Since we are a real estate company, I want to keep this geared towards business plan creation and presentation for …
You cannot do a web search for real estate investing without running by someone telling you how to “Quit Your Job and become a Real Estate Investor”. In this article, I want to tell you why I believe in building your business on a part time basis, while maintaining and continuing to pursue advancement within your J-O-B.
Here are the 3 main subjects I am going to discuss in greater detail:
- Long Term cash flow versus short term capital gains
- Ability to reinvest all of your profits
- Stress – Pressure versus accountability
So let’s start with #1. Long Term cash flow versus short-term capital gains. To understand this, you first need to understand what your long term goal of your real estate business is.
Being 100% clear about what your long term goal is with this business is the most important step you need to take before you get started. You will then be able to use this goal as a compass in the back of your head from which you make all decisions. This allows you to keep emotion to the side, and logic in the forefront. This allows you to delay instant gratification, and pursue the peace of mind that comes with making sound business decisions, consistently.
Are you like me, where your long term goal is to drastically exceed your living expenses with the cash flow that your real estate spits out? Are you hoping that you will be able to retire someday and live comfortably off your real estate business? Let’s assume that you say yes to those two questions. Now let me ask you this question. If you were to quit your job today, what type of deal would be more intriguing to you? A deal that makes you $35,000 in 8 months, one time, or a deal that makes you $7,000/yr in cash flow, for the rest of your life? Being that you no longer have an income to feed your family with, you will probably jump at the $35,000 opportunity. But unless you are disciplined and sophisticated enough to know how to eventually land those quick profits into long term cash flowing (residual income) assets, then I don’t see those types of decisions getting you any closer to your long term goal. I want to be upfront and tell you that I have done both types of deals, but I do them in a way in which I can choose which route I go. Let me explain…
When I see an opportunity with a property to increase its value by, let’s say as another example, $50,000, I will first make sure that this deal will come with a residual income stream. What that means is that I can choose to refinance the property upon completion of the improvements to pull our capital out of the deal and still obtain a cash flow that I am comfortable with by renting it out. A cash flow that I would be satisfied with for the next ten years. OR, if I choose to, because I have another deal in mind that can provide me a better long term cash flow, I can sell that property, pull out my equity (initial down payment + increased value ($50K in this example) and invest that into the next project (ideally via a 1031 exchange). 9 times out of 10, I will choose to refinance the property. This is because I don’t need the income, as I have my job for that, and I am clear about my long term goal which is the simply pumping up the residual income stream. Not to mention the fact that I can delay the tax burden, and then take that tax deferred income and use it to buy more cash flowing real estate. Getting back to the topic of this article, can you see how you might not make the right decision for your long term goal if you rely on your real estate business to put food on the table? When you are living off of the income, its hard to focus on the long term, sustainability of your income versus the short term bigger profit opportunity.
This leads right into #2. The ability to reinvest 100% of your profits. Key number in that sentence is 100%. Not 50%, not even 75%. 100% – period. Why should you be so strict with this? Because of a word that is often associated with real estate investing. Leverage.
To keep math very simple, let’s assume you utilize a 20% down payment, 80% loan structure for your financing (this has been what I have used in 100% of my deals). For every dollar you invest, you multiply that times 5 to get the value of what your portfolio grows by. So if you build your real estate business to a point where it pays you $50,000 per year in residual cash flow, that amount reinvested each year will grow your portfolio by $250,000 per year. In 4 years, you will have increased your portfolio by $1 Million, which doesn’t factor in any of the appreciation you have gotten on your existing portfolio, plus the newly acquired $1M.
If you were to start living off your income at $50K per year, you would have probably only been able to reinvest a maximum of half of that. So those numbers would project like this. $25K investment per year grows your portfolio by $125K per year, or $500,000 in 4 years. Not too shabby at all, but I know Id rather take the million bucks, and grind through keeping my day job, versus cut that total in half. That is IF you can somehow live off of $25K a year. And why would I personally make this decision? Because I know that in 4 years, if I am able to increase my portfolio by a million bucks, that I am much closer to my long term goal of a comfortable retirement off of my assets. A great tactic in making decisions is to project future profits and growth out 4-5 years from now, and then place yourself in your shoes at that point, looking back on your decision, and ask which decision would the future you hope you would make?
And now to my last and final point – #3. Stress. I don’t know about you, but in today’s day and age there is enough stress to last a lifetime. In fact, dealing with stress is one of the fasted growing businesses on the planet. Meditation, yoga, breathing exercises, float tanks, therapy pets, and many other stress coping activities are becoming mainstream. Quitting your job to become a full time real estate investor, to me, will put increased stress on yourself, and more importantly your family (if you have a family). Real Estate investing is stressful enough. Tenant issues, water damage, HVAC units failing, the list goes on and on. But if all of those issues make an impact on how you live day to day, meaning the expenses that come with those issues take a cut out of your living expenses, then I promise you those issues will drive you absolutely crazy, and potentially out of this business. But if you have no plans of touching those profits, then the loss of money that comes with those unforeseen expenses does not become stressful. You are simple able to compartmentalize it as a “part of the business”. I know that I have also found that sometimes, extremely good deals are available, and other times, not so good deals are out on the market. When you do this business part time, you do not feel that pressure of absolutely having to get deals done, so you are able to be more patient.
And speaking of pressure, I know there is a large percentage of the population that believes that the pressure that comes from quitting your job will help motivate you to grind, grind, grind. And while this is actually very true, I think that you can be smarter and think of other ways to create the accountability you are looking for. The motivation you will need when things get tough. I have found that accountability by writing down my goals and then sharing them with my wife. My goals are usually pretty extreme as well. I don’t simply say, “I want to buy 1 home this year”. One of my goals looks more like, “I want to double the size of our portfolio this year”. By sharing your goals with someone close to you, you create a subconscious sense of ownership that can nudge you in the right direction when you aren’t quite feeling motivated. I know I don’t want her to think of me as someone who doesn’t achieve what I set out to do, so that for me is enough motivation and accountability. And it comes without the additional stress of my success putting food on the table.
At the end of the day, if you need additional motivation to grow your real estate business, then I would simply ask you to go back to your goal for doing this in the first place. If that is not motivating enough, and not enough to hold you accountable to taking consistent daily action, then it’s probably time to stop what you are doing, and spend some time on the goal and tweaking it to make sure it lights your soul on fire.
In conclusion, please start your real estate business, and fail and succeed several times before you decide to go full time. If you can focus 100% of your efforts on reinvesting your cash flow, and increasing your income at your J-O-B so that you can also reinvest those dollars, utilizing the 5X leverage rule, I believe you will actually get to your long term goal much quicker. And it will hopefully be a little less stressful along the way.
So the magic question is “when might you be able to quit your job to go full time in this business”? Well that is actually more difficult to answer, and it is different for everyone. The biggest question you will have to answer at a certain point in time, is how much MORE money could you be making if you were able to work on your real estate business for 50 hours a week, versus the current 10-15 hours a week you’re able to spend on it part time? If that answer is that you could confidently EXCEED in additional income, what you currently make at your day job, PLUS you already have a consistent, steady income stream coming in that can cover your living expenses, then I would say at that point you should definitely pull the trigger and make the big leap. But again, this will probably tap into what you could be reinvesting, so I would caution you to postpone this date as long as possible, and continue to leverage your earnings.
But until then, just keep cranking away, consistently building up your passive income stream, delaying gratification, and reinvesting all of your earnings. That is your best bet if your long term goals are the same as mine that I stated above. If your long term goals are different, then a lot of this may not make sense or be right for you. One additional nugget I’d like you to think about, is what banks like to see. Banks love financing to folks who have a steady stream of income from a full time job, plus their real estate income in addition to that. Banks do not like folks who live off of their real estate income, until you are in the +6 Figure park. In addition, I see so many people setting unrealistic expectations for themselves to quit their job in a year or two. And I feel that doing that does more harm than good. If you want to quit your job that bad, then I suggest getting a new job. And if you want to start a business in order to quit your job, then real estate investing for cash flow is NOT the best option. This is the option for someone who wants to slowly, and steadily, build a massive real estate empire that they can one day retire off of, and pass down from generation to generation.
So just keep that in mind, and when the day comes where you are able to go full time into real estate investing and retire from your day job, plan an epic and massive celebration, because you did it the right way, and didn’t make your family live off rice and beans along the way.