Not knowing how you’re going to pay your mortgage at the end of the month is frightening in a way you never forget if you experience it. I know that feeling, and while it has been 15 years since I was faced with that reality, sometimes it feels like yesterday.
Running away from that emotional scar is one big reason why I’ve worked so hard to build the life I have today. I couldn’t have done it alone, though—I have had some powerful mentors who lifted me at critical moments in my life. Thanks to them, I’ve learned we can author the life we want. We can “have it all,” as we define it.
With a vision for what I wanted my life to look like, I built it. I built it so Christian and I could travel. I built it so that I could have an impact on the people and causes I believe in. I built it so that I could enjoy the journey while pursuing exciting opportunities. And, I have to say, I have an incredible partner in Christian along for the ride-—someone who makes me better and has a humble story of his own.
So that you too can build what you want and have it all from your perspective, I’m writing this piece to give you a more detailed look at how I’ve done it. Specifically, how I’ve managed to arrive at 2021 with enough passive income to live the life we love and invest for the future. With numbers…
I see now my wealth-building journey can be broken into 3 distinct phases:
- Phase 1: Learning to buy and invest, and learning how to sell to generate revenue
- Phase 2: Learning to keep more money and invest for the future with a purposeful focus on net worth
- Phase 3: Learning how to manage cash, and organize and analyze financial data
Phase 1: Learning to buy and invest and learning how to sell to generate revenue
It started with my real estate sales practice. I entered the real estate business as an accidental investor who was inspired by an infomercial to “buy real estate with no money down.” I didn’t have any money, so that seemed appealing. I was stuck in a boring job and felt like I was wasting my life, but also scared to pursue something else for fear of rejection since I didn’t have a college degree.
Though in that moment, at 2AM watching the infomercial, I pushed through the fear and listened to the small voice in my head that whispered, “Yeah, but imagine if this worked!” I bought the course.
I studied and realized it was indeed possible to buy something with my income and credit, and in 2000, I bought my first property on Capitol Hill for $100,000 with an FHA 203K loan, borrowing $3,000 for the down payment from my only friend at the time.
Then, two lucky things happened. First, my real estate agent suggested I get into real estate as a salesperson brokering transactions for others. Second, I used the profit I made on that first deal (almost $50,000) and bought another property. I didn’t realize it at the time, but I was applying two wealth-building principles that would serve me well: Learn to sell (to generate cash), and learn to buy/invest (to build wealth).
I learned that the key to selling was listening intently to what my clients wanted—and then finding it. While that may seem obvious, I realized it was a skill many of my fellow real estate agents seemed to lack. Too many were focused on closing the deal and securing the commission check, which didn’t seem to honor the deeply meaningful work real estate agents do around facilitating what is often the most important decision in people’s lives.
Instead, I focused on the long game, the relationship, and used that to my advantage to work successfully with a lot of clients. I found most of them by knocking on doors in the neighborhood looking for sellers and hosting open houses for agents who didn’t want to do them to find buyer clients. For 5 years I focused on this, perfecting my listening and prospecting skills which still serve me well today.
I was also learning how to buy up the real estate ladder by using the profits from flips or commissions from real estate sales to buy property. That worked well enough that, within three years, I was able to buy a property for $700,000 leveraging the income I was making as a real estate salesperson to get the loan and using the cash I had made flipping a couple of houses for the down payment. The $700,000 property was a five-story Victorian townhouse with five bedrooms and six and a half bathrooms. I immediately leased out all the rooms except the master and put my office in the basement. It cost me nearly nothing to live in that home, thanks to my roommates which freed up a lot of income to buy other things. Ten years later, after an extensive renovation, I sold that property for $1.5M.
All wasn’t well, though, as I was also spending furiously on my lifestyle and living on the edge with far too little cash reserves. I was running from commission check to commission check to keep all the financial balls in the air, and while I realized on some level that wasn’t sustainable, I wasn’t sure how to get out of the entanglement.
Phase 2: Learning to keep more money and invest for the future with a purposeful focus on net worth
I was good at generating revenue through real estate commissions, though I also realized that part of the business was very transactional, which I didn’t like. I wanted to build a business that was more sustainable without my constant individual effort. Frankly, I wanted to buy the houses my clients were buying but that I couldn’t yet afford.
And I was haunted by my own financial hypocrisy: I had a big income with little cash, and I was behind on my taxes. I was tired of living on the edge of each commission check, and I was incredibly frustrated that I found myself in serious tax debt for the second time in my career. I knew I could do better. I had to do better. I had to prove to myself that I made the right decision not to go to college and that I could build the life I envisioned. Forgoing a university degree was a big gamble on my part, and when things didn’t go my way, it was easy to blame the failure on that decision. The truth is, the lack of that piece of paper also motivated me. Knowing I didn’t have the pedigree to fall back on, I needed to be creative and find alternatives.
The restless vision for myself about what might be possible if I really applied my intellect and discipline, plus a desire to get out of tax debt and live beyond the next commission check, brought me to collaborate and invest with partners in the Keller Williams franchise in 2006, which was mostly unknown at that time. Turns out that was smart, and for the next 10 years, I focused on my leadership skills and learning what it meant to grow and manage a business with multiple locations.
In Phase 2 I continued to buy and mostly hold residential real estate. I bought two condos and rented them out, bought a third, but sold it quickly and used those proceeds to buy a 66-acre farm, which I still own.
I also made plenty of bad choices, including buying a lot in South Carolina that I held onto for almost 20 years and sold for a $100K loss recently. And I bought not one, but two timeshares. Bad idea. I also sold some properties because I needed cash but that I now wish I would have kept.
As Keller Williams grew, that expansion created some additional opportunities, and I invested in small percentages of commercial real estate every chance I had (about one per year) as well as in other companies that provide services during the real estate transaction. I also took advantage of Keller Williams’ profit share system and recruited a lot of agents to the company, which generates passive income.
I’d characterize Phase 2 as the “buy whatever I could afford to get into and hope things would work out someday” phase. I was putting a lot of chips on the table, even if they weren’t necessarily well organized. Meanwhile, I was finding and hiring other people to perform operating roles in the company as it grew and learning what it meant to lead others.
Phase 3: Managing cash, and organizing and analyzing financial data
Tax debt is incredibly challenging and the weight of that problem—and a desire to never have it again—led me to make real substantive changes in how I was managing cash. I needed to pay myself first and manage a budget that included sufficient reserves, retirement account contributions, and tax savings. To do that, I had to organize and learn to analyze my financial data. That took a long time, but because my coach pointed out that I was delegating the understanding of my financials to other people—and he was right—I was committed to it. I could no longer afford to delegate my financial understanding (literally), or else I would inevitably find myself in another hole down the road. That was a wake up call for me, and I began investing heavily in my own financial education, using my businesses as real-time case studies.
It was an important mindset shift to realize that while I had other great skills that got me pretty far down the road, unless I acquired wealth building skills, I would not see the vision I had for myself come to fruition. I changed CPAs twice, and I hired and fired several bookkeepers and business attorneys until I found a team that would not only do the work, but also help me learn about it along the way.
Finally, after years of hard work, it all started to come together, and I began to develop a more coherent approach to building wealth. My strategy was materializing, and it consisted of six elements:
- Maximize and increase my earned income through profitable active businesses I own or am responsible for.
- Take as much of that earned income as possible and buy things I know and understand and that should gain value over time (mostly real estate for me), at the pace of about one per year.
- Keep as many assets as possible and allow time (compound effect) to do the heavy lifting for my net worth.
- Keep all financial data well organized and learn how to interpret patterns and correct bad habits.
- Learn from others wealthier than I am and continue to refine and improve.
- Use as much as 50% of our income to buy assets and invest in ourselves and our businesses to generate more future income.
Here I am, 20 years later, reflecting on all that went well and the many things that didn’t. Though the net effect is, our passive income to support the lifestyle we love comes from a combination of almost 20 different sources I invested in along the way. By far the majority of it comes from operating businesses we own. The commercial and residential properties produce some dividends, but most of that we reinvest in buying new assets or growing assets we already have.
A word on “passive” income
I believe there is a misnomer with regards to what some might call “passive” income as well as some unrealistic expectations about generating it. Truly passive income could be when your money is making money and you apply no effort. A traditional example of that might be a well-balanced and professionally managed asset portfolio whereby you live off the dividends. That’s pretty passive. That’s also pretty unrealistic for most people until the latter stages of their life because of the size of the portfolio you need to make that work.
To me “passive” is defined as income generated while still allowing me to live the life I love, which includes an enormous amount of freedom to choose day to day, moment by moment what I’m going to be involved in. For me, passive income is defined as income that gives me the freedom to run my schedule as I want. I encourage you to define it clearly and carefully for yourself, otherwise “passive” can be quite elusive.
It’s not a mystery how we got here or how we can afford our lifestyle. It took 20 years using about 50% of our income to buy assets and invest in our businesses to generate more future income. Today we use about $200,000 of our annual income to support our lifestyle and enjoy the journey, which is a number that we calculated very purposefully and has been consistent for the last seven years or so. It’s very important to avoid lifestyle creep. Most people increase their lifestyle spending as their income increases, and this is very tempting and easy to do. We have worked hard to remain disciplined and not chase after “the Jones’”. The rest we continue to invest so that we are very good to our future selves.
I share this with all of you today because I want you to be able to have a vision for your life and see financial success on your own terms. I want you to spend time with those most important to you and to make investments in the areas that help you achieve your goals. I want you to have a clear structure for how to have the life you want.
If I could do it all over again? Well, I wouldn’t change anything, because my ups and downs have made me the man I am today. Though if I could whisper to my younger self, I would say, Buy more assets. Then again, I’ve loved every minute of my mistakes—particularly the condo I bought in Buenos Aires! A story for another day…