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.
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!]