During the recent Chick-Fil-A grand opening event that I went to, I met a handful of interesting people. There was one in particular who I found fascinating and was able to talk to for a great length of time. It was a gentleman named Richard, who eventually revealed to me that he was financially independent and had done so at a relatively young age (mid-40s). After hearing what he had to say and asking him lots of questions about him and his story, I couldn’t help but think that he would make a great case study.
Although I have yet to do any biographical case studies, it is something I think I am going to make a greater effort towards. You never know the kind of interesting people that you will meet as you walk through life, or the amazing stories you will encounter of people through books or other means. Allow me to introduce Richard as the introductory case study toward a hopefully ongoing series.
Richard H. Net Worth and Biographical Overview
Full Name: Richard H. (real name redacted for privacy)
Born: c. 1970
Nationality: United States
Family: Married, with children
Estimated Net Worth: 1,000,000 – 2,000,000 USD
Source: residential real estate – single family homes, multi-unit homes
Richard H. Business Model
- Work hard to achieve academic excellence, if you know it is going to take you to a well-paying career eventually. Richard started out poor, graduated in top 5 of his high school. Most students didn’t go to college because gang violence caught up with them.
- Keep trying until something sticks. Richard went to local college on a scholarship and then eventually transferred to another university. He didn’t know what to pursue professionally – tried engineering, then accounting, then computer science/IT.
- Continually seek to earn more, especially early in life. OK grades in college but nothing spectacular; needed time to work. He worked five jobs at one point during college (computer lab, furniture store, etc.).
- Eliminate debt as quickly as possible. The reason for working so much was to graduate with little debt as possible; graduated with $10,000 in debt, but paid it off the first year out of school
- Go into a field that pays well and has room for growth. He started working in IT (really loves technical challenges) with a decent salary. As far as career goes, he stated that it is important to work in a field/environment where there is a high ceiling on income. otherwise it is hard to progress quickly toward financial goals (i.e. you cannot save as much quickly).
- Constantly expand your circle of competence. Richard is always expanding his circle of competence in his field. He figured out which type of developer positions paid the best, and set out to learn all necessary skills and certifications, always making himself more marketable.
- Seek higher paying positions when the increase in pay and lifestyle change justifies it. He switched jobs a few times but did not do so unless it was for a justifiably higher salary ($20k – $30k increases).
- Advice on salary negotiation: figure out your desired salary, and then tell them you are making a reasonable amount less. Ex. “I am making $80k looking to make $90k”. Of course, be sure that the position you are applying for has value at the level of the desired salary.
- Be well-liked and high achieving so people naturally help you reach higher positions of responsibility. He eventually worked his way up to lead developer (technical role), then was good enough with people that he was encouraged to accept a manager role, making $100k+.
- Take advantage of special situations. The most recent company he worked for got bought out; he knew he was very valuable to the new company in order to help transition their old systems over to the new company. He was thinking of leaving because he knew the role they would transition him to made less than he did at the time. Instead the new company made him an offer to double his salary ($200k+)
- When the time is right, buy back your most precious resource – time. Once the transition was complete, he decided he was prepared enough to be self-employed/do something different.
- Savings lots of money consistently provides greater flexibility as life progresses. Throughout IT career he saved close to 15% of earnings in 401(k) plans, as well as money in regular savings. He left IT job and created two companies: one for [redacted] and one for real estate investment.
- Use the structural nature of the tax-code to your advantage to build wealth. He consulted necessary professionals and rolled 401(k) into Solo 401(k); used Solo 401(k) money plus other cash to do first real estate deal.
- When venturing into a new field, find a mentor to accelerate the process. Richard had a friend that had been doing real estate investing for a decade that mentored him through the first deal as well as several more.
- Build passive income by buying cash-generating assets. Over the past 2.5 years, he has focused almost exclusively on real estate; now up to 9 rental units.
- Building the right team is critical for real estate investment success. Some homes are locally owned, while some are out of state; he stated that property management company was worth the cost for the out of state rentals.
- Understand your niche and stick to your strategy. He only buys distressed properties, usually at auction, and fixes them up (he has construction skills and his brother has equipment). Richard’s target rents for each property is $800-$1200/month.
- if value of property is too low, you risk tenants messing up the property, more hassle
- if value of property is too high, you risk higher tenant turnover because people can/will buy houses
- targets 10-12% cash-on-cash rate of return
- uses rents received only for maintenance and re-investment in more properties
- State clear goals from the outset so that you know when you have achieved them. The initial goal was to replace old manager’s salary of $100,000 with passive income; now almost there at around $90,000. Ever since college he wanted to be financially independent by 45 years old; recently turned 45 and feels he has finally achieved that goal.
- Avoid debt for investing – it requires more patience but reduces risk. He never uses debt to buy rental properties – an rarity in the real estate investing world. He only has a mortgage on his personal residence; all nine rental units he owns are paid for.
- Allow your lifestyle goals to change as you age. He will continue to invest in single family homes but will shift more time to help with his and his brother’s family business.
- Think like a business owner when it comes to investment. He thinks that many real estate investors simply “play games” with weird and shady deals – not true property owners.
- Never stop giving back and enjoying life with people you love. Richard enjoys playing golf, so he volunteers at a local golf course and gets to play for free; brought down his golf game from a 95 to a 75 handicap. Also, he is now able to spend more time with his daughter and play tennis. He ran his first half marathon this year and is going to run in a full marathon this fall.
- Commit to a plan and follow it consistently – over time it will not feel like much of a sacrifice. He said that he and his wife, over the years have not really had to sacrifice much to have what they have (nice home, cars).
Practical Lessons from Richard’s Core Economic Engines
Career in Information Technology
Richard’s career in IT proved successful, even right out of college. The constant learning of new information and what was valuable to the organizations he worked for enabled Richard to command higher salaries for his services. He knew that most of his peers would not take the time to get extra certifications and take extra technical classes that were particularly challenging. By setting himself up to be a learning machine, he paved the way for quick and steady career growth throughout his 20s and 30s.
His high income and avoidance of debt allowed him to maintain a solid savings rate over the period of a few decades. For most, this simply would not be possible because of either a moderate/low income, or simply not enough time to let money stack up and compound.
Transition to Real Estate
One of the things that inspired me most about Richard’s story was that he found a way to invest in real estate without going into debt, a true rarity in today’s world of low interest rates, especially. The wisdom is that yes, a higher cash-on-cash return could be made through leverage, but the quality of an investment is not measured by rate of return alone. The quality of the cash flows an asset provides, as well as the risks inherently associated with an asset, need to be considered.
Note the gradual progression of Richard’s finances. Him and his wife saved tens of thousands of dollars each year for a decade, consistently living on less than they made. It was only with a big pile of cash in his various accounts that Richard felt comfortable enough diving into a completely new field. With the help of his mentor he was able to purchase nine rental units in less than a three year time period. That would not have been possible without a combination of factors occurring at the same time:
- Lots of liquidity available to make deals happen quickly.
- The advice of a mentor to avoid major pitfalls and provide specialized education.
- The power of paying for properties completely in cash, thereby lowering the overall cost of investment (buying distressed properties at auction).
Once the first deal was done, it was simply wash, rinse, and repeat. Upon reaching the 9th rental unit, enough passive income was coming in that he declared himself financially independent. The transition to working on his family’s business and spending more time with family and volunteering became possible once the primary economic engine of the real estate portfolio was firmly in place. This portfolio, in turn, would not have been possible to build so quickly if not for the years of savings that had been consistently set aside.