Like many millennials, Drew graduated from college in debt. When the 28-year-old — who goes by his first name only because he shares details of his finances on his blog, Guy on FIRE — finished school in 2013, he had $20,000 in student loans and a credit card balance between $3,000 and $5,000.
“Starting off in a hole is never fun,” Drew said. But he decided not to let his debt become a money trap. Instead, he quickly turned around his financial situation. Now, Drew owns four investment properties and has a net worth of about $650,000. He hopes to achieve financial independence by the time he’s 30 in 2020.
He Moved Back Home to Pay Off Debt
Drew landed a position as an entry-level real estate analyst shortly after he graduated. Although he had a steady paycheck, he decided to move back home and live rent-free for six months. “I am very fortunate to have parents accommodate me for several months,” he said.
He didn’t take advantage of his parents’ generosity to blow his money on going out and having fun — as many of his friends who were also living at home did. Instead, Drew wiped out his credit card debt with his first few paychecks.
He Used Side Hustles to Build Savings
While living at home, Drew had a few side hustles to make extra cash on top of his full-time salary. He got paid to drive a high school student to early morning swim practices, did freelance photography and even delivered inflatable bounce houses for parties and events on the weekends.
Drew used the side hustle income to cover his expenses and stashed most of each paycheck from his job in savings. He contributed 10 percent of his pay to a 401k retirement plan at work. Then he set aside the rest to build a $10,000 emergency fund in about four months.
“Having an emergency fund provides me peace of mind,” Drew said. “Ask yourself, ‘If I lost my job today, how long could I survive?’ Most Americans cannot come up with $500 or $1,000 in an emergency situation.” He also wanted that cash cushion so he wouldn’t have to rely on credit cards to pay for emergencies. “Credit card debt destroys wealth and is tough to pay back because it compounds at such a high rate,” he said.
Once he had $10,000 in an emergency fund, he started putting extra money in a Roth IRA, which is an individual retirement account. In addition to boosting his retirement savings, Drew started setting aside money to buy property.
He Bought His First Rental Property
As a real estate analyst, Drew saw the benefit of owning investment property. It offered him the chance to have more than one source of income and to be less dependent on his day job, he said. So he managed to save enough within nine months after graduating from college to buy his first investment property.
Thanks to an FHA home loan, he only needed to make a 3.5 percent down payment — about $12,000 — on a $355,000 three-bedroom duplex in the Washington, D.C., area.
To offset a monthly mortgage payment of $2,350, Drew brought in two roommates who each paid $750 a month in rent. His share was $850, which was about half what he would have to pay to rent a one-bedroom apartment. “Being able to live in the DC area for $850 and actually own the place – that’s a bargain,” he said.
He Increased His Pay With Career Moves and a Part-Time Job
Drew’s boss at his first job had been promising him a $10,000 raise, but it never materialized. So when he got a call from a headhunter from a competing firm offering him a 40 percent pay hike, Drew decided to switch jobs to make more money. But he continued to live frugally and used the bigger paycheck to save more and invest.
Drew also got a part-time job as a property manager for a man who became his mentor. He was making about $2,000 a month on top of his $90,000 annual salary. And he was learning how to find tenants, make repairs and manage rental properties.
“I got an education out of it and put extra income in my pocket,” he said.
He Maxed Out His Retirement Accounts
Plugging away as much as possible into his retirement savings has helped Drew increase his net worth. He was able to contribute the maximum allowed to his Roth IRA starting the year he opened it in 2013 and has been contributing the maximum (now $5,500 annually) ever since.
Although he initially contributed 10 percent of his income annually to a 401k, he now contributes the maximum — which currently is $18,500. Drew also invests in stocks through brokerage accounts.
He Grew His Net Worth With More Investment Properties
Drew bought a second investment property in 2015 for $400,000 with a 203k FHA improvement loan that required a 3.5 percent down payment and provided an extra $70,000 in funding for renovations. He turned the three-bedroom house into a five-bedroom property, moved in and found four roommates. The amount he collected in rent covered the monthly mortgage payment, so he didn’t have to pay anything for his own housing.
Since then, he has bought two more rental properties. He refinanced the mortgages on his first two properties as their values rose and lowered his monthly mortgage payments as a result. To buy the fourth property in 2017, he used a home equity line of credit from his second property for a down payment. Most months, the profit from his rental properties is about $3,000, he said. But he expects it to rise to $4,000 to $5,000 once the fourth property is fully occupied with tenants
He Embraced the Combined Power of Passive and Active Income
Today, Drew said his net worth — assets minus liabilities — is about $650,000. That includes the amounts in his 401k and Roth IRA, two brokerage accounts, four properties and a $15,000 emergency fund. “Sure, the extra money in my paycheck had a positive impact,” Drew said. “However, it was not the main boost to my net worth. My income from other jobs and investing regularly provided the greatest boost to my net worth.”
He actually had to quit the property management gig in 2017 because he had gone from managing 23 properties to 60 and was working 80 to 100 hours a week with both his full-time and part-time jobs. However, Drew expects the rent from his properties and dividend income from his stocks to create enough passive income so that he no longer has to work his full-time job by the time he’s 30 in 2020.
“I’m a firm believer of working hard now so you don’t have to later,” he said. He’s not sure he’ll ever actually fully retire — that is, stop working full-time — but he’s been building his net worth to have that option.
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