7 Steps to Replacing Your W2 Job with Rentals

Do you wish you could quit your jobWhat if one simple number could tell you exactly how many rentals you need to walk away from for your nine to five, and when that day could be circled on your calendar?We’re about to play the Rookie Freedom Number game and by the end of this episode you’ll know your personal freedom number and the property roadmap to hit it step by step.This is the Real Estate Rookie podcast. I’m Ashley KehrAnd I am Tony j Robinson. And with that, let’s get into the steps you need to follow to find and execute on your freedom number. Alright, so we spent most of this episode talking through this seven step journey, but let’s focus a little more attention on your actual finish line. So one of the things that you’ll start to notice as your portfolio grows is that your equity starts to grow as well. And different investors have different plans, ideas, beliefs when it comes to equity, some want to leverage it, some want to protect it, and it’s a very personal choice that every investor will have to make for themselves. But equity is capital that can be used to help you keep growing your portfolio if you choose to do it that way. And I think the goal for us is to just quickly talk through planning for your equity and how you can use it to scale your portfolio to get to your freedom number faster. So step number one is to define your baseline. What is the amount of money you need to keep the lights on for your life, for your lifestyle? Think housing, food, transportation, insurance, just the basics to necessitate and sustain your current lifestyle.I think one of the really easy ways to do this, you can do back of napkin math and just be like, okay, my mortgage is this. My car payment is this food. I probably spend this amount every month, but is actually going through your bank statement and your credit card statement. Because if you have never done this, I think you’ll be very surprised where your money is actually going. Like those $99 subscriptions from Apple from your streaming device, they really add up quickly. So I think actually going through line item by line item, there’s a bunch of apps too that you can use where you could actually connect your accounts and then it will say like, oh, okay, Wegmans, or whatever your grocery store is, that is food. So that goes into the grocery bucket and then it’ll actually allocate those for you. So you can look each month and say, okay, I’ve spent $800 on groceries, I’ve spent $500 on dining out getting one of those apps, the one I use as Monarch money. But you can get that to help build out that process of really understanding where your money goes because you could take those bills and add them up, but all that discretionary income really adds up to.Yeah, Asha, I love the idea of going through line item by line item. I do that probably a couple of times a year, both in our business and in our personal life, just cause it’s good to have that exercise of understanding am I actually overspending in certain places that I don’t need to? Like I said, I’ve mentioned this before, but I just did this again last actually a couple weeks ago where I went through all of our business transactions specifically looking at software charges and we had a bunch of different software that we didn’t even need anymore. Again, we had people that were in the software that we weren’t even working with anymore. So it’s good both on a business and a personal level expert, at least the last 90 days. I feel like that gives you a good snapshot of both regularly recurring charges and then some of those one-off expenses.But if you look at the last 90 days and you just go boom, boom, boom, boom, boom, I found that to be a super easy way to do it and my little hack here using a tool like Monarch Money, super cool. Why in my brain it just makes more sense for me to just use Excel, but when I do it in Excel, I’ll export all my statements and I’ll sort them by the vendor or who I’m paying that money to. That way it’s super easy to categorize all of those by vendor at the same time. Don’t do it by date. I used to do it that way. Then I found myself relabeling the same thing over and over again, sorted by vendor, copy and paste all the way down and you can get through it a lot faster.Yeah, the app is way easier. You like things automatic, do want to have to export, import, sort, total equal sum. ComeOn. You’re supposed to be the spreadsheet expert over here and you’re telling people to automate, but no, yeah, there’s probably tools that do it. A lot of you could probably even do chat GT now,But the Excel is free. I’ll say says Excel is free.Yeah, I mean someone could probably even use some sort of chat GT or Clot or Gemini or whatever to also help with this now too. Those tools are getting pretty smart there and I don’t think the goal is you guys go through this exercise is to fill force into cutting a lot of expenses. We’re not saying that you need to go like Dave Ramsey Nuclear, but just understand, hey, what is a reasonable baseline for me in my life to sustain what we currently have? Because we also don’t want this freedom number to be a life where it’s like you’re eating nothing but what does Dave Ramsey say? Beans and rice. Rice and beans. We want you to still be able to go out and have a date night with your spouse. We want you to be able to go on vacation. We want you to be able to do all the things that your life currently allows you to do, otherwise it’s not really freedom, you’re just barely getting by.But that’s the first step is to understand what your current baseline number is. Alright, step number two is to add your lifestyle cushion. The reason that we say this is that we want you to add, call it a 20% life upgrade buffer. Because again, the first step was just making sure that you’re maintaining all the basic, but that cushion is for all the other things that you still want your life to be able to do. So we talked about vacations, your kids’ sports, maybe you like a nice truck, whatever it may be, but you want to add some additional cushion on top of that baseline.So with this goes, I just kind of started learning about this on social media and so I’ve been looking into it more and more and there’s this trend this summer called revenge saving. And so most people say most people used to do revenge spending where they go through a breakup and they buy themselves something to feel better or something bad would happen and they’d splurge on a vacation or whatever. So now this trend is revenge saving and part of the concept is after COD, so many people splurged on things, increase their lifestyle to make up for lost time I guess, of COVID or whatever. But now people are revenge saving and part of the concept is also when you do feel that pain of losing your job and not having the money or something else financially detrimental happening to you, revenge saving is when you don’t want that feeling again. So you’re going to save so that you have that buffer. So if something else happened to you or the same thing happened to you again, you would have that savings. So that whole concept of just revenge saving I think fits into this so well as to when you’re starting to learn how to invest or to reach this financial independence, you do need to know how to save your money and you do need to have reserves and life savings set aside.Ash, I couldn’t agree with you more, and I think personal finance really comes down to two different levers. You have offense and you have defense. Offense is your ability to earn defense is your ability to save. And if you can aggressively attack both of those, that’s when you really start to put yourself in a position to get to this freedom number even faster. So I think the more you can focus on both of those things simultaneously, I feel like Dave Rams is all about defense, defense, defense, defense, defense wins championships, and I talk like maybe Grant Cardone is the opposite, where he’s like, just focus on making more money, make more money, make more. But if you can blend both of those, you tend to maybe land on a more sustainable approach that actually produces more consistent results over the long run. So both of those things are super importantAnd I think that’s like you want to have that money to enjoy your life too, know what your lifestyle costs you, but also be aware of how much you need to save every month. What is that cushion that makes you comfortable so you can do your revenge saving. But yeah, so you should have both of those out as to how much for your discretionary income, how much do you need for your lifestyle, but also for that saving for retirement or just to put into a savings account, whatever that may be, make sure you’re adding that into your dollar amount of how much you need every single month. The last thing I want to say towards this is this idea of saving budgeting or figuring out your number and reaching that financial independence. Do you remember that TV show was on TLC and it was like they would interview people who are extreme budgeters?Wait, I think, wait, I feel like I’ve seen one of the clips on social where it was a guy at the grocery store and he used a bunch of coupons and it was supposed to be like 97 cents was his total and it came out to a dollar oh four and he was upset that it was four pennies off. I think it might’ve come from that show.Okay, no, that’s extreme couponing. That’s a different one. But same concept. One would go to people’s houses and they would show how they didn’t use toilet paper, buy paper towels because they had this one rag that they continuously rewashed to save money. How they would just, they would take one minute showers because their water bill would decrease that much by not running a five minute shower and stuff. Just like these extreme things. And so I want to make that this episode and that your journey in life, it shouldn’t be about depriving yourself, it should be about having control over your money. And I want to make that clear that this isn’t about, oh, we’re going to turn you guys into extreme budgeters and you have to live off rice and beans like Tony said, or my favorite Raymond or Ramen noodles, however you prefer to say it. Just remember that this isn’t about depriving yourself, this is about having control over your money.By the way, the show is called Extreme Cheapskates for anyone that’s interested, I looked it up while Ash was talking and it’s streaming on HBO Max. So if you want some motivation, you guys can find it thereAnd honestly it will motivate you because you’ll feel really guilty for things. You said money.Now, before we keep moving, I just want to give a baseline, right? Let’s say that you are in step one, you identify your baseline to be, call it 3,800 bucks a month. And that’s between your mortgage utilities, food insurance, discretionary spending you at $3,800 per month is your baseline. That 25% cushion that we talked about in step two, that would push you up to 47 50 per month. So that gives you an extra 25% to cover those other things that you want to do. So 47 50 is now your freedom number. So that is how you back into what number do I need to plan for. Now the rest of this episode, we’re going to more so talk about how to get you to that number, but that is the baseline that you want to shoot for. Now Ash, let ask you a personal finance perspective. Are there any other things that Rick should think about when trying to plan this freedom number?Yeah, I think maybe just taxes. Are you self-employed that you have to pay? You have a business or something where you’re making estimated tax payments, make sure that’s included in that. Or if you usually have a tax bill at the end of the year, make sure that’s included. Literally think of everything that can come up your kids’ annual dentist appointment or every six months. What is that? Think of those fees that maybe only come up once a year or a couple times a year that need to be included in that amount too. And then just retirement, I did mention that briefly, but how much do you need to save for retirement? Do you have a college savings fund for your kids that you’re contributing to? So it is difficult to think of everything and account for it, but I think having that nice buffer, Tony said, were some of those things that you might miss out on. Weddings are so expensive not to have a wedding, but to attend a wedding, how many weddings do you expect to attend a year? That could be a couple thousand dollars attending just a few weddings,But I think that takes them to step three ash, which is to just run a quick sanity check on the freedom number that you landed on. I think a good rule of thumb is that it should be somewhere close to what your current after tax income is. And let’s say that your freedom number is, again, let’s use 47 50, but your after tax income, like your take home pay is 37 50. Well that means you’ve been subsidizing a thousand dollars per month using some form of debt, most likely, right? So if you notice there’s a big swing between what your freedom number is and what your current actual pay is, that’s probably not a sustainable lifestyle. So you want to make sure that you bring those numbers back down somewhere. You got to trend the fat somewhere. But if you’re in line or maybe you’re even under what your current take home pay is, and maybe you’re just someone who saves really aggressively already, then you’re in a really good spot.But I think what I would encourage a lot of you guys to do is to get this number visually present somewhere in your life. I know investors who have little cards on their mirror. So when they wake up every morning and they’re brushing their teeth, they see their goals right there as they’re brushing their teeth. So maybe that’s a good place for you to slap your freedom number every morning, every night as you’re brushing your teeth, you’re staring at that number and is staring right back at you to re-center yourself on what’s important. Because guys, I will tell you right now, your ability to be successful as a real estate investor will not always come down to skill. It will not always come down to intellect. More often than not, what it comes down to is your ability to stay consistent over a long period time.And I think that’s what most people misunderstand. And the stronger emotional motivation you can have, the easier it becomes to really stay motivated. So for real, managing tenants can feel like a lot of work, but they don’t have to be. For me, it all changed when I found Turbo Tenant. They’re a free software that makes managing rentals super easy. I used to waste so much time on paperwork chasing down rent, but now with Turbo Tenant, I have everything in one place. They even have state specific leases, digital condition reports, and a simple way to schedule showings without all of the back and forth. Their automated rent collection saves me hours every month and their maintenance management keeps me organized. Everything’s in one place on your phone so you can be a landlord from anywhere. I’m actually good at managing rentals now, not just finding deals. Check it out at turbo tenant.com/biggerpockets and create your free account today.So the next thing is to choose your strategy and you want to do this before you actually figure out how much you need from each door and decide on what kind of door you’re actually buying. So there’s many different real estate investing strategies out there. There’s long-term rentals, rent by the room, midterm rentals. So you have to figure out, in my opinion, where do you have the most opportunity? I know some people say, oh, you want to leave your nine to five, find something you enjoy? Well, you love designing homes and you should flip houses. I think it’s actually the opposite. I think you should do, even if it’s boring, you should do what is going to be the best opportunity and where you have an advantage. So for example, for me, I knew investor that had long-term rentals. I was working as a property manager, so I already had knowledge of how to manage a long-term rental, what rents were in that market.I knew I knew a lot and that was an advantage to me and that’s where I built my foundation with long-term rentals. So to choose your strategy, I would look at do you have any opportunities or any advantages whether that be in a market because maybe you lived there before, so neighborhood to neighborhood, you went to college there. Maybe you have somebody that lives in a market that you’ve analyzed and it’s pretty good and you know, have that boots on the ground person to actually walk properties for you, things like that. And then for your strategy, do you have an advantage as to you have an uncle that does midterm rentals and he’s willing to mentor you and help you through it? Or do you live in a market that there really is a need for rent by the room and co-living because housing has just got so expensive that people can’t afford to rent to their own place? So take a look at what those opportunities and advantages might be that you already have.Yeah, couldn’t agree more. I think the opportunities you have are great kind of filter. I think some other things to assess are how much capital do you have? Because different strategies require different amounts of capital. Buying a short-term rental in a popular vacation destination market is probably more expensive than buying a long-term rental in Davenport, Iowa. Different purchase prices, different costs to get those properties rent ready, different down payment options, like everything kind of shifts depending on what market share and what strategy you’re taking. So ask yourself what access to capital do you have? And I guess not even just capital, but what is your overall purchasing power? So how much capital do you have to cover down payments and closing costs and set up or rehab? And then also, what kind of loan can you get approved for? Can you get approved for a million dollar loan, which opens you up to virtually every market in the United States or can you get approved for $100,000 loan, which maybe limits your options a little bit.So available capital purchasing power, I think is the first thing to consider. The second decision filter on which strategy you should choose is your available time and energy. Again, different strategies require different amounts of time, but depending on the person, they also require different amounts of energy. I would be a terrible traditional long-term rental manager, it just doesn’t give me the excitement in a way that launching a new short-term rental does. So for me, the energy required to be a good long-term rental landlord is a lot more than what it takes for me to be a good short-term rental landlord. And that’s just me personally flipping actually, I don’t mind flipping as much for someone else. Flipping might be the biggest energy drain they could think of. So as you go through these different strategies, how much available time do you have to commit to them? And then from an energy perspective, does it drain you? Does the idea of doing it make you want to roll over and die or does it create energy? It make you want to do more of those things.Along those lines is you should also completely understand what your role and responsibilities are for that strategy. What will you actually be doing? So for short-term rental hosts, you’re in the hospitality biz baby. It is way different than a long-term rental. And so having an understanding of, like Tony said, your time commitment that you’re going to be putting in and what actual job description that is going to be and if there is the option to outsource the things that you don’t like or don’t want to do. And looking at that and seeing if the numbers still work with hiring the help that you would need to actually do the job. So that time piece and what you’re actually going to be doing, is it something that you could actually handle? I could never be a wholesaler because that involves a lot of talking on the phone or talking to people face-to-face and a lot of personal interaction to get these deals done. And I am terrified of just answering the phone if I dunno who it is and having a awkward silence or awkward conversation. So I could never wholesale because of that piece that I am just not comfortable or good at even is small talk with people to kind of build that rapport, that relationship.So those are the first two decision filters and there’s two more that I want to cover. So we already talked about capital, we talked about time and energy as the second point, the third, and this kind of ties into what Ashley said, but it’s just desire and skill. So do you think you’ll actually be good at this or do you have the capacity to get good at this? And if you can honestly answer no to both of those questions, it doesn’t matter how much capital that strategy will produce, if you don’t have the actual skillset or the capacity to build the skillset to get good at it, you’ll never do well in that situation anyway. I think we saw a lot of that in the short-term rental industry where a lot of folks saw the potential didn’t necessarily have the skillset or the ability to develop the skillset to do it well, and they ended up buying deals that were mismanaged. They bought deals that shouldn’t have purchased and it didn’t work out the way that they wanted it to. So you’ve got to ask yourself desire and skill, do you have it?And I think too, understanding that strategies, markets, laws and regulations can shift because when I started in 2018 with my first little rinky dink Airbnb arbitrage, it was very different time to be an Airbnb host. It was very, very low expectations. We didn’t have to fluff the pillows, offer every kind of coffee flavor available, do all these little unique touches fresh. We do one property now we have fresh flowers upon arrival. These little things like you could basically respond short little yes or nos. We didn’t have automated messages set up with a guidebook and all these things. And as time has shifted, the expectations of being an Airbnb host has drastically changed. So think about that as you go into a strategy. Are there things that could change that you would not have time for or be able to conform to? And I know it’s hard to predict, but look at other strategies and things that have changed over the years, like just tenant landlord laws being able to understand, do you have the capabilities to pivot and change if your state were to change laws and things like that. But a lot of those go with short-term rentals and midterm rentals as rules, laws and regulations change too. And IThink that’s a great segue into the fourth decision filter, which is your individual risk tolerance. Different strategies carry different levels of risk and which risk are you willing to accept? Like Ashley said, if you buy a 100 unit apartment complex, you’ve got a hundred different tenants that you’ve signed leases with, you are subject to all the local landlord tenant laws. And depending on what location you’re buying in, maybe those laws are swinging in your favor as a landlord. Maybe those laws are swinging out of your favor as a landlord if you choose to flip, if you’re flipping in a high cost of living area, there’s a lot of capital you have to put out to be able to get the return you’re looking for. And are you willing to accept that risk? Obviously with short-term there’s a regulatory risk, so every strategy carries some form of risk.If there was no risk, there’d be no reward in real estate investing. So no strategy is risk-free, but which strategy gives you risk that you’re willing to accept? So those are the four things to consider. Again, capital time and energy, desire and skill and your overall risk tolerance. And as you go through each of those, apply them against those filters to see which one actually aligns best with your specific profile. I think the last thing I’ll say, Ashton, we’ve seen this a lot with guests on this podcast, don’t be afraid to mix and match or combine these strategies as well. You can house hack, say you’ve got limited capital, you can house hack, call it a triplex. You live in one unit, you do the second unit where you rent by the room and maybe the third unit you do a midterm rental and now you’ve got a mix of all these different strategies. You got ’em for a very low cost because it’s your primary residence, you’re reducing your expenses, now you’re able to save more money for your next deal and it all just starts to snowball together. And we’ve seen lots of folks combine the strategiesAnd you renovate it as a live and flip too and then sell it for two.So there’s so many different ways you can go about it. So don’t feel like you’ve got to choose just one. If you find a deal that allows you to tackle multiple, that’s a good next step. Alright, step number five is to pick a cashflow target per property. Now the reason step five comes after step four, right? The reason you have to pick your cashflow target per property after you choose your strategy is because the strategy you choose will help dictate your cashflow target per deal. So I dunno, let’s say that you have a traditional long-term rental in today’s environment. Maybe you should be happy with $200 in net cashflow per door. If you’re doing rents by the room, maybe your goal is $200 in cashflow per room, right? So if you’ve got a three bedroom, maybe it’s 600 bucks. If you’ve got a midterm or a short-term rental, maybe your goal is a thousand dollars per door.So different strategies and different markets will give different targets you should shoot for. But you’ve got to identify, okay, what is my buy box? What is the baseline that I’m looking for on a per deal basis? So then we can back into the other parts of this equation. But again, let’s go back to our example. The 47 50 is your freedom number. And let’s say that your goal is, or the strategy that you choose is traditional long-term rentals. And let’s assume that for your specific market you can get 2 75 a door. So 2 75 per door is your target for your strategy in your market. Your freedom number is 47 50. 47 50 divided by 2 75 gives us 18 doors. So now all I need to do is get 18 doors that at minimum meet my cashflow target and I’ve been able to achieve my freedom number so you guys can see how it all comes together to really back you into a singular number that you need to focus on.And so when you’re finding this number, this 2 75 per door, make sure you’re being conservative with it that you’re not maxing out. So if you’re going to try and say, well, I want less doors, I’m going to aim for maybe $500 per door, then I need less doors. If that is very, very, very hard to achieve in your market where you’re not going to be putting any more cash down to have a lower mortgage payment every month because you put more cash into the deal, that is just going to stall your acquisitions. So make sure that the cashflow number is reasonable and you can actually find a deal because yes, I’d love to say I’m only going to buy properties that have a thousand dollars cashflow with putting 20% down in my market right now. That actually would be pretty difficult to do to find that and I probably, it will take me so much longer to actually reach my goal because it is harder to actually find a deal that does that.That’s a great point, Ash. You definitely want to make sure that these numbers are rooted in reality and I think you’ll be able to understand what a good cashflow target per door is once you start analyzing deals that meet your strategy within your specific market. And maybe if you do that analysis and to Ashley’s point, you’re like, man, I actually can’t get that number here. Or maybe instead of it being 18 doors, it’s got to be 30 doors, you’ve got to double that number. Then you’ve got options. Either go back and pick a different strategy within that market or maybe go to a different market where you can get better margins. That’s why the whole plan all kind of works together as you do this. But that’s step number five is to pick your cash flow target per property. Step number six is to set your acquisition pace, right?So how quickly do you want to do this and maybe a more aggressive timeframe is five years maybe a more balanced approach? Let’s call it 10 years and maybe a more lifestyle approach is 15. I feel like we’ve met a lot of folks in the podcast, Ashley, who within that 10 year timeframe have been able to replace their W2 income. We just interviewed Matt Kruger and I think he said it took him seven years to be able to replace his income. We interviewed Laura side who I think within three years between flipping and her rentals, she was able to replace her income as a teacher. So we’ve interviewed folks who have done it quickly, we’ve interviewed folks who have done it longer, Dion McNeely and other prime example, someone who did within a decade. Coach Carson did it within a decade. So there are lots of folks who if you just kind of consistently plug away, doing it within 10 years is actually a very reasonable goal to have.But your ability to scale really comes down to three skills and ton. I’ll break down each of these one by one, but skill number one, and we talked about this earlier, but it’s your personal savings rate, the wider the gap between your income and your lifestyle spending. The quicker you can reload money for down payments and rehabs and acquiring that next deal. But if all of your income is going towards just sustaining your lifestyle, where are you going to get the money to buy your next deal? So you’ve got to be able to increase the amount of money you’re saving. And again, like I said earlier, that comes from either playing better offense, making more at your job, getting a side hustle or playing better defense, decreasing your expenses.One thing with this too is to how you’re going to acquire the properties is you need to be comfortable with your loan to value. So if you do find that you’re able to get low money down on these deals, things like that, make sure that you’re still going to be able to sleep at night and not be stressed because all of a sudden you have all this debt or you have these high mortgage payments, things like that. Make sure that it’s still within how comfortable you are. So maybe part of your plan is going to be to save more, to put 20% down even if you could get the deal for 10% with using private money or whatever it may be. So make sure you are comfortable on whatever level you decide to how you’re going to acquire these properties because you can acquire properties really, really fast by using low money, but are you going to be comfortable with that, that you have no equity in these properties even though they’re cash flowing? But what if you have a vacancy or you have a bunch of vacancies and all of a sudden you can’t make these mortgage payments because you are so leveraged and you don’t have any equity to tap into, you can’t sell them because you would actually have to bring money to closing. So as you’re putting together your acquisition plan, make sure you take that into an account, what your comfortable level is.Alright, your second option is your portfolio cashflow. So the goal here is that you reinvest every dollar of net cashflow from your existing doors and use that as fuel for your next acquisition, not money that you get to spend. And again, this is a very consistent theme we’ve heard from our own lives, from folks we’ve interviewed on the podcast that those early days of your portfolio are not for discretionary spending, it’s for helping you buy that next deal. And the cool part is that this starts to snowball. You’re going to use a lot of energy to try and get that first deal. It’s almost like sending a rocket into space. I’m going to make up a number here, but it’s directionally correct, but rockets use like 80% of their fuel just to get out of earth’s atmosphere. That’s where they burn the majority of their fuel.Once they’ve made it out of the atmosphere, then there’s no gravity, you’re flowing, you’re going, everything’s moving smoothly. And real estate investing is much the same way. That first deal, it’s going to use up 80% of your energy, of your reserves, of everything you have. Once you get that first deal, now things start to snowball. The second deal becomes easier. So using the proceeds, the net cashflow from your first deal to help buy your second deal and then your deals number one and two, those proceeds to buy your third deal, you’re saving more money, you’re compounding all these things together, you start to acquire properties faster. So number two, using your portfolio’s cashflow. And number three, and this is a skill that Ash and I have both leveraged to build our portfolios, but it’s using other people’s money. This is where you create the ability to raise capital, private lenders, JV deals, whatever it may be.That way you are no longer capped by your own wallet, but you’re able to tap into the resources of folks that you know who know and trust you to make it a win-win where they’re getting a good return on their investment, you’re able to continue to build your portfolio and get you close to your freedom number. Now one thing I will say, if you are raising money from other folks, if you’re doing it as private money where they’re just funding your rehabs and you’re paying ’em back off when it’s done, that doesn’t really change the math. But say you’re doing equity deals where say me and Ashley buy a deal together. We’re 50 50 partners. Now I need to that 2 75 number I had on my cashflow target per door. Well that number gets cut in half. So instead of me needing 18 now I need an extra deal to get to that same number. So just be cognizant of how partnerships and equity sharing impacts that freedom number that we talked about earlier.Okay? Then step seven is to make sure you account for a vacancy. And really there should be several things that you’re accounting for that isn’t a fixed number. These things can vary. So we call ’em your variable expenses over time. So having that vacancy buffer of 10% is kind of a rule of thumb. And then your cap X expenses, so these are capital expenditures for big ticket items that actually add value most often are depreciated on your tax return and these are not repairs and maintenance, but things that kind of add value to the property or increase the longevity of your property like putting on a new roof siding and replacing your HVAC system. So these expenses hopefully do not come up every year for you, but you need to save for them when the time comes. So you want to make sure it’s accounted for.So you could use five to 10% each month to actually, that’s your number that you know that in the future you will have to use and you’re just going to take that out of your cashflow every month. I think that when you’re trying to determine your percentage for CapEx, you should look at how old the property is, how old are different things in the property. If it’s a very old property and it’s had a septic that’s been there for 20 years, it’s had an HVAC system that’s 10 years hot water tanks, my God, what do they last these days? Five years. So looking at how old the things are in your property, you want to have a higher percentage that you’re accounting for in your numbers. If you’re getting a brand new property or maybe it’s just recently had all new mechanics put into it, then you could do this lower. So you want to make sure that that’s per door that you’re accounting for these percentages.So those are the seven steps to actually use your real estate portfolio to help you get to your freedom number. What we’re going to cover next are the different exit strategies as you start to build your portfolio and how they impact you getting to your feed number faster or slower. First, we’ll take a final break to hear a word from today’s show sponsors. So what we’re going to cover are seven steps you need to follow to figure out the exact number of units you need to help you get to your freedom number. So just really quickly, a few ways you can leverage the equity that’s in your portfolio. There’s the cash out refinance where you’re keeping the door, you get a tax free chunk of cash, but you’re swapping out whatever your original mortgage was for this new mortgage. Maybe that’s great if you locked in an 8% mortgage and you refinancing down to a six, maybe not as great if you locked into three and you’re refinancing up to an eight, right? So depending on where you started cash out refinances could be good.Tony, I actually looked at this in one of my properties that I have a lot of equity in that I bought in 2018 I think it was, and I had purchased it at X amount or whatever and amortized it over 15 years and the mortgage has been paid down slowly. I looked at it though, if I went and refinance and pulled out a cash out refinance, I could pull out a good chunk of money, restart my amortization over another 15 years and my mortgage payment would stay exactly the same. Yes, I’d be paying it longer, but that would give me the availability to not affect what my cashflow is right now. And I could pull out, I think it was like another $50,000 I could pull out right now and my mortgage payment would stay the same. It was just resetting that amortization and that’s like I feel like a car salesman now.They say like, oh, your payment will only go up $1 if you add this warranty in, but yet you’re having to add on five more payments. But I’m just saying as a real estate investor, you’re pulling that cash out. You can use that $50,000 for another investment or something like that. It’s not affecting the cashflow that’s coming in from that property and it’ll still be paid off over time. You’re just extending. So it depends on what you would rather, would you rather the property be paid off sooner or tap into the equity and use it now?And that’s the benefit of the cash out refinance, right, is that it gives you the ability to use some of that equity today. The second option to tap into your equity is a 10 31 exchange. So a 10 31 exchange for folks that aren’t familiar with it is basically the IRS tax code allows you to sell a piece of real estate and defer any capital gains tax if you use all of those proceeds to buy another piece of real estate. So you could do a 10 31 exchange where an Ashley situation, maybe she sells and she gets, call it 70 5K that she uses as a down payment on a bigger property that maybe cash flows even more than the property she has right now. Then that’s another way to tap to your equity. The third way is just to straight up sell the property. Whatever money you have, just sell it.You get a check, typically you do have to pay taxes on that. So I think that’s maybe the downside there. And then the fourth option would be maybe a HELOC or some sort of portfolio line of credit. If you’ve got multiple deals with equity as well, and this works almost like a big credit card where your properties are the collateral and you use it, then you pay it down, you use it, you pay it down. So those are all the different levers you can start to look at as your portfolio grows to free up equity to then buy more deals, which then gets you to your freedom number faster. Now going back to the debate that we kind of started earlier of, is that the right choice? Does it make more sense for me to deleverage and live debt free or does it make more sense for me to leverage and accelerate my growth?The truth is, I don’t know, it’s a very personal choice and it’s a personal decision based on your philosophy, based on your risk profile, based on where you’re at in your life and what do you value more. If you’re a younger single person, then yeah, maybe scaling faster and taking on a little bit more leverage makes more sense. If you are someone who’s closer to retirement than they are to college graduation, then maybe de-leveraging and paying off these deals makes more sense. But just know those are the two different paths you can take to help you get to your freedom number is either, Hey, lemme just pay everything off and I’ve got eight paid off rentals that give me the 47 50 a month I’m solid. Or maybe I’ve got 40 rentals that are leveraged at 90%, but hey, I’m at my freedom number there as well. Either path works fine.I actually had somebody reach out to me the other day that was an investor in the area and he’s looking to sell his portfolio or whatever, but he is very, very conscious of how he’s going to do it because he wants to keep some of them for a little bit and he’s going to do a 10 31 exchange and things like that. But he and offer some seller financing because he has had them all paid off and he chose to have a smaller portfolio and work to pay those ones off and then just continue to have that cashflow that’s coming in. I think I’m a mix of it. I’ve always made sure I have a couple properties that are paid off, but I’m not opposed of doing a cash out refinance. I have three rental properties that have lines of credit on them to tap into that equity that I used to acquire a lot of deals or to pay for the rehabs on things. So you can also mix it where it’s not set in stone to either you’re working towards paying off your property or you’re just going to continue to to grow your property and expand. And I think it also depends on really the numbers. If you’re going to do a cash out refinance, is that cash more valuable in another deal where it’s going to make you more money in the long run?Well, Ricky, those are the steps that we’d encourage you to follow to find your freedom number. Now, I know Ash and I, it’s what been 40 minutes? We kind of blew through a lot of these topics, but the goal here was to give you the overview. We’ve got a lot of other content on the podcast, YouTube, or wherever you want to listen that goes in depth on some of the strategies that we talked about. But at a high level, I think the goal and the purpose of today’s episode is to force you to think a little bit more strategically about your plan as a real estate investor. And if you can start with the end in mind, it becomes easier to create a plan that works and actually gets you closer towards that goal. Because we’ve seen a lot of investors who spin their wheels a lot of activity, but they’re not actually close to the goal that they have. So start with the end in mind, then work backwards, and we hope this episode helps get you there.Thank you guys so much for joining us today. I’m Ashley, and he’s Tony. And make sure you’re following us at a BiggerPockets rookie on Instagram. Thanks so much for watching. We’ll see you guys next time.