The following is a guest post written by Brandon Turner with BiggerPockets.com. Brandon is a bright young man who used his financial road map to become self-employed and independent in 6 short years. His story is fascinating, motivating and a guide for us all to use proper planning in order to achieve our dreams.
Do you like road trips?
I love them. The open road, the relaxation, the time to just sit and think.
At least several times a year I take a road trip somewhere, despite the fact that,with the price of gas, traveling by car is often more expensive (and time consuming) than just taking a flight. One of my favorite drives is down the Oregon coast and if you haven’t had the pleasure of such a trip I highly recommend you take one (the Tillamook cheese factory is fascinating!)
As every avid road tripper knows – you need to be prepared. There are several essentials that every road trip vehicle needs to pack:
- a spare tire
- an emergency kit
- cheese in a can
- a road map
It’s this last one I want to talk more about today. A road map. How do you know where to go if you don’t have a road map? This is the same question I want to ask you today about your financial future.
How do you know where you want to go if you don’t have a financial plan?
Road Maps are created to show the easiest route
Let me ask you a question:
If you were to get in the car right now and drive from New York to San Diego without a map – would you make it?
San Diego is obviously south west of New York, so if you simply headed in a south-west direction at every turn you would eventually make it.
However, would you make it without wasted time, wasted gas, and a lot of headache?
Maps are there to show the easiest route as well as show you the wrong way. Sometimes roads are unpredictable and the right road may seem to lead to the wrong place. Other times the wrong road might seem to point directly toward your destination.
The point is – if your goal is to make it to San Diego as soon as possible you would not risk taking that trip without a road map.
So why do so many go through life without a map of their own?
Do you have a map?
How to Build Your Road Map
There are thousands of different ways to get from New York to San Diego. In the same way there are thousands of ways to get from where you are today to financial freedom. The path you choose depends on the type of trip you want to take. I want to look at three important aspects of your road map and let you decide on each.
What is your destination?
This first question may seem obvious – but I believe the vast majority of people do not know their destination! Just as a road trip to the “west coast” is not defined well enough to plot a map, a plan to “become rich” or “retire” is not defined well enough either.
When I first began investing in real estate at twenty-one years old, I sat down and plotted where I wanted to go. I wrote down my financial goal of achieving $6,000 per month in passive income from my real estate investments, as well as $500,000 in equity in those properties. I clearly defined the amount of money I wanted to make per month to achieve “success.”
This number wasn’t arbitrary either. I looked at the standard of living I wanted to have at thirty and decided at $6,000 per month I would be able to support my family without the “need” to work. I knew that if I could make it to that destination I would be free to quit my job and be a full time entrepreneur and real estate investor.
Once you define your objective, it’s much easier to define your map. Go take a minute to write down your destination on a piece of paper. Don’t worry – this article will still be here when you get back.
What is your time frame?
The second question I want you to define for your road map is your time frame.
Is “speed” your goal? Are you content with where you are? Do you hate your job and long to start your own business as soon as possible but don’t have the financial ability yet?
Is “the journey” your goal? Perhaps you are content with your position and only want to make sure you enjoy the ride and that you reach your destination by retirement.
Without an accurate determination of your time, it is difficult to construct a map that will adequately allow you to reach your goal. When I made my plan, I set a goal of being financially free by the age of thirty. I was not enjoying the work I was doing but instead longed to quit my nine-to-five and work for myself – without the risk of not making enough money that most entrepreneurs face.
Do you know how much you need to retire? If your goal is to retire with $1,000,000 in five years but have nothing to start with, putting $200 a month into a bank CD is not going to get you there. I’m not suggesting that bank CDs are bad, but earning 1% each year will not bring you where you want to be. You need to plan your “road trip” with reasonable expectations as well as solid math.
What is Your Vehicle?
Finally, you need to decide for yourself what vehicle (or vehicles) you are going to take to get to your destination.
I bought my first house at twenty years old and fell in love with real estate. I read hundreds of books on the subject and decided that investing in real estate was the path I would choose. I could have instead gone to law school, started my career making six figures, and set aside 30% of my income for retirement and I may have reached the same goal.
However, I didn’t love the law. I loved real estate. It is important that you find something you love and build your plan around it.
A Look At My Road Map
“Okay Brandon, I get the point. I need a financial road map – but what does that look like?”
I want to show you exactly what I mean by constructing a financial road map by letting you take a peak inside my own. Remember, this is simply the vehicle I chose to get from point A to point B, and yours may be different.
My road map began with a piece of paper.
Like I said before, I want you to actually get a piece of paper. A road trip without a map is bound to easily get off track.
I wrote down my ending goal ($6,000 per month in passive income and $1,000,000 in equity).
I then worked backwards. I know that in a good real estate investment, I need to achieve a minimum of $100 per month in passive income per unit to be a good deal. So, $6,000 per month equates to a minimum of 60 units. Now that could be homes, duplexes, triplexes, small apartments, or big apartments. Obviously, one sixty-unit apartment complex that fit my requirements would get me to my goal overnight – but I was starting with no money and I knew that would be difficult.
Instead, I began plotting my strategy of “Trading Up.” Trading up means to sell one property and use all the profits as a down payment on the next property. For example, my plan was to buy a home, fix it up a little, and resell it. I believed I could make, at minimum, $20,000 profit by doing this. I then took that $20,000 and used it as a down payment on my next purchase. When that one sold I used the $20,000 down payment I had applied earlier and the $20,000 I made on that property and ended up with about $40,000 in cash. Again, reinvesting that money into the next property I could quickly build the amount of money I was spending on properties and would grow exponentially. Eventually, I would begin transitioning to multifamily properties and by age thirty I would have the equity needed as well as the monthly passive income.
Fast forward to today. I made that plan six years ago and while I haven’t followed it exactly (you never can) I have stayed close to the original plan. I was able to quit my job by age twenty-five and now make enough passive income to cover my monthly bills. I still invest in real estate every day and am increasing my goal and re-drafting my road map to plot out the next phase in my journey.
What does your road map look like?
Perhaps your goal is to make $3,000 per month in passive investments and you want to do it within ten years using mutual funds. The same principle applies. How much money will you need to add each month to your goal (and what interest rate will you need to achieve) to get there? If you have $50,000 to start with, and add $800 per month to your mutual funds earning 11% average interest, you’ll have roughly $325,000 – which at 11% interest equates to about $3,000 per month. Is 11% reasonable? That’s a topic for another discussion, but it’s the principles I’m talking about.
Road Maps are Guides… Not Rules
As I mentioned earlier, it is almost impossible to follow a financial road map perfectly. While you can plot your course with diligence and extreme precision – there are still outside forces at play. I did not foresee the real estate crash when I made my plan, but because my map was based on sound principles and mathematics – I still arrived in the same place. The same applies for the stock market, small business market, and all other uncontrollable aspects of life.
Build your financial road map following sound principles and mathematics and you will get to your destination. Your road map is designed to keep you headed in the right direction at the correct speed. You may come across bumps in the road, dead ends, and even a break-down or two. However, if you hold as tight as you can to the map you’ve created you will pass through those problems and come out at your destination.
One final thought: road trips are awesome, but remember that you can’t take it with you. Enjoy!
Brandon Turner is the Senior Editor and Community Manager for BiggerPockets.com, the premier online real estate investing community, where popular posts like those on the Short Sale Process and Foreclosure Process help tens of thousands every day.