Easier way to get rich than finance? Frugal living -> real estate
Finance offers great comp, but it comes with extensive work hours. Mentioning this to my friend, he offers a better way to become rich. He says he’ll get a 60k business job out of college, live with his parents and buy property/stocks using 95% of his income. Doing this, he says he’ll be able to afford a down payment almost every year, which will turn into ~10k month revenue (for near zero labor) in his 30s after buying many properties thanks to his frugal living. Is it that simple? Why bother with 100hr work weeks/high stress when such options are available?
I would personally rather have a higher quality of life than living with my parents in my 20s. Also if you make more you can save more and invest more. Also managing multiple properties takes a lot effort or you need to pay someone to deal with it if you're working FT. Lastly, regular entry-level business jobs are hella boring and your peers are not people I'd want to be around if I had my way.
The point regarding living with parents is valid, but since FHA loan requires for you to live in the building you buy, my friend would only be with his parents for a very short time until he affords his first rental property. From that point, it will just be 40 hours of work + managing one property which already seems less work than breaking into/working in IB. From there, you just keep growing your properties. Is the issue here how long it will take to acquire next properties (and thus delay how long until you see significant cash flow) as well as the stress that comes with managing additional properties?
You also need to look at how much interest you're paying. Some of these BRRR/RE people tax out max leverage (on FHA I believe max leverage is 96.5 LTV) and end up paying $325k or more in interest on a property worth $400k. Thats a losing investment 10/10 and it seems that most of them don't understand time value of money.
There are ways to make $ doing what your friend is talking about however most people ignore how much interest they're paying and what their $ would be worth after however many years if they had simply put that down payment and mortgage payments into the markets.
Ok but is that prestigious though?
If it were that easy then everyone would do it. Buying properties and managing them requires effort and it isn’t as passive as it sounds until you scale. You need liquidity, good credit, enough assets to get loans approved, etc. Its a shit load of work and posses considerable risk if you have no clue what you are doing.
Good to have that type of mentality, though. One thing to want to be wealthy and the other to actually do so something about it.
Is the risk being not getting high enough credit to start/expand your real estate? Upkeep on properties doesn't seem to be too complicated, contractors aren't the brightest people after all. (no offense, but I would argue it is much less intellectually challenging than other prestigious careers like finance, law, etc..)
If your friend is really you, or thinks like you do, run the other way from this.
"Contractors aren't the brightest people" - this sums up the entire problem you're going to have. Who cares if they're smart or not? Most finance people aren't brilliant, they just work hard. More to the point, when you need a plumber, it doesn't matter if he's Albert Einstein or a complete dunce - he has a skill you don't have, and that you need. Moreover, these guys hustle. You know the old canard about how mechanics screw you over if you seem like you don't know anything about cars? Well, welcome to every single subcontractor in the real estate world. Most of them are far more savvy than anyone you'll meet in finance or law, because they're running their own business so they have to own their mistakes. Nothing weeds out the actual idiots like having to pay for a miscalculation - which exceptionally few lawyers or bankers ever have to do. Most subs you meet, will - or else they wouldn't still be in business.
Upkeep is extremely difficult. It's lumpy and requires extensive capitalization. You could have bought an investment property in Texas a month ago and now look at you; between your repairs and your electric bill you're probably out of pocket an additional 50 grand. Where is that money coming from? Even if you get insurance proceeds, that'll take months.
Running even a small property is a huge commitment of time and money. Yes, you can do it while working a 40 hour work week, as long as that job allows you the time to leave in the middle of the day for 3 hours and come back and make it up later. Crises at your building won't schedule themselves around you. When the stove stops working, you don't have the option to just not use it - your tenants will want that up and running and won't pay you full rent until it is. When the city needs to inspect, it'll be on their time, not yours.
Wow..."contractors aren't the brightest people after all." I wouldn't have caught this arrogant bullshit had Ozymandia not written an essay about it. Since you are the one making the statement and not your "friend," I'll address my comment to you. The carpenter I use makes well into 6 figures and drives an audi and works 8AM-4PM. My landscaper owns 6 investment properties that he bought for ~$500k ea a couple years back and recent comps show that they are worth ~$750k today...if my math is right $250k*6 = $1,500,000. My excavation contractor does 1 development/construction a year as a "side hustle" and makes ~$300k-$500k per project...if that's his side hustle, I can't imagine how much he does from his main hustle...he OWNS ALL his heavy equipment. My contractors are only able to invest/develop on their own because they are very handy and get down and dirty everyday and if there is something they don't know how to do, then they just call one of the dozen other subcontractors they work with for advice. Oh and none of these guys went to college. Actually, my excavation contractor's son had the option to go to college or join his dad...guess which one he picked? I'm not sure what your metric is for measuring "brightness," but if brightness means not making money...then I'll take not being bright any day. I suggest you get off your high horse especially if you are considering entering the real estate business in any shape or form. As I've mentioned in my other posts construction is king in real estate (well equity probably takes a slightly higher priority), especially at smaller scales.
Assuming all his calcs are correct (seems a bit funky to me)... just imagine if he did the exact same plan but with a job making 100K+ out of school instead? Wouldn't he get his 10k/month revenue way before he's 30 then with just a couple years of hard work? :) and in the process he could live a bit less frugally. Just depends on what you value, I guess.
The main point I'm afraid of while considering the finance path is in order for me to get the 100k+ jobs out of school, I will be in a big city with high COL which already negates part of the income. Once hourly wages are considered, 60k/40hours (with no expenses) is pretty similar to 150k/100+hours (including COL of NYC, SF, etc..), isn't it? Don't meant to be argumentative in my comments here! Just trying to learn as much as I can.
Yeah sure I definitely agree COL goes into calc. Didn't realize in this theoretical living with parents scenario that it would be in a much lower COL place. Would use https://www.numbeo.com/cost-of-living/comparison.jsp to figure out what the differential was and if it did in fact make up the difference between the salary (also obvsly living with parents = no rent I assume whereas you have to rent if the parents live nowhere close to the job). Could be math works out that this makes more sense for them, and if they get along with their parents then great.
Your friend sounds like a fucking loser
It depends on what satisfies you personally. Personally, I am not a huge spender so the money aspect isn't too important.
-Enjoy the learning component and being able to work alongside people that I can learn a lot from. Doesn't feel like work most of the time.
-Finance specifically, you learn how to invest your capital and see a variety of approaches. Can talk to investors across a variety of asset classes and learn about what they're doing, and how they deliver alpha. IE to learn more about REPE I put some cash into a friend's fund b/c it was way safer and faster to learn about RE instead of doing deals myself. Also allocated into a dental roll up, and learned a lot about executing a roll up from the operators, I was only able to find that deal b/c of my network in finance.
So you would say that the path to wealth that I mentioned is somewhat equal to banking and it just comes down to what you enjoy more? In your case it would be working along smart professionals and learning from them? The approach I mentioned just seems way less stressful than finance, to the point that it feels too good to be true. I'm not huge about money either dude, I'm just looking to retire early and buy some place out in the mountains to get out of this fucked world lmao.
I don't think there's anything wrong with it per se but you'd be betting on RE pretty hard, no? I think you'd get bored quite quickly too.
@m_1 Is that a general strategy that you follow and recommend to "break into" an asset class and learn? Put some cash in and learn along the way?
Just what works for me. I get some level of diversification out of it and it's like getting paid to get lessons from someone who is at the top of their game.
I don't know every single market in the country, but here are some challenges that come to mind
1.) At $60k/yr he'd be netting what? like $3500/month? Assuming his parents pay for all his expenses (food, car, etc..) he'd save $42,000/yr. If he did a 5% homeowner program he would in theory have enough down payment for a $840k property, but no bank would lend $800k to someone making $60k/yr and 5% programs dont work for jumbo loans, which in most states are ~$500k. If your friends lives in a higher COL city such as NYC, Boston, LA, SF, DC then a jumbo loan may be considered over $800k, but then he would have problems with the down payment because properties would be much more expensive (probably over $1mm). But either way, at $60k/yr, your friend will probably only get pre-approved for like a ~$300k mortgage. In order to afford a property, he'd HAVE to be doing this in a low COL city where single-families are ~$200k-400k (I don't know where you'd find multifamilies for under $500k). However, there's a reason homes in low COL areas are a fraction of the price in high COL areas...supply and demand. I'm going to compare Boston and Houston as an example because I somewhat know both these markets and 1 is a high COL city while the other is a relatively lower COL city. SFH's in Boston can cost well over $800k and even into the multi-millions depending on where in Boston, but they will rent relatively quickly because there is huge demand in Boston (tons of corporations headquartered there, dozens of colleges, etc...) and low supply of housing (there's a housing shortage). In Houston, I could buy a SFH for $200k-400k, but it would be incredibly difficult to rent because there is SO MUCH SUPPLY. Take a look at zillow or redfin, literally hundreds of rentals on the market and developers are continuing to develop. In a low COL market like Houston, you would have much higher vacancy than Boston. If your friend does his strategy in a low COL market, he could be eating mortgage payments and RE taxes for months
2.) Based on his relatively low income of $60k, negative net worth due to the mortgage on the first property, and almost no liquidity, no bank will give him a second mortgage, so this point already defeats his plan.
3.) Is your friend going to manage the properties or hire property management? PM services can run you anywhere from 5% to 10% of gross revenue and it may require a lot of trial and error before finding a reliable PM service that charges a reasonable rate. It is likely that your friend will have to do some property management at some time or another especially if he wants to own several units. Is he handy? Can he fix a leaking sink? a clogged toilet? repair appliances? Does he even know how the utilities in a house work? Every time he hires someone to fix something, that will be hundreds of dollars out of his pocket. If he wants to save money and do the PM/repairs himself, how will this be feasible when he's working a 9-5 job? What if an emergency comes up from a tenant that needs immediate attention?
I'm not saying his plan is impossible, but I think he is significantly underestimating the amount of risk and work involved and also how tight banks are on giving multiple mortgages.
This is great. So many people have this idealised version of becoming "Real Estate Moguls" as if it's some life hack that no one else has ever thought of rather than being a form of investment like anything else that has its pros and cons and yields appropriately for the risk and effort required.
This, when I went to school and was working on the west coast almost everyone I knew that worked in tech was doing this or wanted to do this.
Given that the majority of these people make decent money and don't understand the full picture of the housing markets in their cities or how to do property valuation that will only continue to drive prices up.
My friend says you are wrong on the point of negative net worth because even if you owe money on the house, the house is your asset which once sold will cover your debts, and as long as you paid off even part of your mortgage, you will be in a positive net worth. This obviously doesn't apply if your house loses value since you agreed to the loan (but this almost never happens, right?). His father is a successful contractor, so the point on fixing appliances he believes he will be able to learn that skill easily, but that is subjective. Would it be that hard to get approved for a bigger mortgage even with 750+ credit, and two high-income high credit cosigners? My friend seems to believe he will be able to afford a much bigger property than the ~300k you said.
I do not mean to be argumentative in any way, and I genuinely appreciate your thorough and detailed breakdown of the risks involved in the approach I explained. I do agree that my friend is probably underestimating how much work is involved in being landlord while simultaneously working a 9-5. You can probably tell that I don't know shit about this stuff, so sorry for my lack of knowledge on this topic. Thank you for your help.
The idea that real estate prices only go up is exactly what caused the '08 crisis. Banking regulations are a lot tighter now, so another housing bubble is unlikely, but that still doesn't mean your property will appreciate. The first 3 rules of real estate are 1.) Location, 2.) Location and 3.) Location. The location of your property will determine whether or not it appreciates and the cause for its appreciation is population growth i.e. more demand for housing. The problem with low COL markets is that not many people want to live there and there aren't many good job opportunities as high COL markets. For your friend's strategy to work, he would need to be in a market that is beginning to gentrify (amongst other things) so that he can acquire properties "cheap" and watch them appreciate as the market grows, but this is also speculative investing which means more risk. Once again I do not know every city in the US, but when I did a little bit of research into Houston's SFH market a couple years ago. I looked at some properties on the market and looked at what they sold for 5-10 years ago...the prices didn't change and I suspect this is true for many low COL areas and that makes sense. The only reason why prices should go up is if there is more demand for housing i.e. population growth. So if your friend does acquire a property in a low COL market, it is very possible that the price stays flat for many years, but upon sale your friend will have closing costs and will likely use a real estate agent that costs 5% commission, so right off the bat your friend is technically down 5%-6% because of the cost of sale, leaving his net worth negative until the property appreciates more than 5%. It's true that once he starts making mortgage payments that he will begin to build equity, but this will take a long time. Model out a loan amortization table...your friend will be paying mostly interest for the first 10-15 years before significantly paying down principal. And even if he does build equity, it's not liquid. How does he get that equity out of the property without selling? He may consider a HELOC (Home Equity Line of Credit) or refinancing, but it wont be for a couple years until the property appreciates enough(if it ever does) and 10-15 years before he builds significant equity.
His dad being a contractor might change things. How involved will his dad be? Is your friend joining the family business or is he really lone wolfing it? If this is more like him joining the family business, then obviously he can be very successful because he already has a strong foundation to build off of. If his dad will co-sign every loan with him and do all the PM with him then this isn't really your friend going out on his own. Now if your friend's dad is not involved, then who cares if his dad is a contractor? Knowledge/skills aren't inherited...they're learned. Just because my dad is a heart surgeon, doesn't mean that I will know how to perform heart surgery. Now you may think that this is an extreme example compared to property management and you're probably right, but it still takes years of training to become a handy property manager. Hundreds of things can go wrong in a house. When the hot water tank breaks, there could be dozens of reasons why. Your friend's dad may be able to teach him how to repair it if the hot water tank is broken for xyz reason, but what about the 11 other reasons it could be broken? This is where experience (and google/youtube) comes into play. And your friend can only work on PM stuff after 5PM and weekends because he will be working a 9-5 job
So your friend's dad will be backing him. Wtf... well then that changes everything. Yes, if your friend's rich parents buy investment properties for him to collect the rent from and he also works a job paying $60k a year then obviously this route will be an easier path than banking...duh...Given this new information, your original post basically reads "There's an easier way to get rich than finance and slaving away in banking. Just have a massive trust fund." Yeah no shit...I have a similar background...but as someone mentioned in this thread, I don't misconstrue my fortunate background for innovation...
Your friend is retarded and/or naive.
Had friends that started out like this. They're all more successful than my PE/HFs friends in terms of net worth, 6-8 years out of undergrad. They didn't make much initially, but became successful in small businesses (ecommerce, real estate brokerage, mortgage lending, construction, HVAC, bitcoin/crypto investment, etc.).
I would imagine maybe a couple of my HF/PE friends will be more wealthier DOWN the line if they can stick around in the industry. Otherwise, I think a creative small business person who starts at a young age can do better than your average BB MD or mid level corporate employee.
I still think some high level finance experience is good even if you wanna do entrepreneurship down the line. Raising money for a startup or taking your own company public one day requires a skill that most local small business owners aren't really able to pull off (generally speaking), but would help you tremendously if you had some high finance experience.
Everyone made good points above in terms of the numbers and if it can be done.
I'll add, with this, or any idea, you're going to find people who tell you how it won't work, and others who know someone who it worked for. Based on your original description, it just seems like your friend is trying to find an easy way to make a lot of money. Realize, there is no way to make easy money. Yes, once its up and running, the money comes in, but that takes time.
Also, remember, just because something is a "bad idea" doesn't mean its immediately bad, or DOA. Image if you had a friend in 2005 who was "putting no money down" on a lot of house, and saying "its fine, rent will pay all the mortgages", then three years down the road it didn't work out. Need to have a long term view.
So he'll be a leech?
Lol "Here's my easy path to wealth: having someone else pay my bills"
Lol. I don't know why this is such a point of contention on this thread. I know my mom will be more than happy to offer food and home for a couple more years after doing so for the last 18, knowing that it will help set me up in life and she will see her son succeed. I know I would do the same for my kids. Seems like a lot of people here have issues with their parents.
That's the hard way my friend.
Just be born into wealth.
You mistook this concept as innovative when it's really just refusing to move out of your mommy's basement.
High risk regarding the property idea, someone I know did this and covid ***** him over because he lost tenants so he wasn't able to pay his loans. Also when owning several properties this becomes a major job.
This is such an easier said than done thing. it's people living in the homes, not robots that pay you on time. People don't realize how non-passive this "rental" passive income is. It is incredibly high touch.
You could get aroudn this by hiring a property manager but do not expect the best results from someone whose interest is vested in collecting fixed fees.
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