Here’s our latest interview with a millionaire as we seek to learn from those who have grown their wealth to high heights.
If you’d like to be considered for an interview, drop me a note and we can chat about specifics.
This interview took place in August.
It’s a long one so I’ll be breaking it into two posts.
My questions are in bold italics and their responses follow in black.
Let’s get started…
How old are you (and spouse if applicable, plus how long you’ve been married)?
I am 56 years old and have been divorced for 18 years. I was married for 16 years.
As others have related, it is very difficult financially to deal with divorce and my financial life basically reset after my divorce.
This write up is largely post-divorce as my net worth was $0 or negative after the divorce and the start of the Great Recession.
Do you have kids/family (if so, how old are they)?
I have two children (32 and 28) who are both married.
I have one grandchild.
What area of the country do you live in (and urban or rural)?
I live in the northern Midwest, and it is a fantastic place to live. I don’t mind the winters here for the two or three months of bad weather we have as the spring through fall is absolutely gorgeous.
We are fortunate to have an abundance of lakes and open spaces and I live in a bedroom community near a city with a major state university. I can go across the street from my neighborhood and be at a farmer’s stand and have walking trails and nature in abundance or I can make the 6-7 mile drive into the college town and in 15 minutes have restaurants, museums, theaters, sports, and just about anything you would want in a city.
Housing costs have increased here quite a bit so I would no longer say it is very affordable, but there are other similar towns in this region where you can definitely have an excellent quality of life and have a lower cost of living.
What is your current net worth?
My current net worth is $2.6 million.
What are the main assets that make up your net worth (stocks, real estate, business, home, retirement accounts, etc.) and any debt that offsets part of these?
The main assets making up my net worth are as follows:
- Rental business: $1.3 million. My business partner and I own 35 single family rental homes. The total value of the properties and assets in the business is about $3.9M and the debt on the properties is $1.3M. We are 50/50 partners this amount represents my share of the business.
- Apartment Syndications: $590K in my self directed IRA (SDIRA) and $163K outside of retirement accounts. The SDIRA was initially from my 401(k) and pension fund at a previous employer.
- Note Funds: $101K in my self directed Roth IRA. This amount was initially from my Roth 401(k) at a previous employer and is a fund investing in distressed mortgage notes.
- Home: $96K net worth – Conservative estimate of the value of the house is $400K and I have a $304K mortgage. I refinanced at 2.875% for 30 years in 2021 before rates increased and invested the cash from the refinance in the apartment syndications. (This is my answer to the, “pay off the mortgage or use the equity to invest?” question.)
- Rental house in Memphis, TN: About $88K to net worth ($200K value less $112K mortgage). Purchased a few years ago along with two other rental homes I have since sold. I wanted to try my hand at remote turnkey rental investing. (I don’t recommend it, more discussion later.)
- Mobile Home Notes: $72K. (This is basically holding the loan on the purchase of a mobile home.)
- Stocks and Mutual Funds: $78K primarily through current job retirement account
- Whole Life Policy: $60K cash value, $40K of the cash value from the policy is invested.
I am obviously heavily invested in different real estate investments. I went to a financial advisor about five years ago and he mentioned I had a lot of assets in real estate. He asked what I would do if the real estate market dropped dramatically. Since the rental properties provide cash flow income and the value of the property doesn’t usually directly affect the rental income, I answered him, “I’d buy more!” I never heard from him again.
I very much believe in cash flowing / income generating assets and I have been fortunate this formula has worked for me.
What is your job?
I am currently a software engineer.
I started out in another industry and worked for over 28 years as an electrical and quality engineer, as well as a program manager the last 3 years.
In the 4 years since I left my previous industry, I have been working as a software engineer. I have no managerial duties. I moved to this job to get back to engineering and to put an end to the 9 pm calls with counterparts half way around the world. I am a senior engineer, basically as far as you go in engineering without getting into management.
I highly recommend engineering as a career choice. The pay is good, the work can be very rewarding, you learn a great deal about processes, quality, and just how the world functions, and you have a number of options to increase your income through promotion or branching off to adjacent roles.
In addition, learning to think as an engineer is excellent preparation to manage your personal finances and investments.
What is your annual income?
My annual salary as a software engineer is $141K.
In my current job I do not have any bonuses or other additions to my salary except for a modest 401(k) match.
Tell us about your income performance over time. What was the starting salary of your first job, how did it grow from there (and what you did to make it grow), and where are you now?
When I was in high school and considering what area to study in college, I eyed the salary of electrical engineers (I also had an interest in electronics), which at the time was the highest paid engineering field.
When I graduated in 1990 with my Bachelor of Science Degree in Electrical Engineering (BSEE) my starting salary was $36K. I had a manager that advised me, “You have an engineering degree, now you need a degree in paper pushing,” which was his way of saying I needed to get an MBA.
I worked on an MBA for a couple of years but soon lost interest. However, the basic classes in accounting and general business were helpful throughout my career and in my investing.
I was a good engineer and received good raises and eventually did complete a Master degree in Engineering in 1998.
By 2000 I was up to $86K a year, almost 140% more than my starting salary in 1990.
In 2000, I made a bad career decision and was part of the spinoff from the company which originally hired me.
In 2010 I made $101K, so I had a much lower rate of increase over the second decade of my career. The 2000s were a decade of keeping my head down as layoffs were rampant. My newly spun off company went from 3500 to 300 employees over those 10 years, so I was mostly happy to have a job and not lose my house during the Great Recession.
From 2010 to 2018, my salary increased to about $150K as I took on more responsibilities and became a program manager.
In 2019 I started my current job primarily for better work life balance (which cost me a 20% pay cut) and now, four years later, my salary is back up to $141K.
I think I did a great job through the 1990s in progressing my salary and my career by trying to be the best engineer I could be and getting a post-graduate degree.
As I mentioned, deciding to be part of the spinoff was a bad decision and it likely cost me $1M in retirement pension and probably added at least 5 years to my required working life.
Even with that bad career choice, that spinoff allowed me to meet my business partner and I probably wouldn’t be where I am today with my rental business had the spinoff not happened. I think I was very fortunate that things evened out that way, but it also took a lot of hard work.
One of my favorite sayings is, “Luck is when preparation meets opportunity.” I was very lucky and spent a long time preparing for the opportunities we eventually found.
What tips do you have for others who want to grow their career-related income?
Be the best.
How do you “Be the best”? First and foremost, show up every day, work hard, and pay attention. I believe there is “work smarter” in taking the parts of your job that you can automate and put in place processes, but you have to work hard. You have to do things like volunteering to take the challenging assignments.
I always wanted to be the guy that my manager would rely upon to stand in for him when he was going to be out of the office. I looked at the best engineers and learned from them and figured out what they did. I don’t think there are always shortcuts, and you’re better off working hard than spending too much time trying to find the shortcut. The people you work will notice whichever path you take.
Secondly, you need ongoing education.
If you are in a STEM (Science, Technology, Engineering, and Medicine) field it is almost mandatory to get an advanced degree. When I started in 1990 with a BSEE, half the new employees had a Master of Science or Business degree. I knew I eventually needed to get a post-graduate degree to get ahead. An education doesn’t end at a diploma, either. There’s always another specification to review, another report on how a problem was created and fixed, and another process that helps you understand the bigger picture. Learn, learn, learn. Never stop reading and growing.
What’s your work-life balance look like?
At this point, my work life balance is excellent.
I have been primarily “work from home” since COVID hit. My job rarely requires overtime, so I work my job and hang up my spurs at the end of the day.
I am no longer in the “grow your career” mode. My manager asked me last year where I wanted to be in 5 years and I told him I didn’t want to do anything other then what I am doing and I wasn’t looking to get promoted. I like my job, the program I work on is interesting, and I do my job well. I get satisfaction from my work but I also take great joy in turning off my laptop at the end of the day.
One of the main reasons I am in this job is for work life balance. I was tired of international conference calls from 8 am to 10 pm. I was tired of coming in before the boss and leaving when he left. I am much happier now and have much less stress.
Do you have any sources of income besides your career? If so, can you list them, give us a feel for how much you earn with each, and offer some insight into how you developed them?
My primary source of income outside my career is my rental business. My business partner and I pay ourselves $4K a month each. The business makes about another $50K annually that is reinvested, used to pay down debt, etc.
In 2010, I and two friends at work started buying single family homes that were for sale for $25K-$35K (this was the low point of the Great Recession in this area) and renting the homes for $800 per month. Monthly costs were about $350 per month, so the homes were cash flowing $450 a month and over $5000 per year. This meant we were getting back our investment in about 6 years with no financing.
I was fortunate to have a HELOC on my primary residence from before the Great Recession which allowed me to borrow funds for my portion of the rental purchases. I have heard it said this is a “no money down” technique, but I didn’t know that at the time. We purchased 6 homes before we put our purchases on hold.
One of the toughest things about business with partners is you’re really tied to those people and sometimes it doesn’t work out. Unfortunately, it didn’t work out with one of our partners, so my current business partner and I exercised our option to end the partnership and we sold off the rentals. (Always have a good partnership agreement in place including a way to exit!)
By 2014, the homes we purchased in 2010-2012 were selling for up to $85K, and that allowed us to roll over our profits from the sales into a new set of single family rentals. It wasn’t anything spectacular or that creative and we simply purchased homes, renovated them, and then rented them.
There were a few things that worked in our favor:
- We are both engineers and had some experience with home building and repair. My father had me help him on weekends doing projects around the house from about the time I was 10. I had an upstairs dormer addition put on my house in the 90’s and finished out the interior bedrooms and bathrooms. My partner built his own house in the 90’s doing much of the work himself. This allowed us to do our own work on the rentals and build a lot of sweat equity.
- When we started buying in 2014, we were buying in the low $40K’s. Those properties have appreciated over time and are now worth about $110K each. Rents that were $800 then are $1200-$1300 now, so there is significantly more cash flow, too. We now have 35 homes total with an average rent of $1139, average costs (taxes, insurance, other fees) of $339/mo, and average mortgage of $257/mo. We do have to figure in repairs, capital costs (remodeling) over time, and vacancies which we estimate at $169/mo. This results in $374 cash flow per month per rental, or about $13,000 in total income a month.
- We investigated and found financing and very good rates and we employed a lot of different techniques. Pretty early on we started using the equity in the rental homes we owned to get a loan to buy more rentals, essentially using the first property as the down payment. The first time we did this, we had a property worth about $70K and another worth $42K, and by pledging those two houses as collateral, we received a $268K loan for four additional $42K homes and about $100K cash out to pay off our HELOCs. Essentially, we went from 2 houses to 6 houses and we got money out to pay off our personal debt. It took a long time to find banks that worked with us and set up multiple properties on one loan. We have multiple loans with 6 to 10 houses in each loan. None of our loans have a Loan To Value of more than 50% and the cash flow after non-mortgage related expenses generates more than twice the mortgage payment.
- We were very aggressive in buying when we felt prices were good. We wanted to get a minimum 10% return, so the houses were more valuable to us than to other people. We did a very targeted mailing at one point and sent out letters to the owners of about 80 homes and we ended up purchasing nine of those properties. Obviously, that is a very high success rate on a direct mailing campaign.
- Lastly, being engineers has taught us a lot about quality and processes. We self manage our properties. People ask how we manage that many homes, but it isn’t that hard. First, your #1 priority has to be good tenants. A vacancy is better and cheaper than a bad tenant. If you get good tenants, 80% of them will simply pay their rent every month, and you just have to manage the other 20%. Second, while there are good property managers out there, they will never care about your property as much as you do. I bought three turnkey rental properties a few years ago and it drove me crazy watching the waste and mistakes made over and over, not to mention just a complete lack of urgency when it came to the homes I owned. I was just another investor to them. In addition, if there are new leases or repairs, they make money. In most property management arrangements (percentage of rent as a monthly fee with markup on repairs and fees for signing a lease or extension) the property manager is incentivized to make expensive repairs and to have a high tenant turnover. When it’s your house, you care about the house and you do the exact opposite, trying to make best quality repairs you can at the best price you can make it and finding good, stable, long term tenants. That is why, in my opinion, property management of single family rental homes is not all it’s cracked up to be. The turnkey homes I purchased yielded a 6%-8% return. Especially now when rates are as high as they are just for savings accounts, it’s hard to justify the increased risk of rentals for those returns.
If you’re interested in self managing, please read “Landlording on Autopilot.” It is a great book and will dramatically shorten your learning curve on how to manage rentals. I feel single family rentals can be a fantastic way for the average person to build wealth. Just 4 or 5 houses over time can make you a millionaire.
My other sources of income include taxable syndications which pay about $6K a year and mobile home notes paying about $7K a year in interest.
The taxable (outside of my IRA) syndications I purchased in apartment investments in Cincinnati and in Texas. I look for syndications that mimic my preferred real estate investing: forced appreciation and increased rents through value add renovations combined with existing cash flow.
This is why I don’t invest in new builds or luxury or upscale apartments. I look for syndications buying apartments with some renovated apartments already demonstrating the proven ability to increase rents, with syndicator with a plan and track record of improving properties, the property already cash flowing from day 1, and a 3-5 year horizon to exit and return around twice the funds invested through refinancing or selling the asset. The syndications return about 5% annually at this time, about $675 per month.
The mobile home notes are a more recent addition to my portfolio and basically entail becoming the bank with mobile home sales. I do this through a broker that sets up the loans with the buyers. Typically these notes are earning 10-11% in interest with a 5 to 10 year payoff. The park owner pledges to make the payments if the buyer defaults since they don’t want a vacant spot in their park.
The default rate has been about 5% historically, so there is some risk, but it is a relatively easy way to invest $25K-$100K with good returns and you don’t need to be accredited. My plan is to expand this portion of my portfolio with profits from other investments. Right now these notes are returning about $7000-$8000 per year.
Great story so far!
To read the rest of the story, see Millionaire Interview 377, Part 2.