How Replace Your Salary With Alternative Investments & Retire Early

2072

The vast majority of workers are told to contribute to their 401K and IRA for 40 years.  Then you will be able to retire.  The people that teach (and sell) this method usually rely on some outdated and very flawed data to present this case.

Working for 40 years and then having to pinch pennies is not appealing to me at all.

How about we come up with a plan to retire in 3 years instead of 40?

Along with working for 40 years and  investing in stocks and bonds, most retirement planners also teach paying-off debt.

This plan is going to be entirely different than any other plan on you’ve read about.  I ask that you have an open-mind.  Who knows you may end up retiring early because of it.

The focus of this plan is obviously increasing your cash-flow to a point where you can quit your job in 3 years.

Obviously, every case is going to be different but for the purposes of this article let’s assume you have a salary of $60,000.

If you make more than that, then just multiply all of my use-cases below by that factor.

For example, if you make $90,000 instead of $60,000, multiply everything below by 1.5 and that will get you to where you need to be.  Essentially, you can follow the same investments, you just need to make larger investments.

If you make less than $60,000, such as $50,000 then multiply everything by 0.833 ($50K/$60K) and that will get you where you need to be.

Ok lets get started!

Year 0

Salary: $60,000

Alternative Investment Income: $0

Hopefully, you have been able to save meaningful amount in your retirement accounts. This will obviously depend on your age.

Year 1

The first thing you want to do is immediately start getting cash-flow with the lowest amount of investment as possible.  This year we are going to focus on short-term vacation rentals.

The best part about this strategy is that initially it’s not going to require any investment.  You are simply going to rent out a room in your house.  You also can rent out your entire house for extra money.  The first question I always get, when I tell people I rent out my entire house is: Where do you go?  I will tell you the same answer I tell my friends and family: on vacation!

Your rental rate will vary, but let’s assume you can rent out an extra room for just 10 days a month at $120 a night.  Let’s also assume that 3 weeks out of the year you rent out your entire house for $450 a night.  Making these assumptions you are going to gross $14,400 for your room rate and $8,100 for your entire house rate for a grand total of $22,500.

Now, that you are comfortable on Airbnb you need to rent a place for the sole purpose of renting it out on Airbnb.  That’s right, you don’t even need to buy the place, you simply need to find high demand areas and then find an apartment to rent with a lower associated rent.  Obviously, you want to make sure this is ok with your apartment owners and make sure it’s legal.

Do you think this is impossible?  My friends did it in St. Louis and are making a little over $1,000 a month using this strategy.  Importantly, this is after all maintenance, cleaning and fees. See here – http://needwant.com/p/rented-apartments-rent-airbnb-profit/

You also need to buy a house for long-term wealth and rent it out using Airbnb.  This part is hard but critical.  You want to buy a place that again is a tourist destination but you can buy the house at a very low-rate.  My same friends that rented above bought a place in Las Vegas for $40,000.  They then spent another $10,000 getting it ready to rent on Airbnb.  The $10,000 include cost like a television, bedding, furniture, kitchenware, etc.

Their first year they made an annual profit of $13,608.

http://needwant.com/p/buying-apartment-airbnb/

If you think this strategy is far-fetched I can assure you it is not because I’ve done it and I’ve seen people do this.  Sure, its hard work, but you didn’t expect this to be easy did you?

First year recurring income: $48,108

Year 2

Year 2 is going to require you to buy a quadplex at a minimum.  I have owned a lot of different types of rental property.  You will have a little harder work getting these units rented.  However, that is why you need to buy in a very high demand area where gentrification is taking place.

In my town, you can buy a quadplex in an up can coming area for around $300,000.

If you put 20% down and get a $240,000 loan at 4% with a 20-year amortization the payment will be $1,454.  Let’s budget an additional $500 a month for taxes, insurance and maintenance for a total monthly cost of $1,954.

Where I live you can easily rent a 2-bedroom unit as part of a quadplex for $1,100 a month.  Therefore, your total gross income for the month is $4,400.  However, let’s discount this by 10% to take into account turnover and vacancy.  Therefore, your effective net rent is $4,000 a month or $48,000 for the year.

Your total debt and maintenance cost was $23,448 therefore your cash-flow profit for the year is $24,552.

Second year recurring income: $72,660

Congratulations!  You have already hit your income goal.

However, I’m sure you are a little pessimistic at this point so let me share with you one other strategy you can highly increase your passive income goal.

Year 3

This strategy works the best when you have a fair-amount of money to invest and you want solid income that is secured by commercial real estate.

The strategy I’m talking about is triple net lease properties.  With triple net lease properties all taxes, insurance and even maintenance costs are passed on to the tenant.

Now don’t get too excited, if you go buy a McDonald’s in New York City you are going to get a cap-rate of around 3%.

This is why you need to modify the strategy for your own personal cash-flow.  I want you to focus on middle-grade tenants, or B tenants.  McDonalds for example would be an A tenant.  K-Mart would be a C tenant.  I want you to focus on B tenants such as Dollar General or maybe a local company that is doing well, but their debt isn’t rated by a major rating agency.  For B tenants you can expect cap-rates of 8-10%.

http://www.bouldergroup.com/2015-Q4-Net-Lease-Research-Report.pdf

To maximize your cash-flow, you will want to utilize debt.  The best part with this strategy is that the bank won’t be analyzing your cash-flow they will be analyzing the lease and the tenants cash-flow.

http://buynnnproperties.com/nnn_properties_for_sale

$175,000 income / $2,000,000 purchase price = 8.75 cap-rate

This isn’t standard in banking but at this point let’s assume one of your properties is paid-off or has a significant amount of equity.  Instead of putting down 20% to buy the $2,000,000 in commercial real estate, all you are going to do is pledge that property.  The properties will now be cross-collateralized for the bank.

Therefore, the bank is going to give you a $2,000,000 loan on a 20-year amortization priced at 4% for a payment of $12,119.61.  The annual debt service will be $145,435.30.

Finally, your cash-flow profit from this single transaction is $29,564.68.

Third year recurring income: $102,224.68

Summary

I know this strategy requires a lot of work and a fair amount of debt.  But did you really think it was going to be easy retiring in 3 years?

I can’t emphasize enough that I know people who have used this strategy and retired early in life.

You don’t lack resources, you lack resourcefulness” – Tony Robbins

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Jimmy is a former partner in a successful hedge fund and is now a real estate investor and banker.