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Today, we’re talking about Fast FIRE. No, not fatFIRE, although the Semi-Retired MD duo’s Fast FIRE method may very well lead to a cushy fatFIRE lifestyle as it has for them.
Drs. Kenji Asakura and Leti Alto share a job and earn an impressive amount of tax-free income via their role as real estate investors. Today, they’re sharing part one of two explaining how this Fast FIRE approach can beat the pants off the more traditional path of investing in stocks and bonds.
Having attended a number of events like the recent Chautauqua and Camp FI, I have met a number of individuals who have gone from struggling to financially free in short order (like 5 years) by following a similar path.
I met the dynamic duo behind today’s post this year at the FinCon blogger’s conference earlier in 2019 and I was impressed by their depth of knowledge, confidence, and extensive travel history and future plans!
If their strategies appeal to you, they offer a much more in-depth course that will guide you through eight weeks to make you a confident, competent real estate investor. Financial Freedom through Cashflowing Rentals is not currently open, but you are welcome to join the waitlist to be notified when it is available again.
How to Fast FIRE Your Way to Generational Wealth – Part I
Now, I know some of you reading this blog are currently not fans of real estate investing.
Maybe you think it’s too risky.
Maybe you think it takes too much work or time.
Maybe you don’t like the idea of having debt.
But what if investing in real estate could get you to FIRE 5 or 10 or even 15 years earlier than with what you’re doing right now?
Does that get your attention?
Because that’s what this article is about. It’s about how to get to FIRE faster, while you’re still young enough to enjoy it.
That’s what we call Fast FIRE.
I suspect most of you can get behind that.
After all, we’re all here because we want the same thing.
We all want to achieve financial independence. We all want to stop worrying about money. We all want to have control over our time. We all want to spend more time with our families – and to actually see our kids grow up, instead of just rushing off to work week after week, year after year.
You see, we’re all aiming for the same outcome. So, with that, let me share with you a way we’ve discovered to get you to financial independence much much faster.
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What the H*ll is “Fast FIRE”?
Ok, ok. I know you’ve never heard of Fast FIRE before. So, let’s dive in and quickly cover what it means before we show you how you can do it yourself.
Fast FIRE is a four step system we’ve created for achieving financial freedom rapidly using cashflowing rentals. We aren’t talking Lean FIRE, we’re talking Fat FIRE. The type of money that will last for many generations to come.
A side note: A cashflowing rental is an investment property that you buy and rent out, making you money every single month. The money you put into your pocket after expenses is called “cashflow.”
Fast FIRE Step 1: See the Money
The first step, See the Money, is all about cultivating the right mindset to be successful. This mindset is not specific to real estate investing. In fact, I’d argue it’s the same mindset you need to be successful when aiming for FIRE in general.
Everything boils down to having a strong reason for wanting to achieve financial independence and having a big specific goal for your future.
Maybe your reason is to cut back to half-time at work so you can spend more time traveling the world with your family. Maybe your goal is to have $100,000 in income a year coming in from your investments.
Either way, you must have a strong why and a specific goal before you take directed action.
Are you still with me? Good. Then let’s explore the next step, Make the Money.
Fast FIRE Step 2: Make the Money
Now this is where we’re veering off the traditional FIRE route. Most of you following the FIRE path are investing in index funds and other passive investment vehicles.
But Fast FIRE is about owning cashflowing rentals.
Why would you want to own cashflowing rentals rather than index funds? Isn’t that more work and effort? And don’t you worry about getting called about a leaky toilet at night?
Let’s get the leaky toilet issue out of the way first. It’s a myth. That’s why you hire a property manager so you don’t have to deal with any day-to-day issues. So with that, let’s tackle the time and effort aspect head on.
Yes, it’s more work to buy cashflowing rentals. You need to educate yourself, so you don’t make errors and you reduce your risk. You need to network and build relationships with real estate agents, property managers, contractors, lenders and insurance brokers. You need to spend time looking at properties and buying them.
But what do you get in return?
Returns that blow your index funds out of the water. We’re talking 25%+ returns, year after year. And some of our properties perform even better than that.
In fact, we currently have one small duplex making a 40% annual return. Yes, that’s right. We’ll make our money back on this property in two and a half years.
And then you add in the value of leverage, so you’re making money on the bank’s money, not your own. Most of you understand that. But how many of you have actually seen what that looks like in practice?
Which would you rather own: $100,000 of index funds or a fourplex?
Let me give you a direct comparison. Apples to apples. Because this is where Fast FIRE really starts to burn it up.
Let’s say you invest $100,000 in index funds and get a 7% return. In 10 years, you’ve doubled your money. You have $200,000 and, at 4% interest, you’ll make $8,000 per year. However, you pay taxes on that interest income. If you’re in the 25% tax bracket, that shaves off $2,000.
So you’re coming away with $6,000 per year. Not too shabby on $100,000 invested.
Now, let’s put that same amount into real estate instead. A $100,000 down payment buys you a $400,000 fourplex using a residential loan. When we buy properties, we aim for a 10% cash-on-cash return. So the property makes us $10,000 a year. In 10 years, your money grows to $260,000.
Now, some of you might have started to get lost here. How is it that a $400,000 property cashflows $10,000 a year? Aren’t there expenses?
Yes, there are a lot of expenses associated with owning a building. There are taxes and insurance and vacancy and property management and repairs and utility costs. But I’ve already taken all of that out before I calculated the cashflow.
In addition to the cashflow, you also build up equity in the property every time your renter pays your monthly mortgage payment. This amounts to an additional $5,000 a year in the early years of the loan, and goes up over time. For a $300,000 loan at 5% interest, that’s around $60,000 over ten years.
You see, if you buy a property right, it will cashflow for you and you’ll build up equity. Every single month, year after year. And this return is better than the return you can get from index funds.
Instead of delving into how to do that in detail, though, stick with me – and instead let’s keep going with this example.
We have our $10,000 a year in cashflow. And then, just like in that index fund example, you apply taxes to that $10,000 to come up with.…. Wait, that’s not the case at all.
That’s right: cashflow is TAX FREE.
Wait, what?
That’s right. It’s tax free.
So, of that $10,000 of cashflow we put into our pockets each year, we pay none of it in taxes.
And, even more ridiculous (or amazing depending on which side you’re on), some of us even shelter our other income with additional tax losses created by our real estate investments.
How do we do that? That’s Step 3: Keep the Money.
But, before we delve into the additional tax benefits offered to active real estate investors, let’s first do a quick re-cap of our head-to-head FIRE comparison (see Table 1).
Our index fund has grown to $200,000 but our fourplex is at $260,000 (excluding market appreciation, which would make this number even higher). The fourplex has an additional $60,000 in equity paydown for a total of $320,000.
In terms of income, your income is $6,000 after taxes with index funds while fourplex is generating $10,000 tax-free.
We’ve also got at least two other sources of additional value with real estate: Rent appreciation and market appreciation. All of these are very real returns that put more and more money into your pocket, but, to keep things simple, we’re going to keep these out of the equation.
Real estate is way out ahead, even though you’ve seen we’ve left out these two other sources of value.
Are you starting to see why we call this Fast FIRE?
But the truth is, the return we just discussed is trump change (pun intended!) compared to the additional return you get with the next two steps: Keep the Money and Expand the Money.
Stay tuned for Part 2 of this series next week where we’ll show you how your returns with cashflowing rentals go way beyond cashflow!
[PoF: And don’t forget to check out Financial Freedom through Cashflowing Rentals for a course overview, testimonials from prior students, and more!]
32 thoughts on “How to Fast FIRE Your Way to Generational Wealth – Part I”
I’m a big fan of real estate and believe it should be the cornerstone of anyone’s investment portfolio. It is nice to see you doing so well in building your portfolio and being able to extract so much value from your investments.
I get very excited now on prospect of being able to get a 10% cash-on-cash return on a new rental property purchase given how low interest rate is in general. I think I’ll be doing jumping jacks for an hour if I’m able to generate 25% cash-on-cash on one of my rental properties (let alone 40%).
Keep up the good work! Maybe in a few years, we will see Leti&Kenji Tower next to Trump Tower in NYC.
Thank you so much for words of encouragement!
For higher cash-on-cash return, we look for any opportunity to increase income and decrease expenses. we call this hidden value. Some examples are converting and renting garages into workspaces, renting storage units, finding shared housing opportunities, billing back utilities. For the 40% return, be sure to check out supported living programs. They rent by the room (so if you have a 3 or 4 bedroom you can usually do better in terms of rent than renting out to regular tenants) and they also cover almost all expenses (you don’t need property management, no leasing costs, no utilities, no vacancy). When you simultaneously eliminate all of those expenses and increase income, this is how we get to 40% cash-on-cash return for our dinky little $160k duplex in Spokane, generating $20k in cashflow per year.
Terrible biased article.
Midnight toilet issues are not a “myth”. What a complete lie. Even with a property management company, you will be notified and have to approve.
100%. My wife Letizia and I may be guilty of having blinders on when it comes to our mission to help our physician colleagues achieve financial freedom. To borrow from our friend WCI, we just want to help physicians get a fair shake on Main Street. Does owning a rental business require time and effort? Absolutely. Does it require the same amount of time and effort than our clinical jobs? Not even close. Can you cashflow six figures and pay zero income taxes on your clinical income using real estate? We’ve done it for the last five years (Leti is a hospitalist and I’m a real estate investor and semi-retired hospitalist). We hope fear of a leaky toilet doesn’t deter our fellow physicians from taking advantage of wealth building strategies available to anyone who chooses to educate themselves.
Just my 2 cents.
We self manage our properties and believe me that we will not be getting up for a leaky toilet at 2am. If the tenant has an issue at 2am then it can wait until next day. We don’t answer our phone at 2am even if the unit is on FIRE (or fast Fire I should call it).
If it’s a true emergency they should call 911 and not us.
Even if they call during business hours for a leaky toilet (or anything really), I’m not going to be the one fixing the toilet, changing light bulbs or fixing anything. This is a business.
That’s like thinking like that the Surgeon will take 2 hours each day to call all his patients scheduled for surgery to get their insurance information. Of course the Surgeon doesn’t do that.
Love the website but this article is …
Simple fact is that it is NOT apples to apples comparison of index funds v/s the 4 plex.
One uses leverage and the index fund is not. Strip that away and compare returns to be honest. YTD the NASDAQ returned 35% with no leverage. How about we use leverage similar to what was used for RE and then compare?
I do invest in index funds, Moon stocks, bitcoin, real estate syndicated deals and have a rental property. Different assets have their place for a reason but let’s be honest with the risk profile and the real comparison
It’s obviously not the route I’ve chosen to build wealth, but I like to present varying options and viewpoints. Perhaps Part II next week will wrap things up more tidily.
Best,
-PoF
Thanks Leif. I guess we are more used to your nuanced balanced approach v/s the guest poster style which partly sparked my comment. Will look forward to part 2.
Best,
Agree that it’s hard to compare the two investments. Admittedly we struggled with it because one is an investment and the other is a business. And because rentals are a business, it comes with a completely different level of return, risk profile, investment of time and tax incentives. An example is the use of no money down strategies to “invest” in rentals that result in infinite return. For example, you can buy a property at a discount, fix it up and rent it out, then pull all of your money out. The property will generate cashflow and you have no money invested in the property. I guess as long as we continue to call rental property ownership “investing,” we’ll have to continue to struggle through these apples to oranges comparisons.
Kanji,
By that logic my returns on index funds can also be infinite. I invest 100K, wait until stocks are up above any transaction costs ($101K, $200K, $1M – doesn’t matter) and pull my original $100K out and voila! By your math all future returns on what’s left in my account are infinite!!! (Most of us prefer to look at annualized returns)
You are ignoring the time your money was tied up and the value of your labor. Which as a doc is fairly easy to estimate- your 750 hours of real estate work costs you 750 hours of doctor time ( $75 K – $150k for most docs). Admittedly your 750 hours could cover more than 1 RE deal.
Full disclosure- I have both index funds and real estate.
In terms of the infinite returns, when you find the right deal, the typical turnaround time for pulling your money out is 3-6 months. At that point, the property is generating the same 10% return on the original investment, but you’ve now pulled that original investment out to invest in the next property. This doesn’t even include the tax savings, debt paydown and how we typically increase the cashflow from 10% to 20% (by increasing rental income and decreasing expenses) and sometimes 40% using a program called supported living (providing housing for people with intellectual disabilities).
Their article explaining this was featured in the most recent Sunday Best.
One does have to substantiate spending about an avg of 15 hrs a week on real estate related activities to qualify for REPS.
Cheers!
-PoF
You state, “Let’s say you invest $100,000 in index funds and get a 7% return. In 10 years, you’ve doubled your money. You have $200,000 and, at 4% interest, you’ll make $8,000 per year. However, you pay taxes on that interest income. If you’re in the 25% tax bracket, that shaves off $2,000.”
However, index funds don’t produce interest. Rather, they produce dividends. As such, they aren’t taxed at ordinary rates but, instead, are taxed at the capital gains rate. If you’re in the lower two tax brackets, which might include many folks in early retirement, you’ll pay zero taxes on those gains.
Just thought I should point this out for the sake of clarity.
I agree that the quoted paragraph was a significant oversimplification using inaccurate terms.
In recent years, my realized long-term gains and qualified dividends have been taxed at 28.65%, but that depends on income, filing status, and where one lives.
Best,
-PoF
We are sorry it wasn’t more clear. The assumption was that at the end of 10 years, you pull your money out of index funds and put the money in a liquid money market fund giving you a generous 4% return. The idea was to give you access to the money after 10 years like you have ready access to the cashflow from a rental property. It was our attempt to make the comparison more apples to apples! 🙂
I’m still trying to understand the math behind the fourplex example. If your property cash flows 10,000 yr in 10yrs you have an additional 100K. Added to the 100K down payment, your money has grown to 200K although that initial 100K is tied up and illiquid as it gets unless you sell. I’m not following how your money has grown to 260K. What am I missing in the equation?
Equity from loan pay down.
I don’t get the math too.
300K loan with 5% interest means approx 300k*0.05=15K spend on interest only during first year.
10K income minus 15K interest means 5K negative cash flow, not event counting principal payments!
It is hardly believable than 400K property would give 10K _after_ taking 15K interest and other expenses into account, so what i am missing?
A $300k, 30 year loan at 5% amortized would cost about $1600/month, but with taxes and insurance could be around $2000/month.
Sorry, this doesn’t help.
$1600/month equals to $19200 per year.
Out of these $19.2K more than 10K will be spent on interest during first 10 years in the article.
The article claims $160K of net income during first 10 years, and for all these years the interest on the loan with be higher than $10K income…
Real estate can be very profitable. Admittedly we are in an up cycle for the past 10 years.
I have a commercial property that will produce about 500k in revenue, and about 200k in cash flow.
Right time right place and right circumstances you can win with real estate.
I have also had to feed real estate for years so it is not all rainbows and unicorns.
Cash flow is tax free? Hmm… please explain.
They claim real estate professional designation. It requires a ton of hours yearly devoted specifically to real estate. Once you receive this designation you can claim all kinds of tax breaks that can shield a great majority of your income including your income from working a regular job. It’s nearly impossible for a full time physician to attain this designation so many have workaround such as a stay at home spouse attaining the designation. It all feels a bit icky to me. Doesn’t really seem right that a person can shield all or most of their regular income from taxes by investing in properties that have zero role in attaining said income. However, that’s the law of our great land so I can’t really fault anyone for taking advantage of opportunities they are presented.
The real estate designation can be gotten with a safe harbor designation if you put in 750 hrs per year. Alternatively, you can get it with just one or two properties (and good documentation) if you do everything yourself and no property manager. That being said, no matter what you do, real estate is riskier (greater volatility) than the stock market and takes work. Nobody gives you money without risk and work. Finding good deals in this era of low interest and enhanced asset prices takes time and effort. If you think you can just waltz in and make 40% by using a good agent and property manager, call me I’ll take your money!
You don’t need to claim real estate professional status to get cash flow tax Free. Once you take depreciation which is a paper loss against what you net cash flow you could come out with no taxes due even though you put money in your pocket that year. For example if your net cash flow is $5,000 for the year but your depreciation is $6,000 then you have a net loss of $1,000. So you put $5k “tax free” in your account but for tax purposes you lost $1k.
The advantage of REPS is to use the excess depreciation against your W2 income. In the example above you can then use that excess $1k against your income. Or you can do cost segregation studies and get tens or hundreds of thousands of depreciation in the first few years and essentially wipe out your w2 income taxes.
I didn’t see where they said that you can waltz in and make 40%. I get 20-40% regularly in my real estate and should make it to REPS next year to offset my MD W2 income which will be huge. Like they said, it is a business so I expect to make much more than the stock market.
Hi Elad, this article might help explain it. The idea is that each rental is a business and you can subtract expenses from your rental income. With real estate there is also something called a depreciation expense that is a paper expense (not a real expense that takes money out of your pocket). You can also shift personal expenses like phone/internet to your business. When you do this, even though your property is cashflowing, you show a loss on your tax return and therefore, you don’t pay taxes on this cashflow. https://semiretiredmd.com/positive-cashflow-loss-on-tax-returns/
40% annual returns? If you’re going to make up absurd and patently false numbers, why not say 75%? 100%? Just really go for it! If somebody is dumb enough to fall for this “Sign up for our workshops” scam at 40%, really push it!
It’s good to approach information on the internet with a healthy dose of skepticism. However, calling these physicians liars and scammers without doing any due diligence yourself is unprofessional.
Are you going to earn 40% with no risk? Of course not. Are you going to get 40% on every deal you make? No way. But many thousands of real estate investors will do that well and better on individual properties with leverage. Here’s an example of a 55% return on a supported living property from SemiRetiredMD.
Best,
-PoF
Yeah, I get the gist and happy it has worked out for them.
Can’t help but recall the heady days of in 2005 when everyone at the hospital was a real estate pro.
Actually we have gotten higher returns on several other properties but thought we should tone it down for this article. I think it sounds absurd because rental property ownership isn’t an investment, it’s a business. And businesses have advantages that traditional investments don’t. For example, if we purchase a property at a 50% discount, we can rent it out, refinance and pull all of our money out to get an infinite return. Also, we love the supported living program. To be able to provide housing for a vulnerable population is rewarding in itself but they further reward you with higher rent (the program rents by the bedroom) and lower costs (the program essentially pays all of your expenses), giving you high return on investment. Have we done this well on all of our properties? Definitely not but if you know what you are doing, you can have many more winners than losers. Thank you so much for leaving us your comment!
You can and should get much more than your standard 7-11% stock market return.
Like they said , it is a business so you should be making much more than that. I target 15% Cash on Cash return and pretty much always get more than that. Also, the IRR (internal rate or return) is way higher at 40% or more when accounting all other sources of return (equity, appreciation, amortization, depreciation, rent increase, additional revenue sources).
You have to open up your mind to other possibilities.
It seems people either love or hate real estate investing. The lovers poopoo the downsides and risks and claim high returns. The haters speak to the amount of work and knowledge needed to get good investments.
Has anyone come across a balanced argument?