Much of what defines success in personal finance comes down to turning little numbers into big numbers and vice versa. In 2019, Josh and Ali, known at the “FI Couple” (short for “financial independence”), were staring down a very big number: $102,000 worth of student debt and car loans.
Three years later, in an effort to become “work-optional and location-independent,” the couple, who prefer to go by their first names, has reduced that figure to zero. The pair owe their drastic debt reduction to a mix of clever budgeting and aggressive investing in real estate.
Below, they share the strategies that helped them climb out of debt and onto the road to financial independence and offer advice on how to emulate their process.
When Ali and Josh embarked on their debt payoff plan, they realized they needed to drastically cut what they were spending, and it soon become clear that cutting the proverbial lattes and avocado toast wasn’t going to do the trick.
In came the shovel in the form of “house hacking” — a strategy that involves renting out portions of your living space to knock down your housing costs. Between income from their jobs, leftover funds from an old Roth IRA, and cash from wedding gifts, they saved $14,000 to put toward a 5% down payment on a duplex. The move supercharged their savings rate. Rent from the upstairs tenant covered $925 of the couple’s $1,384-a-month mortgage.
From that point forward, the couple employed a budgeting system which broke the year down into quarterly “sprints,” with the couple putting all of their excess cash toward paying down debt and saving for more rental properties. Which each of them working while also collecting rent to subsidize their housing costs, the couple were saving 60% of their income to use for those sprints.
In September 2020, they bought a second two-unit rental property and moved into the bottom unit. “After accounting for all operating expenses at property 1, the cash flow from that property covers our portion of the mortgage at property No. 2,” Josh told Grow in November. “That allows us to now have $0 per month rent.”
With no income going toward rent, Josh and Ali were able to turn their short-term focus toward their remaining student loan and auto debt, which in November 2021 stood at $32,000. “I told Josh, ‘I refuse to buy another rental property until we’ve paid off our debt,’ which I think put a little fire under his butt,” Ali says. The pair made their final payment, a $25,000 chunk, in January. “And then two seconds later, he’s like, ‘OK, so are you ready to buy more rentals?'”
The couple are currently under contract to purchase a three-family rental property for which they’re paying $190,000. Once it’s rented out, they say, the property should generate $725 per month in excess cash flow — money they can put toward their next financial goal. “When we do purchase a starter home to raise a family in, we didn’t want to walk into that home with any consumer debt, especially student debt,” Josh says. “We also want to have the cash flow from our rentals to be able to cover that monthly mortgage payment, so that way we can continue to keep our cost of living really low.”
“Our goal by [the end of] 2022 or early 2023 is to get that single-family home where the mortgage is paid for by the rentals,” Ali says. “Essentially we’d still be living for free.”
Looking ahead, the couple plans to buy a few more rental properties (“Our sweet spot is probably around 16 units,” Josh says) with the goal of having cashflow from rental income cover the pair’s entire cost of living. Over the long-term, the couple hopes to eventually earn $80,000 or more per year in rental income.
The mechanics of owning a portfolio of rental properties almost works in the reverse direction from owning, say, a 401(k) account which you hope grows at a compounding rate, Josh notes. “Rental are worth a lot but you have debt against them,” he says. “Over time, the plan is to have a ‘debt avalanche’ where we’re paying down the mortgages, which in turn boosts the cash flow from those assets.”
To the outside observer, the strategy of buying and renting out houses can seem deceptively simple. But anyone who has shopped for properties in recent years would likely tell you that it’s not exactly a buyer’s market at the moment.
“It’s definitely a scary housing market right now, and especially for first-time homebuyers, I can imagine it’s overwhelming,” Ali says. “I thought it was overwhelming in 2018, and it’s a million times worse now.”
But Ali draws a distinction between a family looking for a place to live and investors, like she and her husband, looking to make a profit. “We are not emotionally attached to these properties. We buy on fundamentals. So as long as the numbers make sense and fit our business model, we’ll go forward on it,” she says.
The couple’s top advice for finding deals in a competitive housing market: Network. “These deals are all off-market. They’re not listed in the MLS,” she says. “We’re about to buy a triplex, but you just see the tip of iceberg. It’s years of networking and consistently talking to people about what we’re doing. We made a connection with a local landscaper three years ago and nurtured that relationship. He brought us a deal because people know who we are and what we’re looking to invest in.”
And if you want to follow in their footsteps, the pair also stress the importance of working with a team of trusted financial professionals who have experience working with real estate investors. “Whether it’s a lawyer, inspector, agent — whatever it is, they need to be experienced with investors,” Ali says. “Our lawyer only works with investors. He’s a real estate attorney.”
Talking with the likes of real estate lawyers may sound like boring business, but it’s the best way to avoid critical mistakes, Ali adds. “The critical error people make is walking outside their circle of competence,” she says. “People see on social media or HGTV that there are these sexy real estate shows where people can flip houses and make a ton of money. But not everyone should be investing in real estate. You have to understand what you’re getting yourself into, do your due diligence, and educate yourself.”