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My "Rich Dad, Poor Dad" lesson on New Year Eve: How one family with $70K annual income owns five houses in the San Francisco Bay Area

January 8th, 2010 · No Comments

Yesterday I wrote about the pressure of living in the bay area due to high cost of living. Today, I’m going to write about a fascinating story of how one family made it all worked out although their household income was less than $70K.

Uncle John is a long-time family friend. On New Year eve, Uncle John’s family came to our folks’ house for dinner.

As we were finishing eating our dinner, Uncle John started chatting to me. He hadn’t seen me for a while since I’ve been living in Seattle. We had a lot to catch up.

Uncle John retired a year ago at the age of 62. He had worked for the United States Postal Service for almost two decades. He told me that although he was eligible for receiving social security checks, he decided not to take it now because there was a penalty for people to take out social security before reaching age of 65.

He has a very active life style after he retired. He takes two international trips a year. He has taken several cruise vacations. He also does a lot of traveling locally. He is taking classes at the local community college. Let’s put this way: he has a great retirement life. He looks great.

His wife is still working because she loves her work, but her job is not very well paid, neither. So, I raised the question to Uncle John: "Now, you retired, but you told me that you’re not taking any social security benefit. How do you support yourself with your reduced household income?"

Uncle smiled. And he told me his story. I’ve known him for many years. But, this was the first time I got a chance to hear his wisdom with respect to personal finance. I felt that I was getting my "rich dad, poor dad" moment.

Uncle John immigrated to the United States when he was in his late 30s. Coming from a very humble background, he had only three years of formal education. A voracious reader, he learned pretty much everything on his own.

When he moved the United States, he had a wife and an infant to support. He spoke no English. It was incredibly difficult. The only job he could get was in the construction industry, working for a subcontractor to build houses. The work was low-pay, physically demanding, and dangerous.

He persevered. He took night classes to learn English while he worked full-time. He started to pick up new skills at work. Once his English got better, he quitted his job and joined another subcontractor with better pay.

He told me that he was paying rent at the time, and he hated to pay rent. He felt that the rent money he paid was gone forever. He couldn’t get a penny back. He was determined to buy a house.

He was very frugal. Three years after he came to the United States, he bought his first house. It was a very small house in a good neighborhood. It was the mid 1980’s. The housing price in the bay area was still relatively reasonable. But, still, the mortgage payment was a stretch for Uncle John. He told me that he felt he was still fairly young at the time, so he was willing to take the risk. He made sure that he would have enough saving for 3-month of mortgage payment in case he lost his job.

Uncle was also worried that as he grew older, he wouldn’t be able to continue to do the physical work. He wanted to make every single dollar he had to work for him.

Two years after he bought his first house, he bought his second house. He used his first house as collateral, borrowed money to make down payment on his second house. Again, it’s a small, two-bed room house in a good neighborhood. Before he bought his second house, he researched the local rental market. He figured that if he rented the house out, the rental would cover most of the monthly mortgage payment.

Soon after he bought his second house, Uncle John had a freaky accident. He fell while he was working on the roof at a construction site, and broke several bones. He eventually recovered, but he couldn’t continue to work in construction.

He was in his 40’s. He enrolled in a community college course, he studied books, and he passed the postal worker exam. An entry-level postal worker job wasn’t paid well, but it provided stability to Uncle John.

The accident didn’t slow Uncle John down. Once he got the postal worker job, he started to scouting for houses again. With the same strategy, he bought 3 more houses over the next 8 years. Initially, rental payments covered most of the mortgage payments. After a few years, as the rent went up, he started to make a small profit from rentals.

As he approached his retirement age, he lived in one house, and received positive cash flow from four rental properties.

Uncle John told me that assuming he can live another 20 to 30 years, he plans to sell one house every few years, which would net him a good chunk of money to support his retirement. He would be able to live comfortably with or without social security.

Finally, he said to me: let me give you some advice, young man.

  • You’re young. You must plan ahead for retirement.
  • If you know how to play the stock market, go for it. But, in my case, I feel real estate is more real. It’s hard asset. Over a long time, it’ll appreciate.
  • You need to make money work for you. If I have your salary, I’ll definitely own more than one house. 
  • You need to have regular, passive income to have a good retirement. Social security only pays you $2000. It probably will not even be there when you retire. 

I want to share with you a few of my own thoughts after I talked to Uncle John.

I totally agree with Uncle John’s point of making money work for you. It’s important to generate passive income.

However, I do think there is a luck factor in Uncle John’s success. When he purchased his first two houses, the gap between monthly mortgage payment and monthly rent in the bay area housing market was small. Therefore, he was able to cover his mortgage by collecting rent payments.

It is much harder to do that today in the bay area. Houses are  so expensive that there is no way to cover the mortgage by collecting rents.

I raised the question to Uncle John. He said that it’s true that the housing price is getting too high in the bay area. But, he would buy houses in cheaper areas in California such as Tracy, Sacramento, etc. Disclaimer: I don’t have specific knowledge about the real estate markets in areas such as Tracy, Sacramento, etc. So, please don’t take this example literally.

But, I believe the lessons still hold: make money work for you, generate passive income stream, invest wisely.

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Tags: Multiple Income Stream · Personal Finance

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