Determine (and Reduce!) Your Rat Race Number

Remember the “ONE thing” for becoming financially free with real estate?

That’s right … it’s your first deal 먹튀검증.

Because the Law of the First Deal states that if you do your first multifamily deal (of any size), you will become financially free in three to five years. But you’ll never get there if you don’t know how to take the steps to get to that first deal. That’s why I developed the Financial Freedom Blueprint, the most comprehensive and unique system for showing you step-by-step how to become (permanently) financially free with real estate in the next three to five years.

The 7-step Financial Freedom Blueprint takes you on a journey from properly setting your goals, to getting started, to closing your first deal, to becoming financially free. The step-by-step roadmap I’m about to share with you is what has worked for me and hundreds of others who have come before you, and it will work for you. Let’s get started with the first step, which is to determine (and reduce) your rat race number.

In his book Rich Dad Poor Dad, Robert Kiyosaki defines financial freedom as the point at which you can cover your living expenses with passive income. I call this the “Rat Race Number.” Once you’ve achieved that, you are financially free and can do whatever you want?like quit your job, travel more, spend time with family, pursue non-profit aspirations, etc.

There are two ways to achieve your Rat Race Number:

Increase your passive income, and

Decrease your expenses.

Let’s first figure out how to calculate your Rat Race Number so that we can be clear about our goals.

The process of determining your Rat Race Number is to figure out what you’re CURRENTLY spending and what you could do to decrease those expenses.

How Much Are You Currently Spending?

If you’re not tracking your spending, then start doing it right now. It’s at the core of sound personal financial management. I’ve been doing this every single month for many years.

A great tool to use is Mint.com. It’s an online tool and mobile app that makes it extremely easy to track your spending and prevent you from exceeding your budget. You can also create a spreadsheet to track your expenses.

In order to establish your average monthly spending, I suggest tracking three months of expenses.

How Can You Spend Less?

Next, look at each expense category and figure out what you could do without.

This is a really painful step, I know.

We love the way our life is! We’re used to the French vanilla caramel macchiato each day. We love our 1,800+ cable channels. We love our brand-new cars and houses. I get it. I love ’em, too.

But think about this: How badly do you want to be financially free? If you really want that, then could you do without some of the things you’ve grown accustomed to?

If you need help with this, I highly recommend Dave Ramsey’s Financial Peace University. This course helps you determine your expenses, create a budget, pay off your debt, and save for the future. You can complete an online course or join a group near you, and it’s very affordable.

Think about it this way: A reasonable rental property should put at least $100 per month in your pocket after all expenses. So for every $100 you save per month, it’s about the same as purchasing one rental property. If you could shave $1,000 off per month, it’s like doing your first 10-unit apartment building!

So don’t skip this step. Really ask yourself what expenses you can do without and what changes you could make (and tolerate!) to save money. The lower your Rat Race Number, the faster you’ll become financially free.

I’m not just telling you to do something without knowing what it’s like.

I’ve been through this myself, from tweaking my spending to actually downsizing my house. It was one of the hardest things I’ve ever had to do.

We had our dream home, a six-bedroom house on nearly an acre in one of the nicest areas in Northern Virginia. I had a good job at my software company and was flush with money from the IPO.

But after I decided to quit and become a full-time entrepreneur, we struggled financially for a number of years, and I felt like we needed to downsize to make ends meet. My wife wasn’t on board because she loved that house. After some time, she agreed that for me to continue working from home, we should sell the house. We decided to move farther into the suburbs, which would substantially reduce our housing costs.

That also meant we had to tell our friends, many of whom didn’t understand why we were doing what we were doing. We had to tell the kids that they could no longer play with their neighborhood friends.

It was a pretty dark time for the family.

But I can tell you that this move was blessed. We connected with an even better community of friends, both for us and the kids. We cut our housing costs nearly in half (it was like buying ten rental houses!), and it allowed me to continue working from home so I could attend my kids’ events during the day.

Looking back on that time, I’m not sure what would have happened if we hadn’t had the courage to downsize. I think the expenses would have forced me to go back and get a job, and that’s not what we wanted. I wanted to be financially free?not for a year or two, but permanently. My high living expenses were making that nearly impossible.

So I highly encourage you to sit down with your spouse and examine your living expenses.

What are you prepared to do to reach your goals?

What’s Your Rat Race Number?

Let’s assume you recorded your ACTUAL spending and made some changes to reduce your monthly expenses by 20% each month.

And let’s say you determined that you could live with $5,000 per month if you really tightened your belt. That’s $60,000 per year.

You might be thinking, Yes, Michael, but what about taxes?

The nice thing about investing in real estate is that you’ll likely be paying substantially less taxes (possibly none at all) on your apartment building income. That’s because the IRS allows you to depreciate the value of the building. This depreciation is counted as an expense on your tax return (which reduces your taxable income) even though it’s not an actual expense that affects your cash flow.

Taxation of real estate is beyond the scope of this book, but suffice it to say that your taxes on real estate income are substantially less than with your W-2 income, and chances are, you might not be paying any taxes on that income. Check with your tax advisor.

Okay, I hope you get my point about real estate taxes. For the purpose of this exercise, let’s assume that you need to cover $5,000 in living expenses.

How Will You Get There?

For many of you, this may be the first time you’re doing this exercise. It’s eye-opening, huh?

Once you have your Rat Race Number, the next question is: How will you get there?

You now know that you need $5,000 in passive income each month.

What real estate strategy will get you there the quickest?

If you’re flipping houses right now, then you know that there’s hardly anything passive about that (I flipped over thirty houses, so I know a little bit about this!). So flipping houses is NOT going to be the kind of activity that generates passive income.

What about building a rental portfolio? This certainly qualifies as a passive income activity, so put a check mark there.

How many houses would you need to get to $5,000 in monthly income? This depends on your market and how good of an investor you are. Let’s say you’re consistently able to get $200 per month in cash flow (after expenses, including vacancies and repairs!) from your rental houses.

That’s great!

But at $200 per month in passive income, you would need twenty-five houses to retire. That’s a lot of houses. Do you have the capital for that? How long would it take for you to build such a portfolio? Do you even want that many houses? Have you ever thought about this?

Don’t Skip this Step!

You might be tempted to skirt around this step because it is painful and potentially life altering. But Step #1 of the Financial Freedom Blueprint is critical because it can accelerate your financial goals, often substantially. As you might know from playing the CASHFLOW 101 game, getting out of the rat race as a high-income earner (like an attorney) is much more difficult than if you’re a janitor. Even though the attorney has a higher income, his expenses are also much higher, and it takes longer to cover those expenses with passive income.

It would have taken me a LOT longer to become financially free had I not downsized my house and started living on a budget.

So don’t skip this step in your quest for financial freedom. As I said before, every $100 you save is like buying one rental property.

If you determined that you needed one hundred units to replace your $10,000 monthly income and were able to reduce your living expenses by $2,000, then it’s as if you just bought twenty units. It’s the “easiest” first deal you can do because you have the most control over it. And suddenly you’re 20% toward achieving your financial goal.

So go enroll in Dave Ramsey’s Financial Peace University right now! Reducing your living expenses and building your passive income with apartments is a powerful combination.

Now that we’ve covered this very important first step of the Financial Freedom Blueprint, we can proceed with the next step, which is to complete your “Vision Map” so that you know where you’re going and how to get there.