September 24, 2020

JF2214: The Truth About FIRE | Actively Passive Investing Show With Theo Hicks & Travis Watts


Today Theo and Travis will be sharing the truth about F.I.R.E, financial independence and retire early. The idea behind FIRE is to focus on producing as much money as you can possibly generate while living very frugal for a number of years so you can eventually have enough income to be financially independent and to have more of a flexible lifestyle.  

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting Thank you for listening and I will talk to you tomorrow.


Theo Hicks: Hello Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks and we’re back for another edition of the actively passive investing show with me and Travis watts.

Travis, how are you doing today?

Travis Watts: Theo, I’m doing great. I’m super excited. This is one of my favorite topics and I’ve never had a chance to dive into it deeply. Hopefully, we can do that today.

Theo Hicks: Yes. This topic that Travis is talking about is the F.I.R.E Movement. F.I.R.E, which is an acronym that stands for Financial Independence and Retire Early.

I was talking to Travis a little bit before the show that I’ve heard of this movement before, I’ve seen a few trailers for documentaries, but I am by no means an expert on this topic. It’ll be mostly Travis talking and maybe I’ll ask him some follow-up questions to learn more.

Travis, kind of take it away. What is the F.I.R.E Movement? You said it’s one of your favorite topics, so maybe tell us why it’s your favorite topic, how you learned about it, things like that.

Travis Watts: I think I was just like you, Theo, a few years back and I had heard that acronym, really couldn’t tell you anything about it, didn’t understand it.

Here’s the long and short of it. I was raised by two very frugal parents. I think we’ve talked about that before. They taught me very well one side of the money equation, which is the saving and budgeting side; nothing about investing, nothing about real estate, but very thankful for that. I’ve always had a good discipline there.

I was raised that way, continued that throughout my life; just frugality, I guess we could coin the term as that. Then all of a sudden, I started feeling like I was the only one out there doing this. It was kind of a lonely existence. Then you start second-guessing it, thinking, “Is this kind of a stupid thing to do, or does anyone else feel this way about money?”

Then all sudden, I discovered the F.I.R.E Movement, which I wouldn’t say it’s a huge community, but it’s a growing community of mostly millennials. I would say people in their 20s, 30s, and 40s, for the most part.

The idea is this, a lot of people get this wrong when they first hear about the F.I.R.E Movement, and the whole retire early thing, a lot of heat gets driven there. The movement is really about designing a life and a lifestyle that fits you, that complements you. It’s searching for things that bring you happiness, joy, fulfillment, excitement, and then creating a life around that.

Now, I think a lot of people get caught up in the financial side of it, which we’ll talk about in just a minute. But it’s this idea that, hey, maybe I have a corporate job, and I make good money, I make six figures or whatever. I’m an IT guy, an engineer, what have you. Well, I may like that to an extent, but realistically, could I see myself doing that from today or in my early 20s, all the way through my late 60s, to get to so-called retirement?

Well, a lot of people are feeling like, “No, that’s just too long. That’s too much of a commitment.” It’s this idea that you work aggressively to earn income early on, as early as you can, make as much money as you can using your highest and best skills, talents, credentials, then you’re going to live very frugally. You’re going to live on just basically as little of that income as possible for a period of time; not forever, but maybe five or 10 years, something like that. It’s different for everyone.

Then here’s the most important element of that. You’re not just going to save that money and throw it under a mattress. You have to invest that money into assets. Now, F.I.R.E Movement is all about stocks and index funds, but what I want to talk about today is how the F.I.R.E Movement can relate to real estate and how I’ve done that. So earn as much as you can, live on as little of that as possible, invest the difference into assets.

Number four is just avoiding bad debt. A lot of people start out with bad debt, maybe it’s student loan debt, credit card debt. Get out of it, and then if you don’t have it, don’t get it. Just stay out. That’s one of the biggest things that detracts people from starting their investing journey.

By doing that, it’s incredible. But you see people all around; there are podcasts dedicated to this, as you mentioned, documentaries, books, there are conferences now around this topic, and you genuinely see people in their 30s retiring. What I mean by that is not going to the golf course and moving into a 55 plus community and these kinds of things, but it’s financial independence. Let’s just focus on the first half of that acronym. That’s what it’s about. It’s about financial independence, it’s about having enough income; as we talked about on our previous podcast, how much is enough? It’s just having enough to have lifestyle flexibility; if you want to travel more, if you want to be more charitable, if you want to spend more time with your family, if you want to go ride around in an RV for six months. You just have more options on lifestyle choices.

That’s a little bit about what the movement is. What I really want to dive into though, is how most people view the F.I.R.E Movement as it pertains to stocks and index funds, but how I think you could shift that over to the real estate. I think that can be very impactful, and that’s what I’ve done. That’s kind of what I want to pick up on there.

Theo Hicks: Yeah, sure. Let’s kind of lay the groundwork, maybe the first talk about what people usually do. You said that really what will remain the same is the saving of the money aspect. We talked about this before, but knowing what your number is, what’s enough based off of your lifestyle, but the major difference is going to be what you’re putting that money into, and then based off of that, when you’ll actually be able to achieve that enough number. Maybe kind of walk us through what people traditionally do in the F.I.R.E Movement, as you mentioned, with stocks and index funds, to maybe kind of give us like a high-level example, too.

Travis Watts: I was getting reeled into this movement. I was getting really excited. I was so happy to see other people are thinking like I think, until it came to this aspect, which is the one thing I really disagree on many levels.

This is how it works in the traditional sense; they use what’s called the 4% rule. The 4% rule is a withdrawal method off of your retirement accounts, whether that be a brokerage account, or actual retirement, IRAs, and Roths and 401K’s.

What I mean is this, they say, “Okay, let’s say you need 50,000 per year in income. The way the 4% rule would work is that you need $1.25 million put into index funds. That’s what 90% plus in this movement are doing, are index funds; something like VTSAX, Vanguard Total Stock Market Index Fund, for example. Why Vanguard? Low fees. Why that particular one? It’s a wide stock market index, so they claim you have some diversification that way.

If you have $1.25 million put into an index fund like that, what they say is, well, historically—I’m sure everyone listening has heard this before. But historically, over the last 50 or 100 years, whatever, the stock market has returned 8%, annualized. Obviously, some years being 20% or 30%. Some years being negative 40%. But we’re just trying to find the middle ground here and the averages, and it’s about 8%, give or take, depending on what you read, and how you interpret that.

The idea is, if you’re pulling 4% off your accounts per year to get $50,000 out, and it’s returning eight on average, that you’ve left yourself in their conservative buffer; that buffer can be used for inflation, or the ups and downs, or just a weird market, and we’ve never seen this kind of thing happen before, whatever. It’s just a safety margin.

In theory, you’re infinitely wealthy; if all you ever needed was 50,000 a year, you had 1.25 invested in something that historically does 8%. That’s how it works. It’s kind of a mindless thing to do. You have one strategy, you don’t really need to learn anything else, every dollar that you can invest, you just do and you just do that for five or 10 years aggressively, or whenever you can hit that number, and then there you go, you’re done. That’s how the F.I.R.E Movement works.

Theo Hicks: Just a follow-up real quick… Essentially, they’re just going to a bank or some broker, and then as they’re making their money, they’re giving it to them and saying, “Hey, invest this in this index fund.” They’re kind of doing that every quarter, every year or they’re just doing it once they’ve hit that number?

Travis Watts: Good question. Due to fees and financial advisors, and all this, they’re circumventing the whole system and they’re saying, “Hey, it’s free to open a brokerage account or a retirement account at Vanguard or Fidelity or Charles Schwab. They’re going to do that; no cost. Then they’re going to go into a low-cost index fund. So not like a mutual fund that usually has a higher asset under management type of fee. I think VTSAX are the lowest fee; you could probably look that up as I’m talking, but that’s why so many people in the F.I.R.E Movement choose it. You’re not using a financial advisor.

The theory is nobody, technically, statistically can outperform the stock market. Yes, people do, but it’s not a sustainable long-term approach. It’s not like someone outperforms it every single year for the rest of their life. So why pay somebody extra fees to basically match or underperform what the index funds do anyway? That’s the theory. That’s the philosophy. That’s the mindset. That’s the strategy.

Theo Hicks: Got it.

Travis Watts: I’m thinking about that. I’m thinking, “Wow, 1.25, 4%. Okay,” and I’m thinking about my real estate holdings. This happened several years ago. I’m thinking, “Well, when I buy a piece of real estate, what do I see as conservative cash flow?”, which is a completely different mindset; cash flow versus equity. I’m not banking on things to go up in value. I’m just saying, what gets collected out of rents, and other income-generating things on the property.

Well, I came up with 8%. 8%, to me, was kind of a conservative number, and let’s just forget about the appreciation side of the real estate, the fact that it could go up just because of inflation, and that’s what happens, or forced appreciation, you’re making it better… But just take that completely out. Let’s just look at cash flow.

If I put $100,000 into a single-family home or a private placement, or syndication or what have you, my principle is locked in there, that’s what allowed me to invest or buy the property, but the cash flow is what I could potentially live on. That’s what I do live on. I thought 8% to me is pretty conservative, as the F.I.R.E Movement sees 4% being conservative for the stock market. I thought, “Well, then if that’s true, you can actually get to where you want to go twice as fast. You could have $625,000 invested at 8% cash flow in real estate, instead of $1.25 million at 4% in the stocks.”

If you look at the yield on VTSAX or S&P index, it’s so low. It’s not a cash flow play. It’s 1.6% or something, depending on when you check it out. It’s really hard to live on that kind of yield for cash flow.

This is just a big mindset shift, and the deeper I got into this, the more I found out that just hardly anybody in this movement talking about real estate. I thought that was the craziest thing, because unfortunately for so many of these people, they could get there so much quicker, with half as much invested.

My wife and I, I don’t know if it’s earlier this year or last year, we went out to one of the biggest advocates for this movement, is Pete, they call him Mr. Money Mustache, and he’s a big blogger, things like that in the F.I.R.E Movement.

We went out to Longmont and we met with him. He has a co-working space, a bunch of F.I.R.E Movement like-minded people, they call him Mustachians, they do this goofy little mustache thing.

I was asking him, I said, “Pete, this index funds stuff,” I said, “everyone’s doing it.” And I said, “I’m kind of a real estate guy at heart.” I said, “Do you own any real estate or whatever?” He said, “You know, Travis, the index fund thing, it’s just worked historically. It just works for me. It works. Why change something that’s working?” This is, of course, before COVID, and as the great bull run has been happening and stuff, and I just thought, that’s interesting.

It led me to think that there’s probably a lot of people in this movement that just aren’t in investor mindsets, and rightfully so. Not everybody has the time, energy, effort, or interest to become an investor mindset or an entrepreneur or whatnot, and that’s fine. But I think that’s what gets so many people to buy into this concept, is “All I have to do is have a brokerage account and an index fund, and that’s all I ever have to do for the rest of my life,” and that’s pretty simple and that’s some peace of mind there.

But anyway, just wanted to point out that real estate’s a great asset for cash flow. If you’re looking at it through the eyes of cash flow, and not through equity, for those interested in this movement or pursuing this journey yourselves, that’s something to definitely consider. You may not go fully in like I am with real estate, but at least maybe having a few rental properties or something; it could really help that equation out.

Theo Hicks: Yeah, you have a really good point there, because one thing that I first thought about when we were talking about the index funds is – okay, so I follow the 4% rule, the example you gave us, 50 grand a year, so I need to invest $1.25 million. But at that point, really, I have my account with $1.25 million in it, and then I’m living off every single dollar generated by that account is me using it, and so that’s gone within the year, and I’m using the next 50. It’s kind of always 50. Whereas for real estate, as you mentioned, you’re kind of just focusing more on the cash flow and how you can get there twice as fast. But if you’re investing in a five year or 10 years syndication, then again, depending on what type of syndication it is – because sometimes you are just participating in the cash flow… Participating in the cash flow and the upside. Let’s say you invest 100 grand, you’re making 8%. And then you can obviously live off of that 8%, $8,000 a year, but at the end of five years, you’re going to get 60 grand. So now you’ve got 160 grand, and then you can pull that 60 grand out and do something fun with it, or you could take 160 grand invest it in something else five years later, and then make more cash flow, and then either live off of that still or reinvest that more and more, whereas I don’t think you can do that with these index funds. There’s no equity play here, it is just cash flow, right? Or is there an equity play?

Travis Watts: Yes. For an index fund, what you’re banking on is not cash flow at all. You’re just hoping that on average, that account balance goes up 8% and that you’re just taking four out of it, so you’ve got a little buffer in there, but inflation is a real thing, so that 4% isn’t just a gain, you’re kind of [unintelligible [00:18:28].03] there. That’s the good thing about real estate, it often keeps up just automatically with inflation.

We could make the case on and on, you and I, for real estate, with the tax benefits and the leverage that you can use and this, that and the other and we could go on and on. But I just want to paint the simple example of, if you’re trying to live off of something, it doesn’t sit well with me to sell off my nest egg, to have an account balance of a million bucks and just say, “I’m going to start selling it and then living on it.” I don’t like that concept.

With cash flow, it’s not that way. That 100k I put into the property is still there, and then hopefully the equity and appreciation come in too, but just again, forget about that altogether. I’m just talking about the cash flow. It’s a better asset, in my opinion, for retiring on, because we all have to come around to needing some income and I think real estate is one of the best asset classes to produce income.

Theo Hicks: Do people ever do life insurance with this F.I.R.E Movement?

Travis Watts: Like the whole life, you mean, and kind of doing that the infinite strategy and whatnot?

Theo Hicks: Yeah.

Travis Watts: Yeah, yeah. Some do, but I’m telling you, my theory—I need to do more research on this. I’m not an expert either. My theory though is that most people in this movement are not investor mindsets. It’s just, “Do this one thing, and then you’re good for life.” That’s kind of like insurance too, right? Open up this whole life policy and just dump everything you’ve got into it.

You have to play to your strengths, obviously. I’m not suggesting real estate is right for everybody, but there’s ways to do real estate passively; even if you were to do the stock thing. There’s REITs, there’s Real Estate Investment Trust, there’s high dividend yield stocks. There’s ways to create cash flow in that strategy, besides just doing an index fund with a 1.6% yield on it.

But that would be my suggestion, is focus on cash flow, versus the buy, hold and pray that the stock market just goes up forever.

Theo Hick: That’s actually a great opportunity to plug the book we’re working on, the Passive Investing Book, because we have a full section in the book where we go over every single passive investment you could think of – index funds, mutual funds, REITs, [unintelligible [00:20:33].14] regular stocks, private equity… And kind of just comparing all of those to one another in regards to risk, returns, feasibility, various other fees involved, just to say “Hey, there’s not one that’s better or objectively the best, it’s just “What do you want to get out of this?” And then based off of – again, if you want a low fee type of a situation, then you can do the Vanguard thing. If you want higher returns, you can do something else. You haven’t said any of the funds that we don’t have in there, so that’s good. I think we have everything covered.

Theo Hicks: One thing I did want to ask about this – so you mentioned that the traditional F.I.R.E participant would place their money and open up their own brokerage account, and they’d just kind of dump money in there, and then it’d be set it and forget it. With apartment syndications there is some more time that goes into it; and so for you, how much time are you spending on just your passive real estate investments, compared to your other investments you’re doing, or whatnot…

Travis Watts: Well, we call it the actively passive show… It is active to a point, but it’s fully intentional, a; and it’s, b, because I love it. It’s my interest. It’s my passion. This is what I like to research and learn. If it’s a Saturday or Sunday, and I’m sitting at home by myself, what am I doing? Probably a documentary on financial stuff or reading a book on that. I fully recognize that’s not most people, I totally get it. But for me, that’s why this topic is even coming up. That’s why not a lot of people are talking about the real estate side of the F.I.R.E Movement. Because everyone just wants the one thing, “Let me just do one thing, and then be done with it. Take the diet pill and lose 30 pounds. I don’t want to actually work out or know about diets.” That’s where it comes from.

I spend realistically, not a lot of time. I might seriously vet maybe one deal per week. That doesn’t mean I’m investing in that deal. I get sent, let’s say, four deals a week from different syndication groups, or whatever, and I pick one. I’ll dive deep, just mainly for the education side of it in, and invest maybe in one a month or one every other month or something like that.

What does that equate to? I don’t know, two hours a week or something like that, not a lot of time. It is mostly passive, which is what I preach and what I advocate. You’re already working 40, 50, or 60 hours a week, sometimes more. You don’t have the time to get out there and always fix and flip houses or do all this kind of research.

Theo Hicks: It sounds like most of your time is spent on not actually analyzing a specific deal or viewing financials, but kind of the other aspect that you mentioned, like watching a documentary or doing additional research.

Obviously, if you are one of those people that don’t have a lot of time, you don’t have to spend all this time on deals, right? I mean, you can just listen to a show like ours and take some takeaways and be able to quickly analyze deals. What we’re talking about in fact is just tradeoffs, right? I mean, you’re not going to have a magic investment where you don’t do anything at all; you just press a button, a spacebar on your computer, and then you make a 1,000% return. It’s just not how it works. There’s going to be tradeoffs. With higher returns, there might be a bit more risk, or there might be a little more time investment spent. With the lower returns, it might be a little bit easier, but then it can take a lot longer to get to that point. There’s going to be trade-offs all the time.

Travis Watts: Yeah, exactly. The last thing I want to circle back to is something that we talked about at the beginning of the show, is what this movement is really all about, and it’s more about lifestyle, it’s more about happiness and fulfillment and making wiser and smarter choices both for the planet, for yourself, for your family.

There was a well-done documentary that came out last year. It’s called Playing with FIRE. I can put a link somewhere. I bought it on Amazon. I don’t know all the outlets for it. It’s got a little orange shopping cart looking background to it. But it’s great. What it is, it’s a couple, they’re millennials, they’re in their early 30s and they live out in San Diego, California, and they’ve got the BMW and the Yacht Club membership and the beach house. More or less what they’ve been doing and they didn’t even realize is just kind of keeping up with the Joneses from their subconscious. It wasn’t intentional. It’s just, they thought they were doing what everybody does and should do.

They did an exercise—anybody listening right now, seriously, hit pause and do this if you can. If you’re driving or something, make a note to do this as soon as you can. It’s a simple exercise, but it means a lot. It can mean a lot. It’s life-changing. My wife and I did it. They did it in the documentary.

All it is, is you write down the 10 things that make you happiest. The 10 things that bring you the most fulfillment, either daily, weekly, monthly, annually; you choose your time frame. The point is, for this group, it was interesting. Husband and wife, right? And it’s like playing with their newborn child, eating dinner at home, enjoying a nice piece of chocolate, going on a walk outside, riding bikes together, and they’re thinking, “If that’s what brings us the most fulfillment, we can live anywhere. Why are we in the most expensive place in the US, paying $4,000 for housing, etc?” They end up moving.

This documentary is just about an average couple, that they’re not experts in the F.I.R.E Movement. They’re just trying to learn as they go. They end up leaving San Diego, they go to—I think it was Bend, Oregon and they just find cheaper housing and more outdoor activities and recreational things, they switch up their car and they reduce all their car payments. It was just a cool thing to see. It’s called Playing with FIRE.

There’s a lot of good books, a lot of good podcasts, so check out all that stuff if you want to learn more, but that’s a little bit what it’s about. Not to give it such a bad rep on, “What are you going to do if you retire in your 30s? You’re going to be bored out of your mind.” That’s not the point. It’s not that you are going to retire. It’s just that you’re going to have that flexibility to do what brings you the most fulfillment and happiness.

Theo Hicks: And I think we talked about this on one of the other shows that if you can think of a job to do if it didn’t really matter—if you could do any job and the salary didn’t matter, what would you decide to do?

My dad drives a bus. He loves it… Because he’s retired, he doesn’t have to worry about the money.

That documentary is by Travis Shakespeare. So if you search Playing with FIRE, Travis Shakespeare, you will find it.

Travis Watts: Cool.

Theo Hicks: All right, Travis, I appreciate you coming on. I enjoy talking about F.I.R.E. because I get to learn a little bit more about it. Make sure you check out that documentary, and then we’ve referenced a lot of blog posts. I’m going to try to remember to add some of those to the show notes for these shows moving forward, for some other secondary sources.

Again, Travis, thank you. Best Ever listeners, as always, thank you for tuning in. Have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, everybody.

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