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SHOW NOTES FOR EPISODE 149: HOW TO BE SET FOR LIFE
Are you tied of a nine-to-five workweek? Do you work hard making someone else rich? Are you retired or approaching retirement and concerned that you won’t have the funds to make it? Why not build and follow a plan that allows you to live the life of your dreams? In today’s episode, Scott Trench, real estate investor and the author of Set for Life, shares how you can achieve financial independence in three simple steps.
What You Will Learn
- The importance of frugality to those seeking financial independence
- A little-known website that can help make you rich
- The role of house hacking to the real estate tycoon wannabee
- Two types of in-debt individuals
- The proven three phases of wealth creation
- The 7 core tenants of smart investing
- Why he sees real estate as the most effective wealth-building investment
- How to effectively pass wealth on to the next generation
About Our Guest
Scott Trench
Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal management. He is also a real estate investor, an executive at a large online corporation, salesman, real estate broker, and author. Through a solid understanding of money management, calculated risks, and a lot of hard work, he has created financial freedom for himself as well as a successful real estate business in just three years after graduating college. He hopes to now share the knowledge he has acquired so that others will have the tools they need to repeat his results in just 3-5 years, giving them the option to go anywhere they want in the world, work any job, start any business, or finish out the journey to financial independence and retire young. When he’s not helping full-time workers move toward early financial freedom, the 27-year-old can be found playing rugby, biking, or skiing.
More About Scott
- Attended Vanderbilt University (no student loans)
- Majored in Economics and History, Minored in Finance and Corporate Strategy
- Right out of college, he got a job in finance at a Fortune 500 company, in a cubicle, crunching spreadsheets in Excel
- He thought, “If I stick with this for 40 years, I’ll be doing the exact thing I’m doing now but in a bigger office down the hall.”
- He completed his assigned work in 3 hours and had lots of free. Would use his free hours to do research in finance to advance his career. He read a lot of books, including books on financial independence.
- He saw how, if he managed his money right, how he could retire in just a few years (maybe even 5 years)
- Discovered a website: mrmoneymustache.com, that promotes frugality and efficient living
Living a Frugal Lifestyle
- He knew if he wanted to retire early that he would have to save a lot of money
- Started saving most of the money from his paychecks
- Lots of finance books emphasized index funds but they maxed out at 8-10% returns
- Got interested in real estate investing because he could see how he could get much higher returns
Buying His First Rental Property
- Found BiggerPockets.com – used what he learned there to formulate a plan
- He had saved $20-25,000 in first year out of college
- Decided to “house hack” – Buy a rental property, live in one unit and rent it out to the other. He bought a duplex.
Debt – Two Types of People
- People who have lots of “bad debt”
- Credit cards
- Payday loans
- Delinquent loans
- Bad credit
- People with large loans
- Student loans
- Mortgages
Three Phases of Wealth Creation
- Stage One – Accumulating Initial Capital
- Financial runway (the number of years/months you can survive without any income – liquidity) Reduce overall expenses
- Accumulating one year’s worth of liquidity
- Cutting big “life expenses” expenses (housing, transportation and food) and still maintain happiness
- Saving your money in this stage
- Stage Two – Increasing Net Worth – $25K to $100K
- Use financial runway opportunities to exploit opportunities on the income front
- Expand income to be rewarded for performance (lower salary in lieu of commission, bonuses, etc.)
- House Hacking – eliminates housing costs
- Increase savings dollars
- Stage Three – Investing
- You have accumulated your first $100K solid financial base to move toward financial freedom
- If you can year 12% return on $100,000, you could get $1K per month in cash flow
- How do I get a return on assets?
- Income from investments becomes a material part of your income until it becomes the majority of your income
- How do we build a system to create financial freedom to move from this base of $100K?
- “A real assets is something that generates income or appreciates in value relative to inflation (ideally both)” – things life real estate, stocks, bonds, small businesses, websites, a book
- False assets are cars, boats, a real residence, retirement accounts. You need to stop acquiring “false assets” and re-deploy these funds into assets that generate income
Most Wealth for 50 plusers is Found in Two Areas
- Retirement accounts
- Personal residence
- The only way it will produce value in one’s life is:
- Sell or refinance the home and redeploy the equity in “income producing assets”
- Pay-off the mortgage entirely and remove the large expense cash outlay
- The only way it will produce value in one’s life is:
The Core Tenants of Investing
- Principles to govern your “asset producing” investments
- System of investing
- His Core Tenants of Investing:
- Never spend the principal of the investment – only the income the investment generates
- Reinvest MOST of the income generated by your investments (all at first and more later on)
- To invest one must have capital – Better to use your own capital than OPM (other people’s money)
- Effort correlates to return only if you are in control of the investment – if you own business or real estate
- Investment returns are impacted by knowledge – do your research, homework, educate yourself
- Do not equate volatility with risk – stocks are more volatile than risk! But over 30 years, stocks always out-perform bonds
- The best investments are specific to the investors personal situation – The best investments are the ones that reduce personal living expenses – the things that you can control – that synergize with your career, interests and passions
How he Saw the Value of Real Estate as an Investment
- He was running a spreadsheet
- If you don’t have debt, real estate performs less than the stock market
- When you leverage in is when your returns start to multiply
- Example:
- Buy property for $100,000
- $25,000 down
- Appreciates 1% – return on equity is not 1%, it’s 5%
- Over time your return-on-equity decreases
- You get a great return the first few years on average but the return diminishes
- The cash flow, however, increases, because inflation takes rents up
- Mortgage payment remains flat
- Gap between rental income and mortgage will grow until you pay off the property and have a ton of cash flow
- He thought, “If I start doing this now and use lots of leverage, like with a house hack (5% down with FHA loan), I can mitigate those risks if I live in the place and take care of it and have a tenant help me out with the mortgage. And I will benefit from this 19-to-1 leveraged position on the real estate. I can do this for a number of years, accumulating properties in a very low risk, highly leveraged way, and only move out, once the properties are stabilized with a certain amount of equity once I fix them up.” This will help boost your net worth!
- The choice is to keep leveraging equity to purchase more properties or to stop at a certain point, pay down the equity and live off the income
Scott’s Current Situation
- Has 3 properties: 2 duplexes and one 4-plex
- Lives in one duplex
- Generates $8.5K per month in rental income
- Mortgages at $4.5K per month
- Not sure on average expenses
- Has about $2K cash flow
- Index funds income (His favorite is VOO – Vanguard 500)
- Working at BiggerPockets
- Receiving income from book
- Will continue to cash flow from those investments
- Continue to house hack
- Will purchase a property every 12-18 months
- Building businesses
- Write more books
- Help grow BiggerPockets
- 5-7 years, sell existing properties ,1031 exchange to 12-15 units in Denver
How do You Instill Wealth Maintaining Principals in Your Children and Children’s Children
- The Millionaire Next Door by Thomas J. Stanley
- The children of the wealthy
- “Economic outpatient care” – parents provide housing, leave too much money, children can’t maintain lifestyles without parents
- The parents have undue influence in their kid’s lives – not able to make decisions without parents approval
- The children of the wealthy
- His relationship with his parents is as equals – he doesn’t depend on money from his parents
- Once kids are out of college and working, they need to learn to live on their own
- The Kennedy family has a good system to perpetuate generational wealth through complicated series of trusts that they don’t receive funds from until they are 55 years of age
Thoughts on College Degrees
- Has afforded him good opportunities
- Will be less relevant and valuable with time
Rap-It-Up
- Favorite real estate book: How I Turned $1,000 into $5 million in Real Estate in my Spare Time by William Nickerson
- Favorite business book: The Compound Effect by Darren Hardy
- Most valuable web site for success (other than your own): BiggerPockets.com and mrmoneymustache.com
- Favorite app: Personal Capital and Mint
- Favorite quote: “He who has patience can have what he will.” By Ben Franklin
- If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? Find a job that paid at or above the median income. Start saving. Use first year of “financial runway” to find a job that offered commission (the opportunity for performance-based rewards). Would house hack.
How to Reach Scott
Buy Scott’s Book
- Set for Life by Scott Trench
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