Summary: If you’re focused on achieving financial freedom as fast as possible (Fast FIRE), it’s inevitable that you’ll run out of money eventually. So what are your options when you run through your savings? Fortunately, there are a lot! In this two-part post, we cover some of the ways you can free up money to build your rental portfolio once you’ve exhausted your easily accessible funds. In part one, we focus on how to make more money and fund your real estate portfolio. For part two of this series, we cover how to access the cash you already have and how to use other people’s money.
Part I
When Kenji and I first started investing, we spent all of our savings on buying our first four properties. That first year we were up to 12 doors. The problem: we were running out of money.
Luckily, that second year of investing, we got a fair amount back in tax-savings since Kenji had Real Estate Professional Status. We also ended up selling our portion of a business Kenji had founded, which helped a lot. Both of those sources continued to fuel our growth for another year until we ran out of money again.
This cycle has repeated itself in our investment journey as well as many of our students’ journeys as well. The issue is that saving up for for 25% down payments take time.
If you are OK growing your portfolio at a moderate pace over time, you can buy a property or two each year and have a nice sized portfolio in 7-10 years. However, if you want to get to financial freedom faster, you may want to tap other sources of funds.
The right fit, ultimately, depends on you and your comfort level.
With that said, let’s assume your goal is Fast FIRE, and you’re focused on building wealth as quickly as possible, what are your options? In this article, we provide an overview of some of the ways you can fund your purchases after your savings have been exhausted.
Make More Money
Do more shifts:
This may be an obvious one, but it bears mentioning because if you’re a physician, this may be one of the best ways to get money fast. Since many of us have relatively high per-hour earnings, even picking up 3-5 shifts extra each month for a year can bring in enough for a couple of down payments.
But remember that for most of us, we give a huge chunk of that money away to the government. So what if you could keep that money instead? You’d have even more to invest!
But how does this work? If you have a stay-at-home spouse, for example, who is willing to do the work of meeting Real Estate Professional Status and you bought enough properties, you could lower your effective tax rate to zero, and keep the value of all your extra shifts in your pocket to put towards down payments.
Become a super-saver:
Although also an obvious one, sometimes people find this to be harder than just signing up for more shifts.
Kenji and I cut out a lot of costs during the first two years of real estate investing. We went without Starbucks, held onto old cars, and cut back on spending across the board. Kenji and I decided not to buy a primary residence, which would have consumed all our savings. We even created a budget, something neither of us had ever done in our lives!
We were lucky enough to live in a no income tax State. However, I can guarantee that if that hadn’t been the case, we would definitely have considered geographic arbitrage. This means that we would have moved to a lower cost of living area with no income taxes to save up for a couple of years.
Start a side business:
Now this one takes time and effort and has a higher risk, but if you have a burning passion, starting a side business might be a good choice.
The downsides of a side business is that it often takes considerable time and effort, and there’s a good chance that there’s no reward down the line because the small business failure rate is quite high. However, if you have passion, commitment, follow-through, and a clear exit strategy that will lead to a nice payout that you can then invest in real estate, starting a side-gig might be a good match for you.
Over the last eight years together, Kenji and I have created four businesses (including Semi-Retired MD and our real estate business) and exited two. The majority of the earnings we’ve created from every business have gone into buying more real estate. The reasons are two-fold. One, we know the key to our future income is having cashflow from our real estate business. Second, every dollar we invest in real estate creates a tax shelter for our earned income.
For example, this year, we are recycling all of our Semi-Retired MD earnings into real estate investments (minus a little discretionary spending). Instead of paying hundreds of thousands in taxes on the earnings of SRMD, we’ll pay nothing by sheltering that money in real estate investments.
Get Money Back by Paying Less in Taxes:
Qualify for real estate professional status as fast as possible
As I alluded to above, one of the things that freed up money for Kenji and I every single year along our journey is getting back all of what we would have paid in taxes to invest into real estate each year. We did this because Kenji was able to achieve Real Estate Professional Status (REPS) the very first year we started investing. Having REPS status has saved us hundreds of thousands of dollars in taxes almost every year. Since we diligently reinvest all our tax savings back into real estate, our portfolio has grown exponentially. If you want to learn more about REPs status, explore some of these articles where we go into detail about this status.
Next week, in part two of this series, we cover how to access the cash you already have and how to use other people’s money!
