3 steps to QUIT your JOB - Escape the 9-5 and Never Return

Hello YouTube, it's Christian and I am back this week with Dion again, part 2. Cody's in Hawaii so I have officially replaced him. I'm just kidding, but this week we have an important question that I wanna ask Dion 'cause he is uniquely qualified to answer this, which is when can you leave the 9 to 5? Now note, this doesn't mean you have to, but when do you actually own your time to the point where you have the option to responsibly leave the 9 to 5. Dion, what are your thoughts?

Well, I appreciate you having me here. I think it works out great because both me and Cody are about a foot and a half shorter than you. So we got, we got the video looking the same. There are 3 main ways that most of us talk about reaching financial freedom. There is starting and growing a business to the point where it's large enough for somebody else to run the day to day so you don't have to be in the office. That's when you are able to walk away from that as a 9 to 5, when someone else can run the day to day. There's investing in stocks, and there's the Trinity study where they studied where if you grow your portfolio to 25 times your annual expenses, that basically means you can take out 4% of your portfolio and it will, in normal years, not in 2022 years, an average over a long enough timeline, projected growth of 10% per year, meaning they'll cover the 4% you're taking out, the 3% to cover normal inflation, and then the money to cover taxes. And then there's a way that we've chosen, which is buy and hold real estate. Yes. And for me, I really like that most of us invest for cash flow and we think, once I have enough cash flow, I can retire. And BiggerPockets recently had a video out by David Greene where he was talking about don't retire on cash flow. And as an almost clickbait title, it's not because when he goes into detail, he actually covered what was in the title, which makes it not clickbait. If you need $3,000 a month to cover your living expenses and you get your cash flow to $3,000 a month, you do not retire. That is, that is retiring on too narrow of a margin because things will happen in the future like a pandemic where tenants don't have to pay and you can't evict. And you don't edit, do you? With problems like a pandemic that can come up, a stock market crash, or a health concern for yourself, there needs to be a multiplier of what your actual cost of living is. And for, for most of us, we need to figure out what our freedom number is. That freedom number is how much does it cost me to live? That amount of money needs to be coming in from a source that we don't sell our lives one hour at a time for. For me, it was around $3,000 a month. When I was a police officer, my take-home pay was $2,600 a month. I was surviving as a single parent raising 3 kids, and I had a mortgage. So I know I could live on that, not comfortably. When I had 7 rental units, the cash flow— I had 3 duplexes and a single-family house— the pure cash flow, which means money left after principal, interest, taxes, and insurance, and setting aside for repairs, maintenance, and vacancy. So like, we have to pay for future expenses. My cash flow was $2,700 a month, and I was house hacking. So technically, in 2018, that's when I hit those numbers. I could have walked away from my job. Barely, uncomfortably, and not planned, not planning very well for problems that are going to come up in the future. So for me, I thought if I could triple my cost of living, so if I need $2,500, $2,600 coming in, around $3,000, once I have $9,000 coming in, I could comfortably and easily walk away from work and never worry about cash flow again. Interesting. I'd be able to build a reserve and And so part of this is how much do you have in reserves now? When you have a W-2, you don't have to have as large a reserve as when you're gonna walk away from that job because you have the security of those consistent payments coming in. The other thing you wanna do is look at, you know, you and I invest very differently. I invest with residential loans in my own name. All of my properties are from the MLS. I haven't done any seller financing. I use traditional, regular, conventional, owner-occupied loans on 2 of them, and then conventional loans on the rest, which is beautiful.

You don't have to stress about refinances and balloon payments, which is the video we're going to make for my channel.

So when you're looking at— this is the cash flow coming in— you can increase it easier while you have a W-2. If I stop working and I don't have the W-2 to bring to lenders, because right now we can have up to 10 mortgages in our own name, before we need to go to non-QM loans, asset-based lending, DSCR loans, seller financing. Right now we have the, the 10 loans in our name, you know, Fannie and Freddie backed, which gets us often, if owner-occupied, the lowest down payment, the best interest rates. So I'm still working on those. That's a consideration on whether I should walk away from my job or not, because right now I have 7 properties with 16 units but only 6 mortgages. So there's still 4 mortgages I can get in my name while I have a W-2 that are very easy to acquire. I could probably still get them once I stop my W-2. So something to consider is if in your first 2 years of investing you don't have rental income on your tax returns, it's very hard to qualify for any kind of loan in your own name, you know, a qualified mortgage where they use you to qualify for that loan. So I would not quit your job within the first 2 years of investing. After those 2 years, your debt-to-income is almost irrelevant because lenders will look at 75% of the rents of the properties you own and the property you're buying. Some lenders will want 3 months remaining on your leases or longer, so month-to-month leases aren't as attractive, but they want to know that you have money coming in. So when you're looking at after that first 2 years of getting rental income on your tax returns, your W-2 is not as important to get a job— to get a loan for the next property. So here's, here's some exact numbers, and I'm very transparent. I'll share like the exact numbers. Don't sue me, bro. In 2021, my profit after principal, interest, taxes, insurance, and setting aside for repairs, maintenance, and vacancy with 16 rental units was $128,000. With $128,000 of income from my rentals, I can qualify for a loan to buy another property. So my W-2 wasn't as important. I I still have a W-2. I love my job. I haven't quit it yet. Um, getting there, but I haven't quit it yet. But I paid— not only did I pay $0 in rental income tax on my $128,000 in profit because of these beautiful things that exist in real estate, write-offs and depreciation, I look like I carried an $8,900 loss forward to 2022 from 2021. So you would think as a lender How can I borrow money if I'm showing a loss? Mm-hmm. Lenders aren't stupid. They take the depreciation out and they know that that's just a paper loss. So my W-2— or not my W-2, but my tax returns, even though they show I paid a bunch of money from my W-2, so I would qualify for a loan. But if it didn't exist, the $128,000, even though it doesn't exist because of depreciation, would have been my income to qualify for that next loan. Once you're past those 2 years of getting rental income on your tax return, it's a little easier to leave that W-2 and continue to get loans in your own name.

And you'll want to get relationships with great lenders who are really comfortable in walking you through what this process looks like. You get 1 or 2 lenders who understands how you operate, let them know your pieces, you can navigate this very, very smoothly.

You can. And every time that we talk to lenders, here's my order of operations for lending. I have one lender that I start with, and I like to start with a large bank like Wells Fargo, Bank of America, because they have the most standardized criteria. If you qualify for a loan through them, almost any other lender will qualify you based on the same decision. So if you have a good relationship with a local credit union, you might not get the same rates and terms from someone else. So I start with the bank. Once I have a property under contract, I then go out to Wells Fargo, to Fairway Mortgage, Guild Mortgage, local credit union, I take the offer that the large bank has in writing— rates, terms, buydown fees, all of that, the interest rate— and I let the other lenders see what the large bank offered and ask any of them if they're able to beat it.

That's incredibly intelligent.

There's one more step.

Okay.

It sounds like a lot of work. Yeah. If they beat it, I have honor and I go back to the original first bank and I say, this is what a competitor offers. If you want to keep my business, you need to beat it. And it was actually my, my Wells Fargo representative that taught me how to do this. She said, I can't go to my boss and say, I really like Dion, can we give him a better rate? But she said, if you bring me a competitor's offer in writing— and a printed-out email is considered in writing— she can then take that to her boss and say, in order to keep this business, this is what we need to beat. Sounds like a lot of work. It's a total of maybe, on the worst case, 5 emails.

Which is not bad.

So think about this. If you're going to put on a $5,000 deck on your house and you're going to call 3 contractors to get quotes, check where they get their materials from, make sure they're licensed, you're going to do all these steps to have a $5,000 deck project done. Why wouldn't you do 5 emails on a commitment for 30 years for several hundred thousand dollars? That's why the order of operations when it comes to lending is so important to get the best rates, best buydown rates. And it might not always be the interest rate that's best. It could be the other fees that are less. One might want full points to buy down your rate. This, uh, your other lender might be able to cut that in half because you'll be surprised what people will do to beat a competitor.

So we've addressed the income and some of how to push that with the right loans and the right loan product. What do you look for in cash reserves? That's one thing that I get a question a lot, you know, like, hey, we built some, some income, I want to do this full time, I'm ready to leave my job. I've seen people have to go back to their job because there was a little buildup phase. So say you're leaving, you're still building your cash flow. What do you look for in reserve before you actually make that jump?

So there is a difference between when you're working and when you're not working. Here's how my cash flow looks. And I like to do things very simply. I actually call myself the lazy investor. If it, if it doesn't work for a lazy person, I won't do it. And if I make it super simple, then the lazy in me will let me do that. I will add more units. I will keep investing. I will keep adding to the cash flow because it doesn't add a lot of work.

That is awesome. It doesn't have to be easy to invest, but it definitely should be simple. That's what we believe on our channel as well, right?

So when I had 7 units or less, I thought things can go wrong. I can need a roof, I can have a water heater break and have floor damage. So I kept $10,000 in reserve. That would cover a couple of months of a few tenants not paying. It would cover a roof or a water heater or some problem like that. Um, the idea for $10,000 was from Murphy's Law. If something can go wrong, it's probably going to, right? Once I started having more than 7 units, I went with Murphy's fourth corollary: if a sequence of events can go wrong, they probably will, and in the worst possible order. So since I had more units, I didn't go this much per unit or this percent of my overall portfolio or anything confusing like that. Over 7 units, I've raised my, my reserves to $30,000. That can handle a couple of roofs, that can handle a couple of water heaters, that can handle several tenants not paying for a few months. So that is enough reserves for me to be confident and be able to sleep at night while I'm working. As soon as I'm not working, whatever my reserves are, I'm going to double it in an account that I don't touch. So this will go to at least, at a minimum, $50,000, if not $60,000, that I just don't touch when I stop having a W-2. So that when we buy a property, things like a roof and a water heater and a foundation problem don't impact cash flow.

I love that.

We have reserves to handle problems, and when we buy a property, we, we talk about setting aside for repairs, maintenance, and vacancy. 10% of gross rents goes for repairs and maintenance, 5% for vacancy. So overall, every month, 15% of cash coming in would fill the reserve account if we ever use that for any repairs or maintenance, not impacting cash flow.

Mm-hmm. Wow, I love that. By the way, this is a little addition to— if you're W-2, I love that model, 3 times your income. That is a great metric. If you happen to be a commissioned salesperson, because I had to figure this out, and I'm like, well, my income is somewhere between, you know, $1,000 a month and $20,000 a month, how do we determine that? A metric I've used, if you've been in sales or any other commission job for a while, look at the best month that you've ever ever had. If life looks sweet for you with the best month you ever had coming in passively every month and you're looking for a target, that's a target that worked really well for me.

And I'm going to add my kindergarten twist. Yes, literally like I was a 5-year-old. This is why this works for me. What you make is irrelevant. Mm-hmm. Our freedom number is based on what we spend, and you have that data. Look at your bank statements, credit cards, and everything that you've spent in the last 6 months. Pad it with a good 10% to 15% to make sure you could be more comfortable and project that forward. A lot of people are worried about, I need to replace my income. But while you're working, you're saving for retirement, you have a commute, you have all of these expenses. W-2 income is one of the highest forms of taxed incomes that there are. So while we're working, we're spending a lot of money. You have to have that income. That we don't need in retirement. Once you're financially free, you are no longer saving for retirement.

You're done, which is amazing, and it's a different place to be. So recap of the rules following Dion's strategy, which I think is an excellent, excellent strategy: 3 times your income. If you're adding my piece, if you're a salesperson, what is your best month ever? Can you replicate that? You want to have enough reserves set aside for your properties and for yourself in your own silo. Make sure you have those pieces. And one piece, I word it on my channel as just having the requisite experience to move forward. You said that perfectly. If you are a new investor, you probably don't have the experience and the knowledge to just jump out and do this full-time. A lot of people reach out and they go, how do I retire this year? I was in the real estate industry for 4 years. I left the 9-to-5 and I grinded it out for 2 years to be where I'm at today. It's been a 6-year journey and you're seeing me at the very end of that. And if you're not ready to work 16 to 18 hours a day, 7 days a week, you're probably not going to go at exactly that speed. If you go the Deon strategy, it's going to be— I was going to say you lose less hair, but yeah, you lose all of your hair apparently. You're gonna save yourself a lot of stress. It's gonna take a little bit longer, but you need to make sure you have the experience to step out on your own. It's very uncomfortable if you do actually leave the 9-to-5 to not have that safety net of, hey, I have recurring income. Every time I work, I get paid. If you're looking to do this full-time and you want to do the Christian Coding Method and just go all out, just know it's not quite as simple and the experience is 10 times as important. You have to know for a fact I can leave and I can rely on my skills to continue to provide. And you're not going to know that until you've experienced it. 2 years of experience and proven track record. Absolutely recommend that you follow that advice. Do we miss anything?

If you found this video because you're a part of the FIRE community, Financial Independence Retire Early, when it comes to investing with strategies like this, we're we really want to focus on the financial independence part. The retire early— some of us aren't even sure we want to retire late, but having the ability to makes us a lot more confident. An example is I run a truck driving school, and recently I took 2 months. I went to the owners and I said, hey, I'm going to go to Florida for a month or 2. I wasn't sure how long. And I'm going to scuba dive until I'm bored. Once I'm bored, I'm going to come back. But because work is optional Their only option was to say, "You're fired," or, "Go ahead." And what they did is they said, "Please take your laptop and do some work while you're there." Making work optional makes life a lot more interesting because there's so many people trapped in a job they hate. Imagine if you only had a job because you wanted to do it. And some people will make the mistake of saying, "I love my job so much, I would do it for free." And I'm gonna correct that with, "I love my job so much, it's the only job I would do for money." And that's the point we're trying to get you to.

I love that. So if you found this helpful, I'm really glad. Please like, subscribe, follow this. If you don't follow Dion yet, I'm going to drop a link down here. Dion is phenomenal. He is a shining example of how you do this with a job, how you passively just keep collecting properties by intentionally going out, setting your principles, setting your guidelines, and then just executing. What he did is completely replicable by absolutely anyone. And that is why I love his channel so much. It's for everyone. If you're trying to do what Cody and I do, it's— it gets intense sometimes. This is a model that everyone at any stage can absolutely follow, and Dion's executed it wonderfully. So like and subscribe. We will see you next week.