At one time, I was just a working stiff. I still am, for now. Working a 8-5 job, sometimes on-call, weekends, and trying to climb the corporate ladder. I was a member of a hot shot team that was selected for future management. When you are climbing your way up, you have a tendency to make a lot of people happy, and some not so happy.
It’s fun when you are making a lot of money; but you know the money train cannot last. At some point, a merger may knock you down, a layoff, a boss that you cannot satisfy, or some other reason that you may not even understand.
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Regardless, you need to make sure you are prepared. An emergency fund comes first, then becoming debt free, then bringing in other forms of income. I already had the first two, when I started investing in real estate. Here is how I knew I finished the journey to be financially secure.
I have always been a busy person. While holding a full-time job, I purchased a tavern in southern Minnesota. My partner and I ran it for five+ years, and then sold. I ran for political office as the endorsed candidate for the Minnesota House of Representatives. I received my graduate degree while working.
I had a lawn care and snow plowing business, that started shortly thereafter. It was a great weekend and after work project – unless it rained for a few days. Then it was hell. Or if it was super-hot outside. Or it was cold and snowy. Or if I had other things to do. But the sacrifice made money, and helped garner capital to invest in real estate.
I really ramped up my investing career in 2008. I purchased a 4-plex, and did what I thought was an extensive remodel. As it turns out, it was mostly new appliances, painting and cleaning in most of the units. A light remodel.
This worked well for about 9 months, and another 4-plex became available. I bought it. After all, if the first 4-plex was a deal, the second one would be too. About 9 months later, another one. Then another and a final one in 2012. I had a total of five 4-plexes, plus the two duplexes I already had.
Each 4-plex required a significant down payment, nearly $100K. Each one required a lot of work and vacancy expense. You can add another $10K to $60K to the purchase price. Each one cash flowed better than the previous, but my investment account was slowing eroding away. I would spend $100K on the property, and a year later my account would be close to where I was again, just slightly lower. After five buildings, including one that took ~$260K cash, I was down quite a bit.
In 2012, I purchased my last 4-plex, and it was a cash deal. Approximately $200K investment, plus another $60K in repairs, and a lot of free labor to get it back in rentable condition. On 1/1/2013 I had it completely rented, approximately 6 months after I purchased it. Something happens when you do not have a mortgage. Rental property cash flows like a madman.
Prior to tax year 2013, I always received a big refund in my income taxes. I had lots of deductions due to all of the depreciation, interest expenses, property taxes, etc. I paid a lot of taxes through my employer, and I claimed zero deductions, so they withheld a lot. Those big refunds were a good deal. I was working so much, and trying to keep the rentals going, that I didn’t have time to spend money, or see how much the rental were cash flowing. I was just working, sleeping, and working again. Nights, weekends, vacations, etc. were all used to work on the rentals.
I also did a property flip in November 2013 that generated a bit, but required another $140K outlay before it was sold in January 2014. I always felt that I was barely making money, but it was because I was continuing to invest in properties and had no time to look.
As I was doing my 2013 taxes around February of 2014, I realized that I was going to have to pay income taxes. Despite of having already paid a large sum, I had to send in additional check for about another $10K. WOW. I really needed to look at my income stream and see how much I was really making.
I calculated it out, and low and behold, I was making more than my gross pay at my real job. I didn’t have to work. I still could not quite believe it, so I set a retirement date on a whim. I have saved about 50% more than my gross pay at my real job for the past 3 years. Here is how I set my date to leave my real job.
I figured that I was near 55, so I said “25% chance I will retire at 55, 50% chance at 56, and 25% chance at 57”. There was no science to it. Since my birthday is in November, I added a few months because I wanted to max out my 401K the next year by the end of April, then leave. I found out that after 1,000 hours, my company gives me another year of pension, which is about an extra $100 per month at 65, so I added just a couple of months to my end date to ~6/25. I then added July 1st, to get another 1.67 days of vacation and healthcare paid for the month. I added July 5th in, so I would get paid for July 4th, double-pay day.
At one time, I did have a “do or die” asset amount I wanted to have in my investment account of $1.5M, but since then, I paid off my personal home, another large rental mortgage, almost paid off another large rental mortgage, and purchased another rental property with cash. All told, paying those extra mortgages off generates another almost $4,000+ per month in cash flow. So my investment account is not going to be that high.
Looking back, I probably should have left a year ago, or even three, but I am now nearly 100% positive I will not have financial issues, regardless of what the stock market does. And I can live better than I did while working.
How will you know you are financially independent? If you are already, what criteria did you use? Or what criteria will you use?