Reader Question: I have capital but no time – how do I break free?

In: Real Estate By: Brian Armstrong

28 Jan 2009

Hi Brian,

I have been a long time RSS subscriber to your blog (since the 30 day marketing series – I guess it worked) and I would really appreciate your input on something. A little bit of background first: I am 24 year old software developer in New York City making $120k/year. I paid off all my school loans and do not have any debt. Professionally, I like what I do. It’s interesting work, and it pays damn good money. But, I also want to “break free”.

I have been reading your articles for some time, and the way that I see it, they mainly focus on how to convert time into passive income while using a nominal amount of capital. I’m coming from the other side of the spectrum. I have plenty of capital (I should have around $50k in the bank or in minor investments by the end of the year), but very little time. There are plenty of books and articles which talk about finding good real estate deals or starting businesses, but all those things require time. I have not been able to find anything really useful that investigates the possibilities from the other side of the fence. There is always the stock market, but with the current economic conditions, I am not quite sure that is the best option. Real estate is the other option, but that has also come to a standstill in this economy.

What do you think I should do? I feel that for me, personally, trying to convert my earned income into passive income is the way to go. I am perfectly content to save and invest $50k a year at a good return rate for several years. The question is, what is the best starting point?

Thanks,
A

Hi A,

I think you’re right, if you have lots of capital then no need to start your own business if you don’t want to. You can invest this wisely! Real estate is by far my favorite here because it generates cash flow (money you can actually spend each month) instead of just capital gains. I hate stocks. Plus income from real estate is largely tax free. Also, you are right that the real estate market has slowed – but this does not mean it’s a bad time to invest. When home prices are depreciated its a great time to buy (and not to sell). So there are two sides to this, no matter which way the market swings it’s not a bad time for real estate necessarily, it’s either a bad time to buy or a bad time to sell but not both.

Also, when people are unable to purchase houses they have to rent, so home prices and rents are inversely correlated. You can ride out any recession in real estate if you keep your properties rented out and they cash flow each month…you might have huge capital gain shifts during this time but it doesn’t matter because they are generating income you can spend every month. Then when the market shifts the other way and prices are inflated, you can sell at the perfect moment.

Real estate is by no means risk free and there are probably 100 ways to lose money doing it (like buying speculative investments – high end town homes, new construction/development, flipping, etc) and I have lost money on some deals. But there is also a safer way to do it and it takes some learning just like anything else. Buying foreclosed 3/2/2 starter homes at a steep discount and renting them, for example, and possibly eventually doing bigger deals with apartments that are more hands off, etc. If you want to go this route, my suggestion is to read some of those books (Rich Dad Poor Dad, The Automatic Millionaire Homeowner, etc), join some local real estate investment clubs to get around the right people, and find a good mentor (someone who has already done this and is RICH, not someone who is still learning).

Btw, not sure I answered your question about real estate taking time. Yes, investing in single family homes will take time both to find the deals and keep them rented. But maybe not as much as you’d think, lots of people do this with a full time job for example. I spend about 3-4 hours per month dealing with my 3 houses although they took a lot of time up front to get going. Once you get into bigger real estate deals, for example being a passive investor in a multi-family deal, you can be completely hands off but this can require larger sums of money (around $100k or so) and I don’t have much experience there.

Millionaires own lots of real estate and they are a great source of passive income!

Hope that helps,
Brian Armstrong

Tags: Real Estate

8 Responses

Chiko

January 28th, 2009 at 7:39 pm

I think you should seriously consider the stock market because you can make some great dividends with investment capital like that (50K). That is the safest way to gain a little bet of money, not even mentioning the fact that the market will rebound back in the next couple of months (which will added some value to your investment (I think at least 30%))

If you want to step into my realm of taking a lot of risk for a lot of money, then I think that is a great idea for you because of two reasons.

1. You are young (24 years old)
2. You have a lot of income (120K/yearly)

If you can learn how to take some risk in the stock market (since you don’t have much time) you can really build something big. I usually trade and make about 10-30% a week on average.

With your type of income and that kind of percentage gain the stock market, you can be looking really nice in the next couple of years (maybe months).

Brian Armstrong

January 29th, 2009 at 2:56 pm

Hi Chiko…dividends don’t really cut it for me. Typical dividends are a couple percentage points right? I’m looking at 12% cash on cash return for my real estate investments – and this is typical for other investors I’ve talked to.

Then in terms of capital gains there is leverage. Let’s say you bought a $10,000 worth of stock and it went up 10%. You’d make $1,000.

But with real estate you have leverage. $10,000 can get you a $100,000 house. So if the house went up in value just half that much, 5%, you’d get a 5% increase on the $100k not the $10k. So you’d make $5,000. Leverage and using other people’s money is key. Nobody will loan you or I money to buy stocks, but banks will lend you money all day to buy real estate.

Then look at the tax benefits. The deductions you get with real estate make the cash flow (12%) basically tax free. The interest you pay on the mortgage is all deductible, the depreciation, all repairs, etc. Your deductions far exceed your income from the property so it’s tax free income (not to mention 1031 exchanges, etc).

Then look at the risk. The stock market changes wildly from day to day with huge swings. In a worst case scenario you could lose half your portfolio in one day. It has happened to many people – worse if you are all in one stock like Enron. But look at real estate. Much less volatility. Even in the worst possible case (say a home in California you bought at the peak of the bubble) it might take a YEAR to lose half it’s value. Not a day. It’s much easier to see that train coming down the track and get out of the way whereas the stock market can blind side you.

Real Estate kicks the crap out of stocks. It’s not even close.

James

January 28th, 2009 at 10:41 pm

Also, if you want to start breaking free with regards to time (you mentioned you do not have much of it), you may want to check out “The 4 Hour Work Week” by Timothy Ferriss. Lots of strategies to cut out time wasters and consumers in your work life, plus info on how to reposition your focus in life towards what truly excites you.

Good luck original poster!

Brian Armstrong

January 29th, 2009 at 2:58 pm

Hi James,

Good point…I personally love that book. Although what Tim teaches is certainly more time intensive, building a passive income business.

Matt Thomas

January 29th, 2009 at 7:36 pm

That would have been my suggestion too. Tim’s advice on outsourcing and cutting out all busy work is the best bet if you have minimal time for start-ups.

Many entrepreneurs would prefer to have more capital and less time, as they would have the opportunity to start hiring right away. Whether it’s web designers and SEO specialists, or just someone to analyze real estate deals for you, I would use the capital that you have to hire someone to do the heavy lifting and technical work for you.

Chris Guthrie

January 29th, 2009 at 7:40 pm

You can also look into partnerships as well. I have somewhat of the opposite situation. Although I work full time, I’m always looking for ways to pair up with people to be successful.

In fact, I will be developing some top tier (very top tier) domain names for my friends dad who bought them back in the mid 90’s. Sort of a random connection, but I mentioned in passing that I’m sure I can make more money with them than his domain parking service and now that the income has dropped out he’s coming back to give me a try.

If you have a good idea you can also outsource the work to be done. To help keep costs down I try and do as much as I can without getting coding help but I always have to have one of my coders hop on and fix a few things. You’re in the opposite situation though so you could just say “I want the website to look like this, work like this etc. etc. here is money. Go do it.”

Chiko

February 1st, 2009 at 2:59 pm

@Brian: Everything you have said is correct, but I guess I have to ask you one question. With my scenario of the stock market and your scenario of the housing market, which one is like to happen first (or faster)? I think that is the most important question. You mention that the stock market is riskier, and you are right. But that is also the reason why you can make more money with it in a shorter period of time.

Breaking Free

Reader Question: I have capital but no time – how do I break free?

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