Chad Carson is a real estate investor and coach. I’ve read Chad’s blog and have heard him give various interviews telling his story of how he has used real estate to design the life he wants. To date, many of the case Financial Independence studies I’ve reviewed have focused on debt repayment and investing in Index funds. That is why I am excited to review Chad’s case which focuses exclusively on real estate.
Chad describes growing up in an “upper-middle-class” household. A vague term. I interpret “upper-middle-class” to mean money is not an immediate concern in day to day life, but if you take your eye off the ball it could be. Chad’s father was an entrepreneur. He had successful businesses and businesses that failed. Chad said that money was a subject his parents talked about as equal partners. This taught early lessons of the mindset required to be a successful entrepreneur.
Open and honest communication about money is a recurring theme you’ll notice when observing people who have mastered their money. Those who are willing to face the difficult reality of their financial circumstances are much more likely to turn things around than those who want to pretend that “Everything is okay” even when they know deep down, that it’s not.
Chad got a scholarship to play football which gave him a tremendous advantage of graduating college debt-free. As sad a statement as it might be, starting with a $0 net worth is a massive head start. Many people these days are starting with tens of thousands of dollars in student loan debt.
Here is what he learned from a professor about how to become rich.
Step 1: If you make $30,000 per year learn how to live off $30,000 per year.
Step 2: Find a way to make $60,000 per year while still living of $30,000 per year.
Step 3: Find a way to make $120,000 per year while still living of $30,000 per year.
If you can complete all three steps it’s nearly impossible not to become rich.
This is the path to financial independence distilled into three steps. The lesson should be obvious, learn how to live within your means, find new ways to earn income while not falling victim to “lifestyle inflation”.
There are two parts to the wealth-building equation: money coming out and money coming in. We want to maintain the money coming out while always looking for ways to increase money coming in. If you make $120,000 and spend $115,000 per year, you will never build wealth.
What a powerful lesson for Chad to learn while he in college, which is by far the best time for someone to learn that lesson. Why is that you ask? Because when you are in college you are by definition “living like a student”. Meaning you are probably living in cheap housing, eating cheap food, taking the bus and stealing internet access from the local coffee shop.
Your lifestyle does not cost much to maintain.
Preparing to Become a Real Estate Investor
Chad seemed to take the money lessons he learned and apply them straight out of college. When he graduated Chad got into real estate “wholesaling”. Which is someone who goes out and finds a good real estate deal, brings it to an investor and takes a finders fee. If you know how to find real estate deals but don’t have the money to buy properties yet it can be a great way to learn the ins and outs of your local market before you put your money on the line.
In his first year of wholesaling, he continued to live the “student lifestyle’, living at home and saving almost every penny he made. In his second year, he maintained his frugal lifestyle living in a spare room of his business partner and eating ramen noodles.
Before long Chad and his business partners began flipping houses. Living off a portion of the profits from the flips and saving a portion to eventually move into buy and hold rental properties.
By 2006, in addition to the flips, they began buying rental properties. Since neither of them had a traditional 9–5 job they found it difficult to secure traditional financing from a bank. If you don’t have a predictable paycheck coming in every two weeks, banks can get nervous about lending you hundreds of thousands of dollars. Chad was forced to seek financing from “private money” AKA investors. You have to pay higher interest with private lenders (chad mentioned paying 10%) but if it’s the only game in town they have that right.
They started with single-family homes, buying them and renting them out. Eventually, they moved into multi-family student rentals. Sticking with the lesson of “living like a student” Chad began with a house-hack, living in one unit while renting out the others. A great way to have someone else pay your housing costs, freeing up more cash flow to reinvest.
Surviving The Financial Crisis
By 2007 Chad admits that he and his business partner were growing too fast. In 2007 they had 50 closings. Right before sh*t hit the fan a year later in the U.S housing market. One of the key factors that helped their real estate business survive the worst real estate downturn in the history of the U.S was the fact that they sitting on a ton of cash.
Even though they had been making a few hundred thousand dollars per year flipping houses, they were still living like students. This allowed them to compile a very healthy pot of money. The money they would need to weather the storm over the next few years as property values and rents plummeted and vacancy rates increased. I can only imagine how difficult a time it was to be a real estate investor. Many investors, who did not have large savings to rely on were wiped out by the financial crisis.
Another factor that helped Chad weather the financial storm was the personal relationships he developed with his private lenders. This is where paying 10% interest pays off. Unlike a big bank, a private lender is simply a person. Someone you can build mutual trust with over the years. Trust that would sure come in handy if you need to extend or refinance any of your loans. If you tried going into your bank and asking for a refinance or extension in 2008/2009 you would surely be denied. Banks were terrified and they scared to lend money, especially in real estate transactions.
I want to circle back to the importance of having cash reserves if you invest in real estate. Not only because we never know when the next recession will hit but because real estate comes with a lot of unexpected expenses. Furnaces can die without warning, roofs need to be repaired, windows get smashed, tenants trash the property there are endless reasons why you may need to have immediate access to thousands or even tens of thousands of dollars.
Not to mention real estate investing involves a great deal more financial risk than investing in index funds. To buy a real estate, most investors rely on leverage AKA a mortgage to buy the property. Many investors put 20% down and borrow the other 80% to buy the property. This can greatly accelerate your return on investment, but also provides you with additional risk. If you can’t find a tenant to pay the mortgage, you have to eat that cost. Leverage is a double-edged sword, be aware of that if you are thinking of investing.
Real estate investing is not for everyone. You need to be disciplined and build cash reserves, put in some sweat equity and be flexible and prepared for whatever life or the market throws at you.
Own Your Destination
Chad talks a lot about building a real estate portfolio that reflects what you want out of life. When Chad and his partner were doing 50+ deals per year they had very little time to do many of the things that brought them joy in life, like traveling. It’s very easy to hear stories about people who own 1,000 rental units and think that’s what I want to do!
Figure out what you want in your life and set your own goals, don’t adopt other people’s goals. If owning 1,000+ rental units will make you happy and is what you need to fund the life you truly want, then make that your goal. If owning five rental units allows you the flexibility and freedom to live the life you truly want, then make that your goal.
Start with “Why”. Why do I want to have passive income? Do I want to volunteer, do I want to travel? do I want to sit in my PJ’s and watch Netflix all day? Figure out the best version of your life would look like and then figure out how investing in real estate or index funds or bitcoin can help you get there.
You can check all of Chad’s writing and coach over at his website.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.