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Escaping the (Legal) Rat Race through Early-Stage Real Estate Investing

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The “Rat Race”

The term “rat race” was popularized in the bestseller “Rich Dad Poor Dad” and refers to an exhausting, repetitive lifestyle that leaves no time for relaxation or enjoyment. It involves subjecting one’s self to a time-consuming job, saddling one’s self with heavy debts, and forcing one’s self to continue working day in and day out at that same job. Individuals in the rat race assume that working at the same job will be better and more profitable in the long term.

The truth is, lawyers are overwhelmingly in the “rat race.” According to the National Association for Law Placement:

  • the average number of billable hours required for a first-year associate is 1,892 hours.
  • for firms with more than 700 attorneys, the average is 1,930 billable hours.
  • to achieve 1,800 billable hours, an associate would need to spend a total of 2,430 hours “at work” (non-billable activities)
  • to achieve 2,200 billable hours (and hit the firm bonus), an associate attorney would need to spend a total of 3,058 hours “at work.

For those reasons, lawyers generally “work to live” rather than “live to work.” These long hours impinge on other personal activities and cause undue stress. This post aims to offer a way out of the “rat race” and focuses on the freedoms real estate investing offers.

Getting Started

While there are a number of ways real estate investing can provide passive income (and set attorneys on a course for financial independence) the focus of this blog post is on early-stage investment. After all, many first-year associates do not come out of law school as skilled real estate investors. Here are three ways young attorneys can get into the real estate game:

  1. Consider House Hacking-house hacking is the easiest way to buy your first rental property. In the bargain, you get to live for free. The traditional house hacking concept is straightforward: you buy a small multifamily (2-4 units), move into one of the units, and rent out the others. Your neighboring tenants’ rent covers your mortgage and other costs. This does require a traditional downpayment, which can be as low as 3.5% (FHA loan) or in some cases 5% (conventional).
  2. The BRRRR Method-BRRRR stands for buy, renovate, rent, refinance, repeat. In this method, you buy a fixer-upper with a purchase-rehab loan, which does involve a down payment. You then renovate it, refinance the property and pull your original cash back out. This method is better suited to more experienced investors because there is a higher risk that comes with leverage. That said, pulling the original cash out allows you to use it for another property.
  3. Partners-partners are friends and family seen as possible sources of money for a down payment. For beginners with little or not enough money for a down payment, chances are you know someone who’s looking to diversify and invest some money in real estate. Partnering on a project or rental could be that first foray into real estate investing. Just read the success story of Jonathan Twombly, who left his New York job as an attorney to pursue real estate: https://www.biggerpockets.com/member-blogs/5063/48335-from-miserable-lawyer-to-full-time-real-estate-investor-how-i-did-it

Passive Rental Property Numbers 

Here is a brief example of a passive rental property. :

  • Property: quadplex with 5% down ($20,500)
  • Purchase Price: $410,000
  • Mortgage, PMI, Escrow, Taxes, Insurance: $2500/mo.
  • Unit 1 Income: $1500
  • Unit 2 Income: $1500
  • Unit 3 Income: $1500
  • Unit 4 Income: $0 (this is the unit you live in)

The rental income from the quadplex is $4500/mo, and the mortgage is $2500/mo, leaving you a surplus of $2000/mo. With this example, you not only live for free but also generate an additional $24,000 in income. For that reason, house hacking–among other investments–is an ideal first step to financial independence.

Sources:

  • Kiyosaki, Robert T. “Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money – That the Poor and Middle Class Do Not!” 1st Plata Publishing ed. Scottsdale, AZ: Plata Pub, 2011.
  • “10 Ways to Escape the Rat Race Faster with Real Estate investing.” Epic Real Estate
  • Liz Brumer-Smith. “6 Ways of Buying Rental Property with No Money Down.”
  • Baruch Silvermann. “Beginner’s Guide to Real Estate Investing.” Dec. 21, 2019.
  • “BiggerPockets” Podcast
  • Jaliz Maldonado. “The First-Year Associate’s Guide to Managing Billable Hours.”
  • https://www.youtube.com/watch?v=naZAknwNgkY