, I was off to Chicago to explore more opportunities!

Keep on Rollin…

Even though I made a trip out East to Chicago, it wasn’t like I was certain I wanted to land another property. Not this soon anyway. I had just closed on Rental Property #2! The trip was made because I wanted to satisfy my own curiosity. I wanted to see for myself what else was out there… I was spending a lot of time on the Bigger Pockets forums, and everyone was talking about the Midwest and how you could easily locate cash-on-cash returns of greater than 20%. Sounds too good to believe, right?

I came back from Chicago impressed. Really impressed. I loved the operations, team, rehab, everything… Especially the cash flow! I spent a lot of time running the numbers, and no matter how conservative you were with them, they always came out looking fabulous. I kept looking for a good excuse not to do it, but couldn’t resist… I was captivated by the $$$.

So, I arrived back home from the trip, pondered for a day or two, and decided to get back into contract for Rental Property #3. My numbers were telling me that the Chicago property should deliver around $566/month in cash flow, after accounting for all expenses and reserves.

At the half-way point in the year, I had the following (rough estimates at the time):

Rental Property #1: $400
Rental Property #2: $300
Rental Property #3: $566

Wow, $1266/month in cash flow! Since the goal for 2013 was only $1000/month, it was definitely a step in the right direction.

It Bit Me!

After closing Chicago, yeah, you could say I was bitten by the real estate bug. I just kept wanting to learn more and more. I did research and pretty soon decided that I wanted to diversify my holdings across numerous markets. Since I started off as a dividend investor, I carried that same mindset into developing my real estate gameplan. In particular:

  • I wanted to diversify into at least 4 major markets. Similar to how a dividend investor owns a basket of 20 to 40 stocks.
  • I wanted some properties that had excellent appreciation potential and a stable tenant base (Bay Area).
  • I wanted a non-volatile market that would hold up well to market fluctuations and was extremely affordable (Indianapolis).
  • I wanted a market that had ridiculous cash flow potential, even if it was riskier due to low income, bad neighborhoods, etc. (Chicago).
  • I wanted an affordable, emerging market where the people and jobs were moving towards (Houston, Dallas, Austin).

By mid-year, I was convinced that I now wanted to eventually own 10 rental properties. I was going to build my own mini real estate empire. :)

Oh, and the new goal was to now become fully financially independent (and retired) at the age of 30!

Fall Season

When Fall arrived, I decided that life was too short and I needed to find a way to better balance work and play. I was working hard, trying to save for a better future, but this did not mean that I couldn’t also enjoy today. All work and no play makes for a dull boy…

Thanks to travel hacking, I started taking regular vacations every month. In September, I visited San Diego. I was unwinding on Coronado Beach when I decided I wanted to accelerate the pace of my rental property acquisitions even further… I still had some shares in TSLA, and decided it was time to cash out so that I could purchase another property in Indianapolis.

Closing Rental Property #4 was PAINFUL! The loan dragged out for over two months, and the lender kept coming back with reasons why I couldn’t close. The biggest obstacle was my debt-to-income. At the final stages of closing, I couldn’t get through underwriting because the underwriter refused to count any of my rental income, which would have helped me offset all the mortgage payments. This lender reasoned that none of my properties had been on tax returns for at least two years, so they didn’t qualify.

I was faced with a tough decision. Do I let this property go and miss out on a potential good deal? Or, do I try everything possible to make the deal happen? I had already invested money into the inspection report, and appraisal, so I definitely didn’t want to back out. After talking it over with family and friends, I decided that I didn’t want to give up quite so easily. So, I asked around and eventually found a co-signer who was willing to help me close the deal. I now owe this person a huge favor… ;)

It Don’t Stop

With Rental Property #4 in the fold, the revised cash flow numbers (even more conservative than before) look something like this:

Rental Property #1: $270
Rental Property #2: $180
Rental Property #3: $540
Rental Property #3: $350

Total cash flow is now ~$1340/month. These revised numbers set aside even more funds for reserves (you never know). It’s very difficult to project things like vacancy and maintenance, but here’s an honest attempt to really factor them in…

My original early FI target was $1500/month. So, I’m getting closer. This year isn’t yet over, and I’ve already made plans to purchase another rental early next year. I made a trip out to Chicago again this past November, looking for more properties.

Seasons Greetings

We are now approaching the final days of 2013. Oh boy, what a year! A lot has happened, and I’m finishing out this year more optimistic than ever before. To celebrate, I’m planning an end of the year trip to Maui.

I started off 2013 as a dividend investor. Then I switched to real estate investing. In the end, however, I’m neither one of those. I’m a financial independence investor, and if I’ve learned anything these past two years, it’s to always remain adaptable. Take what the markets gives you. Most importantly, keep moving forward with the plan. You only live once, so you better make sure to maximize your life!

If I can continue to execute, there’s no reason to believe why I shouldn’t be financially free by the end of 2014. Once Rental Property #5 closes, the cash flow should well exceed the original $1500/month target. I haven’t set my goals yet for 2014, but I already have an idea of what I expect to accomplish next year…

Year 3: “The Accelerator”

Let’s go get it! :)

 

To be continued…

Related posts:

{ 22 comments… read them below or add one }

Fast WeeklyNo Gravatar December 13, 2013 at 3:36 am

It’s good to play in more than one pool buddy, and you’re doing great investing in different asset classes. I hope you can meet all your goals

-Bryan

Reply

FI FighterNo Gravatar December 15, 2013 at 11:44 am

Bryan,

Thanks! I also believe in investing in different asset classes, and even though my primary focus is on real estate right now, I’m certain I’ll diversify back into other investments later.

Cheers!

Reply

FI PilgrimNo Gravatar December 13, 2013 at 3:41 am

That’s a great recap, congrats on the sweet year! You’ve certainly been prepared when the opportunities come, but you’ve also done your own research and forged ahead. Very impressive!

Reply

FI FighterNo Gravatar December 15, 2013 at 11:45 am

FI,

Thanks! I’m doing my best to stick to the gameplan, taking it one day at a time. It’s hard to predict what the markets will do, so it’s always a good idea to come up with backup plans. Whichever way the markets decide to run in 2014, I’ll be prepared.

Take care!

Reply

GaryNo Gravatar December 13, 2013 at 5:25 am

I say go up 40 on each property or find some way of getting 40 profit by offering Christmas light installs or something along those lines and you will be at your 1500 #

Reply

FI FighterNo Gravatar December 15, 2013 at 6:49 pm

Gary,

haha, I read that as get to 40 properties… Getting just to 10 will be a pretty good challenge ;)

Yeah, it wouldn’t be too difficult to try and squeeze an extra $40 on each property. Since I don’t plan on stopping now, it’s ok if my net cash flow is less than $1500/month. By the end of next year, I’m aiming to be over $2000/month, so should have a bit more wiggle room. Might need even more than that before I call it quits.

Cheers!

Reply

AJNo Gravatar December 13, 2013 at 9:32 am

Nice post, thanks for blogging your journey.
I have similar strategies, have 5 rentals now looking for more. All in Portland, OR (mostly appreciation, not great cashflow), but buying some properties in Houston next.

Your blog isn’t compatible with Feedly (can’t add your website to my list of sites I read) – can you make some adjustments to your website?

Reply

FI FighterNo Gravatar December 15, 2013 at 6:50 pm

AJ,

Thanks! Congrats to you on acquiring 5 properties in Portland, that’s a great area! Houston may very well be my next stop as well. Either that or Dallas…

Hmm, I will have to check on the Feedly feed… not sure why it isn’t working. Is anyone else running into this problem?

All the best!

Reply

AJNo Gravatar December 16, 2013 at 9:12 am

Feedly is working for me now..
Keep up the good work.

Reply

FI FighterNo Gravatar December 16, 2013 at 7:24 pm

AJ,

Awesome! Glad it’s up and running now. :)

Reply

JC @ Passive-Income-PursuitNo Gravatar December 13, 2013 at 10:56 am

It truly has been a big year of changes for you. I’m floored by all the progress that you’ve been able to make and the best part is that it’s been mostly with other people’s money. I think that RE is a great way to diversify your income sources. Same as I’m doing with my DGI, I wouldn’t buy just one company. Why not diversify into RE as a complement to my DGI strategy. Best of both worlds. A completely passive source from DGI and a fairly hands off with RE. I expect to see some pretty lofty goals for 2014 for you. Best of luck and thanks as always for sharing your story and inspiring us all.

Reply

FI FighterNo Gravatar December 15, 2013 at 6:52 pm

JC,

Yeah, I definitely attribute most of the success to using other people’s money… All the appreciation I got was made possible by using the bank’s money.

Diversifying real estate with dividend stocks is probably the perfect way to go. Maybe even add in some index funds for traditional retirement as well. This is my long-term plan, even though I’m mostly focused on rentals atm.

Dividend stocks are much more liquid, and it’s always a good idea to have some readily available cash on hand…

Take care!

Reply

The First Million is the HardestNo Gravatar December 13, 2013 at 1:48 pm

Very impressive for one year. How do you stay on top of your properties with them being spread around the country? Did you have connections to trustworthy property managers in each market?

Reply

FI FighterNo Gravatar December 15, 2013 at 6:54 pm

Jay,

Thanks! I manage the Bay Area properties myself and outsource to a property manager for my out of state properties. I just check in regularly with the PM to make sure everything’s going smoothly.

I didn’t have connections at the time I started investing… but now I trust these people to do a good job. When first starting out, it’s always a risk trusting people from out of state…

Take care!

Reply

Pauline @RFIndependenceNo Gravatar December 14, 2013 at 1:00 am

What a ride! My main regret was not to buy more properties while I was still employed. Now I don’t even try the banks, although I have a bit of cash and am looking for a new property. Maybe the US, you do have some cracker yields. How much % of rent does your property manager charge in Chicago?

Reply

FI FighterNo Gravatar December 15, 2013 at 6:55 pm

Pauline,

That’s interesting, I’ve heard the same thing from a few other retirees as well, which is another reason why I’m so gungho about getting to 10 properties. I want to maximize my loans before I’m no longer qualified to get one…

The PM in Chicago charges 8%. The one in Indy charges 10% since there margins are lower (properties are cheaper; sub $100k).

Cheers!

Reply

LeighNo Gravatar December 14, 2013 at 8:40 am

Goal for the year of $1,000/month and you have $1,340/month. Pretty sweet! Curious to see how your journey continues in 2014!

Reply

FI FighterNo Gravatar December 15, 2013 at 6:56 pm

Leigh,

Thanks! I’m curious to see how your journey goes as well… Your savings/net worth progress are unparalleled for 99.9% of people your age!

All the best!

Reply

Stefanie @ The Broke and Beautiful LifeNo Gravatar December 15, 2013 at 3:27 pm

Wow, I can’t imagine owning one property let alone 5! I’m hoping to get my side hustle income up to $2,000/month by June, but that won’t exactly be passive- blogging, VAing, etc.

Reply

FI FighterNo Gravatar December 15, 2013 at 6:57 pm

Stefanie,

Wow, $2000/month in side hustle income is awesome. You’re doing an excellent job with it! I’m hoping to start generating some side hustle income next year…

All the best!

Reply

EvanNo Gravatar December 18, 2013 at 10:27 am

Impressive (makes me feel like shit since my 2013 did nothing for my independence lol).

Any thought of using that 1300 to deleverage a bit? Pay off one or two notes to increase the cash flow or is that a 2015, or 2018 plan?

Reply

FI FighterNo Gravatar December 19, 2013 at 11:31 pm

Evan,

Thanks! Don’t feel too bad… and you can always aim to improve the results in 2014!

At this time, I have no plans to deleverage… Actually, I’m working on adding more leverage. I’m trying to increase the cash flow, so need the saved funds to buy more assets… paying down existing loans wouldn’t help build more cash flow since the loans are so substantial… I’d be better off snowballing any savings into buying more properties.

At some point in time, it would make sense to deleverage and start paying off debt… I’m not there yet. That’s probably many years away…

Take care!

Reply

Leave a Comment

Previous post:

Next post:

Copyright © 2012 FI Fighter