Honest Advice to Someone Who Wants Financial Freedom

0:00Henry Washington:Financial freedom is a journey, not just a destination. And that's a good thing. Maybe you want to replace your income and quit your job someday. And real estate can absolutely help you get there. But maybe what you really want is financial flexibility, the ability to buy dinner or go on vacation without having to stress about the costs. And the ability to provide that flexibility is somewhat unique to real estate. Today, we're talking about how your goals can change over time, but there's always an investing strategy to meet you where you are.

0:37Henry Washington:Hey, everyone. I'm Dave Meyer, head of real estate investing here at BiggerPockets, and I'm joined once again by my friend, Henry Washington. What's up, buddy? Glad to be here. I am glad you're here as well, because I think it's fair to say both of us have sort of reached our own version of financial freedom. Is that right? Would you say that? Yeah, absolutely. Absolutely. I'd say that. It sometimes doesn't feel like that, but yeah, for sure. Right. I think that's kind of the point though. I've sort of hit financial freedom too, but also neither of us are actually retired at this point. We're still working every day, which is basically sort of the big secret of this entire industry.

1:14Henry Washington:Everyone who says that they're retired is not actually retired. They're just maybe doing something different than they were doing before they started getting into real estate investing. But that's okay, right? That is, I think the whole point of the episode we want to have today is that the journey that you take on financial freedom does not look the same. It's sort of a moving target. It shifts and changes. And in my opinion, at least, every real estate deal I do, every decision I make should make me more financially free. And like what the actual destination is, I don't even really know. And that kind of changes, but it's about improving your financial situation with every deal you do.

1:53Henry Washington:So that's what we're going to talk about today and how everyone's goals are going to change during a wealth building career and how it's actually okay to use real estate to make your life better right now, even if that means it will take you a little bit longer to reach some number that you may have in your mind. So Henry, let's just dive into your story a little bit. When you first got started, was financial freedom even a goal? Like, did you know that word? Was that what you were pursuing? Yeah, that was 100 % what I was pursuing. It was. Okay. And like, what did it mean to you? So I had this vision in my mind of like, at some point, I would have enough rental property that I would just have cash flow coming in, just in droves.

2:35And I would just be able to sit on a beach somewhere and not have to work. And just, in other words, I just had this like picturesque vision of cash flow funding everything so that I could go where I wanted and do what I wanted. and not have to worry about making money because my real estate portfolio just kicks off all this money for me.

2:57Henry Washington:You were Scrooge McDuck just like diving into your pool of gold every day. Just in the pool of gold coins. Yeah. Doing gold coin angels. I mean, that is a vision I think a lot of people have. It changed though, because you said that was your vision at the beginning, but it sounds like there's a butt coming there. Man, I don't want to sound like a downer, but I want people to have a realistic, understanding of like what it is when you get in this business. As you start doing deals, what you start to realize is like, yes, you buy properties that do make cash flow. But realistically, in a long term rental scenario, your properties are probably kicking off between 100 and 500 dollars per door of monthly cash flow.

3:43And so for you to truly live the lifestyle you want, it probably is going to take a whole lot of doors if you still have leverage on your property for that to become a reality. The other reality is like the more doors you buy, the more money just comes in and goes out. And so, yes, every month I get paid from my property manager and then mortgage payments comes out and taxes come out and insurance comes out and maintenance requests come out and, you know, I have over 100 properties. And so like this morning, I got an email, I have, you know, somebody wanted$1 ,100 to replace a front door that somebody had kicked in and somebody wanted another$3 ,000 to replace a siding glass door and some trim in an apartment.

4:30And that's just multiplied across a bunch of properties. And yes, in my underwriting, I accounted for these things to happen. Sure. But like, the money comes in, the money goes out. And unless you're just some super accounting spreadsheet genius, it's hard for you to know at any given point exactly how much actual net cash flow you have every single month. And then sometimes unexpected things happen. And so even though I thought I was going to have so much net cash flow, I have substantially less because maybe this month I had like four HVACs go out. And so So what I learned was it's really hard to live your life based on that cash flow income because every month is different.

5:15And if every month is different, it's hard to have some consistency with like being able to pay your bills and truly live off that money. And so what I quickly learned was like, I don't necessarily want to live off my cash flow. I want my properties to cash flow. Yeah. But I want to be able to have a different, more consistent income stream that I actually live off of. And then I can take the cash flow and I can focus like on a quarterly basis or on a semi-yearly basis on paying down the assets with the cash flow that I have. Because at some point, as more assets get paid off, that cash flow grows exponentially because now I don't have leverage to pay off anymore.

5:57And then you can truly live off that cash flow. Right. Because it's kicking off so much more cash flow that it's easy to actually plan your life around it. And it's easy to take care of the maintenance items because your cash flow will go from$100 to$500 a door to like$1 ,000 to$1 ,500 to$2 ,000 a door, right? If you're not paying that mortgage payment every month on that property. And so I realized that the true cash flow that I'm looking for comes after the properties aren't leveraged anymore. And if I can not live off the cash flow and I can reinvest that cash flow into helping me pay off the assets sooner, I can get to that goal sooner.

6:37And so that's why I started flipping houses to generate the more consistent income that I can actually live off of. Because I can do the math and know if I flip five houses a year and I average 40 to 50 grand per flip, like that's good. I can manage my life off that.

6:53Henry Washington:I would never, when I first started, think that you would say flipping is the more consistent income. But the way you do it, it does actually make sense that if you do enough volume, it does become actually more predictable than cash flow on a monthly basis. I think what you said makes a lot of sense is that cash flow is great to hold onto your property, but until you reach a certain size of your portfolio, it's not actually all that dependable, even if it's dependable on an annual basis or a long-term basis, which you should be if you're underwriting well on a monthly basis, like you got to make rent, you got to pay for your car.

7:30Henry Washington:Like, you know, you can't really rely on that until you get a certain size. And actually what I thought you were going to say is like money's coming in, money's coming out, which is true from an expense standpoint. But I think the other thing that happens is you start to make cash flow And you start, even if you're acquiring it, you want to use it towards your next deal. You want to use it to fund your next rehab. You know, you don't want to use it for your lifestyle. And that can sort of spiral too, because if you want to get to a significant portfolio size, you need to keep up a pretty good reinvestment rate.

8:06Henry Washington:That's how you compound, right? You just keep pouring your money back into your business. And so I think that's another thing that sort of gets lost in the shuffle here. But let me just take a step back because when you first started, I get what you're saying. You thought you'd live off cash flow. I think everyone does. Did you have a number in mind? Like X dollars of cash flow would give you your beach living fantasy? Yeah, the original number was just to get to what my current monthly income was from my day job in monthly cash flow. So I was making about$10 ,000 a month, right? Before taxes.

8:43Henry Washington:Before taxes, yeah. So if I could get to$10 ,000 a month in net cash flow, then I wouldn't need my job anymore. Seems like a pretty reasonable thing to think about. Great way to think about it, yeah. And so you get there, and like I said, it's just not as easy to know that you're actually going to have$10 ,000 every month to spend. But what I truly started to learn was that real wealth is built through equity and appreciation. like that's where real estate is the most powerful real wealth isn't built through leveraged cash flow leveraged cash flow it's more of a measuring stick to know you bought a deal that makes sense because it makes you money every month that's why they say real estate's a long-term game like the real payday comes much later you know i do agree with that and that has been my experience as well that cash flow doesn't make you a ton of money especially up front but i do think that there are times in my life when I look at my investing career where cash flow did have a real significant impact on my lifestyle at that moment.

9:53Henry Washington:My goal when I started real estate wasn't to retire. I wasn't like, I didn't have this vision of like, oh my God, I'm going to sit on a beach. I'm going to buy enough rental properties. My original goal was like, I was waiting tables and I was struggling to make rent. And I was like, if I could figure out a way to get 250 bucks a month, that would be really beneficial to me. And that's why I bought my first deal. I had a friend who was like making a couple hundred bucks a month on a rental property. And I was like, I want that. And when I got that 200, I think it was actually more, I wound up doing a little better on that first deal that like had a really big impact on me.

10:28You know, like I could go out to dinner,

10:30Henry Washington:I could make rent. I wasn't a struggle to make my car payment. And as my lifestyle got more expensive and I know people will say like, oh, you shouldn't have lifestyle creep, but like that was part of my goal. I was 22 and I was scrimping by, like I wanted a better lifestyle. I'm sorry. You know, I wanted to go on vacation and to not worry about my finances all the time. And so like, as I sort of settled into what I actually want my lifestyle to be, my goals like totally changed. And that's where I sort of like took the, the approach you started saying like, Oh, actually 200 bucks at a time is not going to get me where I want to get to.

11:08Henry Washington:I got to go a different route. I think that the great thing about real estate is that if you start generating cash flow, whether it's$200 a month or$20 ,000 a month, is its flexibility. It allows you to decide every month based on changing circumstances. Do I want to reinvest this capital into my portfolio? Do I want to invest it in something else? Do I want to use it to support that my lifestyle like that's to me financial independence like it's not some destination that you get to where you're like okay i'm done i'm never working again everything's fine for me it's like no now i have some level of independence where if i choose to spend more this month i get to spend more this month if i choose to reinvest it i get to make that choice to me that's the part that like reduces my very significant amount of financial anxiety that I've had for my whole life.

12:02Henry Washington:Like that's the thing that I find valuable. So let's dig more into this flexibility concept because this is a really important thing that I think a lot of new investors maybe don't realize. And honestly, I think a lot of experienced investors don't take advantage of as much as they should. We do have to take a quick break though. We'll be right back. Do you ever notice how every passive investment somehow turns into a very active lifestyle? Active spreadsheets, active phone calls, active stress. Here's a better question. What if you could buy brand new construction homes, 10 % below market value in the best markets across the country without making real estate your second job?

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15:44Henry Washington:welcome back to the bigger pockets podcast i'm dave meyer here with henry washington talking about the journey that is financial freedom so henry you said at the beginning your goal is to replace your income was like 110 000 like have you updated that goal no not from a cash flow perspective like where i'm at in my journey now is i'm fairly comfortable with the size of my portfolio. Will I buy more rental properties? Yeah, probably, but not at the pace that I was buying them before. I can't pass up a great deal in a great neighborhood. If I find it, I'm going to buy it. But for the most part, I'm not actively trying to scale as much.

16:21And so for me now, it's more about paying down the assets that I have. The way I look at things right now, I can get to a different level of financial freedom faster by getting rid of some of the leverage that I have versus buying more doors with more leverage. So if the goal was cash flow so that I don't have to work, I can either get there by acquiring hundreds of doors leveraged to get me to a monthly cash flow number. That makes sense. Or I can get there by paying down the doors that I have and exponentially increasing that cash flow. And after having a big portfolio, I like the idea of not increasing that portfolio too much and then paying them off because big portfolios, the more doors you have, the more problems you have.

17:13There's a lot of work that comes with that. And so I can get there more comfortably and enjoy my life a little more by having a smaller portfolio with paid off assets than having a larger portfolio with more leverage.

17:25Henry Washington:Okay. This just made me think. Hot take question for you. Can you be financially free, truly financially free, whatever that means to you, if you have debt on your properties? No, you can't. Okay. You have to own them outright. I kind of like that take. I've never really thought of it before, but I kind of feel like if you're sort of right, you still have, there's a certain amount of risk in that that limits your quote unquote freedom, right? If you have debt. And you don't truly own the asset until it's paid off, right? Someone can come and take that from you and change your financial freedom situation, right?

18:02Like if something happens and you can't make the payments, you can lose that asset and then your lifestyle is different. Also, the larger the portfolio, the better you have to be at managing your managers or managing those properties yourself. And that's a job. That's not freedom. That's work. Yeah. And I'm not saying that I'm getting rid of that work, but I'll have a whole lot less of it with less doors that are paid off than with hundreds and hundreds of doors that are leveraged.

18:29Henry Washington:Yeah, that's a good point. Because like financial freedom, right? You need to get your, you should have this cashflow number, right? Like there's a certain number that you need, but like there's also an amount of risk that you probably want to get to, an appropriate amount of risk and an amount of time that you want to be able to put into that. Because despite real estate being more passive than a W-2 job, it is not entirely passive. And so it sounds like for you, Henry, that's kind of like you need three different variables that you're trying to work on. The total amount of cash you're bringing in, the amount of risk you're taking, and the time that you're putting into it.

19:03Yeah. And we're talking about financial freedom here, but there's another element to this that we're not touching on that's also important to me. And it's not just the financial freedom that comes with owning the properties and getting the cash flow out right. But it's also the legacy of being able to pass on those paid off cash flowing assets. It's the wealth that I want to pass on to my children. And the more leverage I take on, that's more leverage I would pass on to them. But if I get these things paid off, like people use the term generational wealth all the time, but I don't know that they actually think about what that means.

19:40If you want that wealth to to transcend you, you've got to get those assets to a place where you own them, you control them, your trust or your family owns and controls them and not a bank or some other financial institution. Right. And so that they're actually producing meaningful income that you pass on to future generations of your family. So it's more than just financial freedom for me, but it's also financial freedom for the people who are going to be around after me. And that's going to require me to get those assets paid off.

20:12Henry Washington:I love that. This is a great take. I love it. Financial freedom. The three variables is a really cool idea. It's not just money. It's also these other things that really matter here. But I need to circle back to something you said earlier. Yeah, yeah, yeah. Has your financial goal really not changed? Is that$10 ,000 a month you were trying to replace still what you're comfortable with? Or has your lifestyle changed and had gone up? When I said the financial goal hasn't changed, I just meant like I haven't sat down and figured out what the new number is. Okay. What I essentially planned on doing after I figured out that the true wealth is in getting these things paid off was my original plan was like, how many doors do I need to get to for me to be able to sell off a portion of my portfolio to pay off the majority of the rest?

21:02Right. And so that's kind of how I started looking at this problem. Like, so in other words, if I had 100 doors, could I sell 50 and pay off the other 50? Right. Because 50 unlevered is going to pay me well more than 100 levered. And so what I actually started to look at was like, okay, in my portfolio, which assets are producing the way I thought they should or better, which assets are underperforming? And then I can look at the assets that are underperforming and I can say, okay, does it make more sense for me to sell this asset, take that equity and pay off another asset? or is this an underperforming assets that's in such a good area that it makes more sense for me to pour capital into that asset to get it to perform better because the location is so good, right?

21:48So my goal became more of an analysis of like, okay, let's get strategic with what you do have and then make decisions on what you should sell to pay off the ones you love or the ones that are in the best areas or the ones that you should not sell but maybe need a capital infusion or maybe some sort of exit strategy pivot so that it does produce because of the location or because of some other quality of that property that would say, I shouldn't sell this property. And so I've just gotten a lot more strategic.

22:20Henry Washington:That just makes so much sense. I hate the idea. I always say this, but I hate the idea of people being like, I'm going to buy real estate and never sell. That just doesn't make sense. Or I'm going to do one renovation. Maybe you need to do another. If you think about the way other people invest, stock market. You don't not invest in a great company because you bought it at 20 bucks a share. If you can buy it at 30 bucks a share and you think it's going to go to 50, sell some other stock and buy more of that one. It's the same concept in real estate, right? If you have some assets that are fine, but you can have one that you take from being a solid performer to a great performer, go do that.

22:58Henry Washington:That's the kind of strategic thing that you need to be doing? I wanted to ask you that question because one, it makes me feel better about myself because I was concerned that you said like, oh, I've just like had this enormous amount of success in real estate and my financial run rate and goal hasn't changed at all. And that would have made me feel terrible because mine definitely has. But I think like the reason I bring that up is because like, that's kind of how it should be. I know there are these like financial puritans out there who are Like you set a goal when you first started real estate to get five grand a month in cash flow.

23:33Henry Washington:And like, once you're done with that, you're retired. And like, I just don't buy that at all. Like I didn't get into real estate to live the exact same lifestyle that I had when I was 22 and scraping by. And like, that's why I just think this concept of like financial independence as a destination or a single point in time is just not real. What your goal is going to be changes all the time. At least mine does. And like I, you know, what I thought my goal was when I was 22 is completely different from what it is now. And it's not just from lifestyle creep. It's because I understand things like risk and time and inflation, which was just like never on my mind when I was 22.

24:17Henry Washington:I was like, all I'll ever need is$500 for rent. Like that's what I was paying in rent. My expectations have changed quite a lot since then, you know. And so that's where I just, I think this concept of locking in that you have to have this date or this number in mind is honestly kind of limiting. I just think that's never going to happen. You have to go with the flow a little bit. And I still keep a goal. I have a five-year goal always. But it changes. It changes. And it probably will change again. And it's not just your lifestyle or what you want changes, but the situation can change. Like, for example, you know, I did.