Assets Over Hours: Replace Your Paycheck

Brandon (00:23) Okay, okay. excited to introduce a very special guest and good friend to the Owner Mode Summit. My man, my brother Arthur Johnson. Affectionately, I call him AJ. in many ways, he represents the core persona of what this summit is targeted to, which is the high achiever.

Who's done all the right things, checked all the right boxes, went to the right schools, worked at the right companies. but there's a parallel universe where some folks do those things and then leave their financial freedom to the fate of the corporate guys. Arthur Johnson is someone who did not do that. While he was building his corporate career, he also you know, built a real estate portfolio over a 15-year span that ultimately grew to be 53 units, which allowed him to step away from corporate.

And achieve financial freedom at the age of 52. and so he's here to help break down the entire playbook for us. He's a good friend of the Gravy Wealth family. Welcome, brother Arthur Johnson. Appreciate you joining us. Hey man, thanks for having me, man. It's always good to connect with you and your audience. I love what you're doing at Gravy, so I'm excited to talk about my path, my career, building wealth. And so let's let's dig into it, man. So talking to talking to AJ makes me mad in some ways because

He is so chilled out right now. I was I was talking to him before the show around it just feels like this energy s literally since he retired in the in the world, in the country, has gotten really tense, gotten really uncomfortable, kind of the the job security piece, the geopolitical piece, just a lot going on that that makes folks uncomfortable. Meanwhile, you know, AJ's just kind of sitting back, you know, hands hands behind his head and and kind of relaxing. And and if anything, I think it goes back kind of

To this parallel universe idea, this concept of putting in that work early, recognizing that, you know, he needed to do some additional things on top of his, you know, his corporate grind to achieve freedom. And he's kind of the poster child in my in my mind of of how this works. Let's let's break it down. Let's kind of go back to just the essence here. This just ground us in where are you from? Who are you? You know, let's just kind of go through your background because a lot of us I think can identify with.

your journey, right? Going s doing all the right things. And then we'll get into like the the the turning point for you where you decided this this real estate thing was going to be something you were gonna get serious about. Nice, nice. Happy to do that. So I'm a child of immigrants. My mother and father were both born in Trinidad and Tobago. they had my sister and I when they migrated to Trinidad and spent the first seven years of my life in New York with the family, enjoyed kind of life there, and then my whole world got turned upside down when my parents divorced.

My mom wanted a fresh start, moved us out to California, Los Angeles. That's where I began my my career as a Southern California resident and playing sports. And in California, you can play sports year round. You can play all year. So I played baseball, excelled there, got a baseball scholarship to college. And then my dreams turned into a nightmare when I got injured when I was a junior and I didn't know what to do. I was always good in school. I liked math. I liked business. And so I decided to major in business and got a job as a a bank analyst at the Treasury Department. Worked there for three years. Great job.

And then I said decided to go to business school at that. I went to Stanford Business School. And that's when my my my lights turned on. I tr I learned about technology and I got bit by the technology bug. And I wanted to marry technology and finance. And so I decided to work on Wall Street as a technology investment banker. So I worked at Citigroup and then Goldman Sachs advising tech CEOs on raising money, M&A, etc. And then about after doing five years of banking, I decided to slow things down because I had my first child. And I noticed a lot of the partners at Goldman would

only see their family on the weekend. And coming from a single parent household, I don't want to be that kind of father. So I decided to go join one of Goldman's biggest clients, Hewlett Packard, and have more of a predictable career and a predictable schedule as opposed to being on call for a client all the time in banking. So worked at Hewlett Packard for five years. and that's when I I got the epiphany 'cause I was working at Hewlett Packard for a couple years and it was like nine PM at night. And I felt like I was a small cog in a big wheel.

And I felt like that's not what I wanted to spend the rest of my career. So that was the seed that was planted to think about is there another path? And we'll get back to that in my in my in the story. But after HP, I worked at Intuit as a head of Corp Dev and Strategy and then became chief operating officer at Cisco, running the WebEx business for three years. And that took a left turn of my career. I I I was an operating partner at a VC firm in Andreessen Horowitz for about 18 months, which was a new way to think about working close to startup companies.

One of the companies in the portfolio that was interesting is called Twilio. And I spent you know some time with them, but not a lot of time. And the CEO said, I want to spend more I want you to spend more time helping us think about how to grow this business. So I decided to join Twilio full time, pre-IPO, running strategy, corp dev and alliances, and that was a complete rocket ship, which is fantastic. And after that, I joined Pure Storage as a chief strategy officer to run strategy, corp dev, and and and strategic planning for s for for for Pure Storage.

And then that's the point where I decided to to build that to to finalize that glide path into the next chapter. So after Pure Storage, I retired from corporate life because I was able to build up income streams from real estate, mortgage notes and a dividend portfolio. And now I just do board work, advisory work. And as Brandon said before, that feeling I have now that that I may be emanating is that I don't have as much stress as I had when I was working in the corporate life. And so life is is really good now in this next chapter.

Love it. And so we're going to get into the into the real estate kind of revelation for you and then the action plan you put into place. But I'm actually kind of curious to go a little bit deeper on how you navigate it. You know, looking, you got quite the resume, you know, and and you and you went from top banks to top tech companies. but you also come from humble beginnings. And so I'm curious, what was your navigational compass? Like many of us, like myself, for example.

I would be maybe exposed to something. I'd meet somebody. I'd hear about something for the first time. What is this thing? Investment banking. Sounds like it's something I should learn about, do some work, figure it out, hop into it. What was your like what was driving you? How are you being exposed to kind of the playbook that you ultimately navigated in corporate? So the the thing that that I think drove me initially is that it had this huge chip on my shoulder, right?

So going back to undergrad, I went to a small school, it was a public state school that wasn't very well known, wasn't one of the big brand name colleges. And I applied for an internship at that time. And I kept on calling to find out if I got it or not. And she said to me when she when she finally picked up, you don't measure up. You don't have the background for this internship. And that just lit a fire to say, I'm gonna prove her wrong.

And I became the first person to graduate from my college to get a degree at Stanford. And so and that carried through my entire work career. So I thought about, you know, work going to Stanford and I felt like kind of a step behind because I didn't come from that, that, that background. I didn't know much about banking. And so I learned about that and was able to find my way into some of the larger banks. And so I think to me, that chip on the shoulder was the driving motivation for me to succeed in business school.

And in my corporate career and also to kind of build out this more independence tracking bec and become and get to freedom. So that's kind of what was the origin story of my my motivation and what what lit a fire to do what I do. I love that. I love that. I didn't know that. And I love that story. So another thing I want to kind of put on the table is particularly for folks that are really, really smart, numbers oriented, they struggle with risk, right? Like the idea of kind of taking risk.

You found a way or you found a pathway that complemented who you were, your risk tolerance, right? And that you put together a plan. What is now kind of as a retiree, an early retiree, what are your reflections on risk and how folks who check the boxes and kind of do all the right things, how they might miss you know, kind of conceive the role of risk, their risk, and now what's legit, what's not legit? Like what let's kind of ground us in your your philosophy on risk. Yeah.

So that's a great question because I think that looking back on it, I wish I would have taken more risk sooner. Right. And there's two big things that that I had to change my perspective on when it came to risk. One was compensation. I always thought that cash compensation was the right way to make money. And then talking to mentors along the way, they kind of opened my eyes to equity is the better way to build wealth. And you used to think about equity when it comes to your compensation at these tech companies or your full time job.

And equity as it comes to building out your portfolios. That's number number number one. Number two on the risk spectrum is that comfortable W-2 paycheck. I thought I'm gonna have that for the rest of my life. But there is a way to build your own paycheck and you can pay yourself and spend your time doing what you want to do. And so once you kind of start to disconnect the comfort of that W-2 paycheck and realize that, hey, there's another way, another path, you can take more risks.

And so that's the second part that helped me to understand that hey, this W-2 paycheck is not the end all be all. You can kind of it's not gonna take as much risk or or you're gonna not gonna be able to to to have to take as much risk if you kinda build an independent kind of W-2 paycheck outside kind of working for somebody else. Okay. And so let's fast forward a little bit, you know, to the moment where you had this philosophy, you you kinda grew into this philosophy, but you needed to actually take action.

How far along were you into your corporate career at the point where you got serious? And what was the moment that that triggered you getting really serious about this journey? So going back to my time, my first job after Goldman, working at Hewlett Packard, it was a great company, great culture. I really enjoyed my time there. But I was working late at night one time, it was nine o'clock at night, and I felt like a very, very small cog in a big wheel. And I thought to myself, is what I'm working on away from my family, does it really matter?

And am I really being valued for what I contribute to this to this company? I didn't feel I was. And I was talking to one of my colleagues at the time, and he felt the same way, but he did something about it. He talked about, hey, I'm I'm using this as a means to an end. And I'm using this time to build out an independent income stream of real estate properties to take the place of my HP income. And I said, Well, how how do you go about doing that? So we sat down, like every week or so we kind of got together to talk about real estate, talk about his philosophy.

And talked about again separating and building your own W-2 paycheck. And his approach was real estate. And that planted the seed. And that's that got me thinking about, okay, of all the different kind of asset classes out there, you could be a franchisee, you can kind of buy, you could do different things in real estate, wholesaling, et cetera. What's the right thing for me to do? And so I I latched onto real estate because of that conversation. And that was when I first started to have that that seed. That was in my in my early thirties, when I kind of had the seed. Took me about a year or two to kind of do some research before I acted on

On that information. But that was the thing that kind of led to my path down the real estate path. Okay. And at the time, in you know, the way the Owner Mode Summit is structured, there's a pathway theme for each day. So acquiring a business, building a real estate portfolio, creating digital products, advising companies, launching a company. Did you ever look at the full kind of repertoire of entrepreneurship or were you just kind of locked in from real estate from the very beginning? Great question. So I I looked at a lot of things. I looked at selling stuff on eBay.

I looked at, you know, buying a franchise. And I looked at real estate, 'cause real estate's a big, big asset class. So you can kind of do buy and hold, you can do wholesaling, you can do flip, et cetera. So I looked at all different ways to create create money. And I looked at, you know, the asset class itself, how it's performed historically. I looked at the the ability to leverage it, to to leverage debt against it. I looked at the tax efficiency, and based on those three criteria, I said buy and hold real estate.

It's probably best thing for me. Because if you do like, you know, buy a franchise, that's another job. If you kind of sell stuff at eBay or or that's another job as well. If you do wholesaling, that's kind of it's it's just a lot of taxing. So I had a pretty demanding job at HP. So I need to to have a a a side hustle where I can kind of contribute to that, build it up and then set it and forget it. And so buy and hold real estate was to me was the best path. But I did look at a number of different different ways to make money outside of work. Got it.

And so that raises two questions, right? So the first thing is you you you divide them into what is another job and what's not another job. A lot of people perceive building a real estate portfolio while working as another job. And I know you had a very interesting approach. You're you're one of the very few people I know that built their entire real estate portfolio out of state, number one, across multiple states. right. And so

A lot of people can't even really understand how you could pull something like that off while working a full time job. And I think that the second piece of it is this idea that once you, you know, are in corporate, you are, you know, ultimately focused on this role. How do you complement these things with just from a focal d you know, kind of a focus bandwidth perspective? How are you able to be well do do well in both these things at the same time? That's a great question. So to your second question, I think that

It it it it I think that if you take the time to kind of build the platform, build the foundation, it's gonna pay off for decades. And that building of that foundation of that the initial platform, it took nights and weekends for sure. It was like working double duty, working ten, fifteen hours a week on top of my W-2 job to do that. So but I knew it was only gonna be temporary. I knew I didn't have to do this forever. So my thinking was let me put the time in to build a platform, build a foundation.

And I know it's gonna pay off for a long time. And that's how I kind of got around do doing the double duty. And I think I didn't want to go out of state. I wanted to buy something in my own backyard, but I lived in Northern California and I couldn't find that many properties in in the early two thousands that could fit my buy box that would be appreciating and have some decent cash flow. Most of the folks buying real estate in California, they had a lot of negative cash flow. So I didn't want to have another expense on my on my on my line item.

To have to pay for that. And so I I looked at my meeting area, I expanded out to Fresno, Modesto, all parts of California, Sacramento, couldn't find anything. And so I said to myself, Okay, if I'm gonna try and find something out of state, I'm gonna pick an area I can I can kind of get there in a day, I get there and back in one day. So I kind of looked at areas surrounding California, New Mexico, Las Vegas, et cetera, Arizona. And so that was why I had to do that. But for me, it took a huge leap of faith.

To buy something out of state because I was again the risk factor. I didn't trust these guys. These are third parties. I didn't trust the property manager. I didn't really trust the realtor. I didn't trust the contractor. But again, talking to a few mentors and seeing what they did, here's what they did to help build some trust in the system, to help them get beyond the risk there. So I didn't want to go out of state. I was sort of forced to go out of state given where I lived in Northern California. Did you have a mentor

coming out of the gate. So you have the the the the guy who inspired you who was the coworker to get busy. But then you did a bunch of work and a lot of the work you did it seemed, you know, again, I think one thing that I'm taking away from conversation is you're very intentional. You're a family man. A lot of decision making that we talked up to this point is like, is this good for my family? Is it not? Right. You I want to spend time with my family. It was central to kind of your decision making process. So in some ways you kind of have to carve out your own path.

But what level of mentorship did you have as you were kind of figuring things out going through the School of Hard Knocks during those 10, 15 hours per week during the first one, two years? Great question. So at that time, there wasn't a this this cottage industry of real estate investing happening in the early 2000s. And so they had these things called real estate investment clubs that met in person on the weekends and they had these seminars and you had these these books you can read. So my mentorship was basically the person I had at HP.

I went to several real estate clubs and met other people at those clubs and I read several books on real estate and that was it. and I think that if I I wish I would have had the infrastructure that we have today to help people learn about real estate, like BiggerPockets and things like that. But that didn't exist back then. So I had to kinda go to the real estate clubs, read books, go to seminars and and and do it that way. Let's talk about your goals, right? So there d this is a multivariate equation. There's how much money you're making.

Right. And covering your current expenses is how much you can invest, how much you're comfortable investing, and then what you're comfortable kind of like experimenting with initially. Right. And so I guess you roll it up into a, I guess you called it a buy box. What was your kind of constraints initially coming out as far as what your goal was, what success looked like in the short, medium, long term? So my initial goal was to is was to basically crawl, walk and run. I said to myself, okay.

We typically s saved about twenty to twenty five percent of our s of our income every year and we put that into the in the stock market. I said for the first year, I'm gonna take five to ten percent of that savings that I would normally put in Vanguard and use that to invest in real estate. And every year I kind of make that higher and higher to got to like almost the majority of our savings was investing in the real estate market. And so for me, I wanted to kind of just test this thing out. And the way I did that was I looked at just coming from my banking background.

I looked at the top three hundred MSAs across the US and looked at various criteria to understand where I wanted to invest in population growth, job growth, income growth, affordability, and looked at those top three hundred MSAs and tried to stack rank them to see which one is the most attractive to me. And so based on that, I looked at, you know, Arizona, New Mexico, Colorado, and we kind of landed on Albuquerque, New Mexico.

And that said, okay, now that we've landed on this this right MSA, I'm gonna just buy one house in this area and see how that goes. And so that that was the f for the first two years. Learned a lot of learned a lot from that whole experience and then bought a couple more houses. And so that's kind of how we kind of did it. Was he we're gonna take an allocation of our savings, apply it to real estate, and then start to build from there. But it was really a crawl, walk, run approach. Did not go some people go all in right away. My conservative nature didn't allow me to do that, and my wife also being conservative.

said that may not be the right approach. Got it. And then at a more micro level, as you were evaluating opportunities, what was your cash and cash return target? Kind of what what what numbers as a numbers guy were you running to say this looks attractive, this does not look attractive. What what made it worth your while? So for me, I thought about okay, if I'm going to invest in real estate, it ha and it it takes a bit more time and a bit more risk.

I have to hit have a higher return than investing it in in the stock market. And so for me, I would typically get about 8 to 10% return on my typical index fund investment in the stock market. And I thought to myself, I need to have at least a 15% cash and cash return if I'm going to invest in can you still hear me? Yeah, I can hear you. Yeah. Okay. I need to have at least a 15% cash and cash return on my investment because I have to I'm taking on more risk. As that was kind of my my underwriting kind of buy box for

my properties. And so for me, building out a quick template in in Excel and kind of having a way to quickly evaluate the deals I looked at. And if I didn't get to a temp a fifteen percent cash and cash return initially, I would just go to the next deal. And so that was my that was my criteria. Some folks thought it too high. but I that's one thing I really tried to stick to is to say, listen, I need to be compensated for the risk and time I'm putting into this portfolio. It's not worth my time or my risk appetite if I can't get at least a 15% cash and cash return.

on this real estate investment. Got it. So you you looked at different metros that 'cause in your consideration still was appreciation, meaning the market was healthy in terms of broader appreciation, but you were super disciplined in that whatever property I get, it needs to hit that fifteen percent cash and cash return for me to even move forward. After you kind of chose your market, that was the the buy box, so to speak. Before we we go further, because I I want to mobilize people around your playbook and how you really kind of got

got into this is the ingredients that are needed, the people, et cetera. But let's back up a little bit because we first started, you know, there's a couple things you mentioned. I want to have people understand how you're thinking about this from a broader kind of philosophical perspective. So one thing you mentioned was this idea of I actually invest in mortgage notes. I invest in real estate directly. I think you mentioned you invested in the stock market, right? So you had asset classes. So I would love to hear your

Thoughts on diversification in general and allocation across the different asset classes. And I would say that the second piece is when you talk about real estate, there's ways that you can invest in real estate. As you mentioned, there's a wide variety. There's we've invested together in multifamily complexes, right, that are professionally run by these big, big firms, right? But there was a reason that, from a financial perspective, you thought real estate was attractive beyond that cash and cash return.

or unlocks the cash by ca cash and cash return through depreciation and tax benefits. So tell us a little bit around the diversification allocation piece and then how the tax benefit aspects of real estate, particularly as a W-2 employee, were attractive. Yeah. Well, I think that it's important to have kind of multiple income streams. I mean, think about if you're if the goal is to kind of build up enough income to replace your paycheck, I think it's important to have multiple income streams. And so real estate is one of my income streams.

We talked about mortgage notes, we talked about dividend portfolio, and we talked about traditional kind of stock portfolio. But I think for me it's important to look at those streams because it's getting it's not gonna be a hundred percent correlated. And so if one goes down, the other one's gonna still be resilient. And also there's different sh income streams have different advantages. So for example, real estate has a huge tax advantage. So if you are gonna be designated as a real estate professional, which means you have to work six hundred and fifty hours towards a real estate endeavor.

then you get to d to depreciate all your real estate assets against your income. Right. And that is a huge tax benefit. And being able to kind of get that write up as a high income W-2 employee has been incredible. and you also get get a chance to to to leverage real estate in a way that's hard to leverage other portfolios. So being able to borrow against it is also good as well. And if you look at the asset class in general, it's a pretty steady, even asset class that tends to kind of go up over time.

As opposed to being more volatile like other asset classes. And so for me, it was kind of a triple threat when it comes to asset class. And that's why I decided to have that be one of my core, probably my my biggest kind of income stream was coming from from real estate. So attractive that when you couldn't find it in your backyard, you decided to look out of state because those benefits were still attractive enough to make the the the risk return profile make sense. Okay. So you you you I want to go a little bit deeper on a couple of things you mentioned.

The real estate professional status, right? That is a huge unlock. And, you know, you basically mentioned you buy a house or a property, let's just use even numbers here, $100,000, right? You can depreciate a good amount of that. And then that depreciation is a not a real expense, but it offsets what as a household you're making even in your W-2 job, which allows you to to effectively reduce your income tax rate from, particularly if you're on a coast, somewhere in that

mid to high thirties down to a lower percentage. Can you give us maybe like an example of what that looks like? Cause I want people to really understand, you know, the before and after. If you're a W-2 employee, you're just getting paid W-2 income. And then the W-2 employee who maybe bought a property and kind of walk us through the math if you don't mind, just so we can kind of get it sink our teeth in. Yeah. So this is really a a a huge unlock that a lot of folks, a lot of wealthy individuals take advantage of all the time. And so the government says that

a real estate property depreciate declines in value over time or depreciates. And it says in 27 and a half years, that property is going to be worth zero. And every time if you do a straight line depreciation and divide that by 27 and a half years, that's going to be an expense that shows up on your tax return. It's a paper expense. It's not a real expense. And so the IRS says you can take that paper expense and deduct it from your taxable income. So it lowers your taxable income. What's even better than that, Brandon, is what's called a cost segregation analysis.

Because all the items in that house don't depreciate at the same rate. So for example, carpet depreciates much faster than the house does. Carpet depreciates over ten years. Your appliances depreciate over five years. And so if you do a cost segregation analysis on that property and segment out all the different kind of fixtures in that house and depreciate that over shorter schedules, you get a higher depreciation expense so you can deduct even more money up front on your tax return. So my advice to people out there when you think about buying a real estate property, not only do

the depreciation across the house, but get a cost segregation analysis to depreciate all the fixtures inside the house so you can get even more of a depreciation expense that would lower your taxable income going forward. So I think that's that's the a key unlock for for depreciation for real estate properties. And and you you know you you put that that playbook definitely to work. Could you maybe just bless people with just so they have an idea of what maybe your effective tax rate maybe look like when you were just a two income and like what what you could

potentially bring it down to if you were to to to put a strategy like this together over a few years. Yeah, so we were I mean we if we looked at the the federal tax rate, we were close to like thirty-five percent tax rate and we got it down to close to fifteen percent and some years ten percent. Because in when in the years we did the cost seg analysis, which we got kind of bonus depreciation and we kind of got up front, it got us down to ten percent federal tax rate. California is different because California doesn't really kind of allow some of the d depreciation for

The properties, but you look at the federal tax rate, it's a huge benefit to shield your taxes in a very legal way that can kind of have you more take home income. And it's not what you make, it's what you keep. And I think our audience, I think you need re really needs to understand what he just said. He said, This man said his tax rate went from thirty-five percent down to fifteen percent, ten percent in some years. That's twenty-five percent of what he's making that he's able to keep. And doing that by deploying it into a property that's delivering cash flow.

And he's kind of writing this off, but appreciation as well. And this is how you retire at fifty two. Okay. Now everybody's before before we close out on that, it's important to make sure you have a CPA that has a lot of good experience in real estate investors and have a CPA that's very creative when it comes to thinking about the tax statutes and the tax law. Cause that really helped open my eyes to how we can kind of do the cost seg analysis, for example. I didn't know about that. That was kind of brought to me by

One of my real estate mentors and confirmed by my my CPA. So it's important to get a CPA to help you with this as you think about using real estate in your portfolio. A hundred percent. And it it's it's funny you say that because you know I always say people, if if you're at a high earner level and you're still using, you know, H&R Block, not no, no, you know, no shade, but if you're using the the kind of the basic submit your your your your your you know your your taxes to them and they get it done and they come back to you, then you are you are

you know, not taking advantage of what a lot of other the wealthiest folks are are doing and to AJ's point, probably the most important team member is that CPA who is helping you keep the money that you're working so hard to earn. Okay. The real estate professional status is something that unlocks a lot of benefits, but there are some restrictions for people, you know, to to be able to unlock it. What are the ways that people can unlock this? What what how the should they think about if they have a partner or whatever, you know, their situation, what are the elements that

you know, kind of can can go into them being able to unlock the real estate professional status and and get these kinds of tax benefits. So this one's a really important thing to to think about. So you get you have to do it by the book, right? And there's two basic tests for real estate professional status. They could be either you or your partner, but you have to work at least 750 hours in the year on a real estate business and you have to work more than half your total working hours towards a real estate business.

If you pass those two tests, you're in pretty good shape. But it's important to understand as a W-2 employee, I couldn't do that. When my wife Nicole decided to, to stay home with the children and she started to work more in the real estate business, we said, we can make her the real estate professional because she was doing a lot of the work with me as well. And so that was a huge enlightenment for the first few years when she was still working, I had to suspend my depreciation. It was kinda hanging there. I couldn't take it, take it down.

But once you started working, I could take it down in that tax year. And all the suspended depreciation, I could take down as well. And so once you kind of become a real estate professional status, you can take it down every year. If you're not a real estate professional status, it's suspended. And then when you sell the property, you get the payback when you sell the property. But the benefit of being a real estate professional is that you get to take it in that tax year as it happens and you get it along the way. This is why it's so important to have those family meetings, those family summits, because you're getting together, you're both looking at the numbers.

You know, I think a part in there that people really need to emphasize is there may be two folks in the household. One of them may be able to unlock this value for the entire household. And if you're looking at the numbers and you're working together on a game plan, and maybe this person starts to to lean in and hits those minimum requirements, right? That that can be, as we talked about, a 25% boost in terms of what you're able to keep, which accelerates retirement, accelerates your portfolio growth, et cetera. So I guess my point is.

It's a team sport and having a plan and a joint vision for building wealth was how you were able to really unlock unlock that. Okay. That's incredible. I've heard also, and I don't know if you know anything about this, that there is a short term rental exception where you're able to unlock real estate professional status while working. Is there is there anything that you can speak to or know about? I'm not too familiar with that one. So I I can't speak to it. Okay, we'll we'll we'll unpack that in a later Gravy session. So

Now let's kind of get into and I want to highlight this before we move into your playbook, which is depreciation recapture. So, as you mentioned before, if you run these plays, you do a cost segregation analysis, you're able to accelerate your depreciation and ultimately lower your taxable income in that year. When you sell a property, there's something called depreciation recapture, right? And so the wealthiest folks, for that reason, oftentimes don't sell their properties. In fact, they do

And you can kind of tell us the the plays, right? But they do things to make sure that they are deferring taxes and ultimately ideally never paying taxes. Can you speak a little bit around that? 'Cause I want people to see both sides of it where yeah, you can accelerate the depreciation, but there has to be comp you know, complementing that with a longer term wealth building strategy that allows you to keep, you know, what you gained as far as a lower the lower tax rate. Yeah, depreciation recapture is where Uncle Sam still wants to get paid. So there's a statute in the law that says

there's a s a a chunk of the real the the of the depreciation that you still get taxed on when you sell the property. So it's not all 100% a free lunch with a depreciation. To avoid that you can do two things. Number one, you can do a 1031 exchange. And that basically means you can sell the property and you have a fixed period of time to to buy another property with those proceeds and you don't get taxed on the sale of that initial property. Now there's some restrictions that says there's time restriction, there's a property type restriction as well. You have to buy a similar type of property, but

For me, because I only invested in residential kind of real estate, it was a great way for me to kind of transfer wealth from one property to another without paying any taxes on it. And that's one way to avoid the taxes and depreciation recapture. Another way to do it is just to not sell. And the benefit of not selling is that if you if you not don't sell a property and you want to pull money out, you can kind of do so with the home equity line of credit. When you pass away and that property goes to your your beneficiaries, they get what's called a step up in basis.

And so if the pro if you bought a property for $30,000, now it's worth you know, $100,000, and you kind of die, pass on to your beneficiary, the basis on that property is not $30,000, it's $100,000. And so they get they if they want to sell it right away, once you pass away, there's no tax to be paid on that property, no depreciation recapture. And so people kind of like to have the ability to keep the property. If you need some liquidity, pull money out via home equity line, but pass it on to your beneficiary so there's no taxes paid for your estate.

And so those are two ways to save money on taxes, a 1031 exchange, or just kind of just g give it to your beneficiaries. So let me get this straight. There's a way that you can be a high-earning professional, your tax, your federal tax rate in the 35s. You can collectively, you know, with your partner, if you have one, come up with a strategy to get that effective tax rate down into the low teens, you know, maybe even down to 10%, while getting cash flow, while getting appreciation, and

Not only are you keeping more money, but it could be a way that you could own those buildings, properties over time, and not even have your heirs and your your, you know, your your kids pay taxes on the these kind of earnings and depreciation benefits over time. So it's like in essence, true generational wealth to the to the highest degree. And so I think for the audience specifically, you're hearing some terms like 1031 exchange, et cetera. The most important thing is what AJ said is.

Now that you're aware of this playbook, how do you tap into mentors? How do you tap into ways to really think through what this strategy and plan looks like for you? And then bring in the right folks, like the right CPA, so you can mention these terms too, and they can help you navigate what works best for you. Okay. So somebody's hearing this and they're like, I'm ready, I'm in. I'm sold. They're gonna need some things. They're gonna need some, you know, let's assume that they're starting off looking at markets.

They finally get to a place where they've identified where they feel, you know, they they want to focus their energies, but they're gonna need some kind of team. Who are the folks on their team that you think folks kind of need to think about right now? So I think it it really depends. I think if you're gonna go with the the with the buy and hold strategy for real estate, it's important to think about, you know, going into the right market. You you can't I can't emphasize that enough to pick the right market. So do your homework and take your time. There's no need to rush but

pick the right market because even if you if you buy a a a bad property in a good market, you can still come out ahead. If you buy a great property in a bad market, you're not gonna get the returns you want. So really take the time to pick out the market. Once you've identified the right market based on your criteria, it's important to have a core team in that market, assuming it's going to be out of state. And that core team has to be anchored by your realtor, maybe even kind of a a half dozen realtors that cater to investors.

There are some realtors that cater to the retail, which people that want to that want to buy a house and live in that themselves. But find realtors that cater to investors. They know exactly how to talk the lingo. They know what you're looking for. They've been through the whole game before. The second piece part of your team has to be a very good experienced property manager. I cannot emphasize enough how important it is to have a trustworthy, experienced property manager on your team. And you have to kind of and for me, I've had to have have to go going through

couple in each market because you can't it's not always the right fit. But and also the property manager business is run by a lot of mom and pop shops as well. And so there it's hard to kind of find a big kind of franchise of property managers. So have to kind of in some cases kiss a couple frogs. But in order to prevent kissing too many frogs, you have to ask the property manager, you know, what properties do you manage and make sure that the property type that's compatible with your portfolio. How much experience do you have? Do you have a system set up where it's electronically set up where we can kind of get things done electronically?

and more tech forward and give me a sense of how you think about the tenant. Do you think about the tenant as a customer or just a number? And so you have to really kind of take the time to interview the property manager, talk to three or four references that property manager. And once you do that, you can kind of go in. And it as at at the point where you don't think the property manager is not is working based on some of the goals you have, it's okay to switch. But it's important to kind of take the time to interview and do the right kind of due diligence on that property manager. Got it.

And what would you say for so we heard realtor, we heard property manager. Manager, yep. And I would also say you have to kind of have a good attorney in that market as well. And you're gonna have to have a good I would say a good contractor too as well. So I think that although some property management firms have their own kind of in house contracting services, what I found is that they tend to mark things up too high and to have an outside contractor to keep them honest to make sure the repairs are kind of in line with market.

And so if you have a good contractor as well, an outside contractor that's gonna sometimes complement or keep in check the property manager, that's important as well. Got it. And we'll we'll kind of get into some some war stories in a second. But obviously a big part to talk about is is financing. Knowing what you know now, if you were starting off right now and you're a high earner, how would you approach the financing side of getting into this game? And that means everything from

All cash, you know, like who are you going to partnering with from a financing perspective? What are some of considerations as you start to build a bigger and bigger portfolio? Just kind of give us, if you don't mind, a an overview of of how you would think about financing. So when I first started doing this, I thought about the traditional kind of put 20% down and finance it with the traditional mortgage, which which I think is is is fine. Thirty thirty-year fixed rate on the mortgage, and you put 20% down. In some cases, they require 30% down.

That's what I usually I did initially for a good chunk of my portfolio. And then I started talking to more mentors and I realized that if you have a a stock portfolio, let's say at Fidelity or Vanguard, you can kind of go to a bank and say, Hey, bank, I want to borrow money to buy a s a number of homes and I want to have as collateral my stock portfolio at Vanguard or Fidelity. And they tend to give you kind of better rates because they kind of think that it's it's actually less risk.

To have collateral be the stock portfolio versus having a house and you get a it's a faster loan process and you get a better rate. So that's the second way you can kind of finance your property. The third way to finance your real estate property, and this is on the riskier side, but you can also have a margin loan. And so there are brokerages like Interactive Brokers, Vanguard, Fidelity that allow you to take out a portion of your of to borrow money and hold your cloud your portfolio as collateral as well, which is a margin loan. The risk with that is if the portfolio declines in value.

you can you'd be issued what's called a margin call and you have to kind of pay back the money right away, which which again is is on the riskier side. So three ways to finance your property. You can kind of do the traditional kind of mortgage, 30 year fixed, you can do a portfolio loan, or you can do a margin loan. For me I've done all three. And I think that I think that for folks that are just beginning the real estate portfolio I'd suggest going with the traditional kind of mortgage loan. You can kind of work your way up to doing it with a with a margin loan.

Got it. And what I like about this is it it's very much tailored for the high earner working at a company that's paying maybe twenty percent of their overall compensation in stock, right? And so a lot of us just have the stock sitting there. You're just you're talking about ways to really put that stock to work beyond just the value of it increasing over time, right? Because historically we thought that was the win. Okay, you know, I got Google stock at a hundred, now it's at two hundred I won.

But you could have had that Google stock go from 100 to 200, potentially, you know, secured a loan or took a margin loan to get fifty percent, you know, fifty dollars of capital for each share of stock to acquire something else that's gonna move you closer to financial freedom. So I I I like the way that that's tailored. The other thing I would say is, you know, smart leverage, right? And so there's always gonna be risk and reward, you know, in general, getting into real estate. There's gonna be the risk of a tenant that doesn't pay and and what w whatnot. So everything has risk, but there's ways to

understand what your risk tolerance is, and then understand how the wealthiest folks move, which is they leverage their assets to grow their portfolio, which gives them the ability to get additional liquidity to get more assets. And then you kind of get this what we call the ownership flywheel going. And the other piece of it is because it's secured by assets of value, you actually are getting the best cost of capital that you can get. And so retail folks are always going to get much, much higher interest rates for taking out loans.

than folks that actually have assets that they can secure these loans with, and then you get a lower cost of capital, which allows your return to be either higher or you f or allows you to do more deals. Would you agree with that, AJ? I would. But I think that I want to kind of just speak to the the part of the audience that are that's a bit more risk averse, that tend to want to to to buy property all cash. There's nothing wrong with that. But the thing that you're gonna face is it's gonna take you a bit mu a a bit longer

to build up the portfolio and get that flywheel going. It's definitely less risky to buy properly all cash, but again, the trade off is gonna be time. And time is such a valuable resource that we don't really have a lot of. And so I think that if you're willing to take on a bit more risk, you can accelerate that timetable to build up that portfolio and income stream if you decide to use debt and leverage as opposed to doing all cash. So that so people say that debt is bad and in some cases it may be bad. But when you kind of use debt in a smart way and you are

fully aware of the impact of that debt, you're fully aware of the instrument you're using, the rate, the rate's gonna change, you can kind of use debt to your advantage, and that will kind of get that flywheel going a whole lot faster than doing it with all cash. Love it. Let's talk systems, you know, and you started saying that, and again, I know you, so I know you're a very measured person, and you're always evaluating risk and looking at all the things that can go wrong. And then you but you still make a move. And I and I again I mentioned that this was something I think

A lot of people that fall into that super conservative mindset, they don't act at the end of the day, right? And so I think you forced yourself to take action, but also did in a way that you evaluated, you know, really fully did the work to understand the risk. So now we're talking systems. When you first started off out the gate, your goal was to crawl first, like you mentioned, maybe find a property in that first year, see how it goes. But then you somehow got to 53 units, right? And so when I hear that, I'm thinking systems, right? And so systems, obviously, there's a team component of it.

But you have to manage this stuff, right? And so I'm curious to know when did you really start picking things up and what kind of systems did you put in place to effectively manage that 10, 15 hours, right, to begin with per week down to whatever it ultimately became or if it stayed the same. Like let us know how you were able to compress that time if you were able to, and what kind of systems were required for you to do that. Yes, I think that the there's a couple buckets there. So the so the first bucket is kind of the the evaluation.

part of my portfolio building. So how do I evaluate a market? How do I evaluate a team, putting a team together? And the thing that helped me a lot was like, because I'm again came from a banking background, I built this spreadsheet template to quickly and easily evaluate the financial metrics of a property. And I built this template, I can plug the numbers in quickly, I can kind of put the numbers in there and then move on. So building that as as opposed to building a spreadsheet over and over again for evaluating a property, I built a template for that. And I built the script also to interview realtors.

I built the template also to interview property managers. And so being able to email the property manager the list of questions or to email the realtor list of questions, it was the same questions in each of the markets. It was easier for me to kind of do do that work. And so I built up those systems and templates to help me evaluate properties and evaluate markets. Now, when it came time to actually manage the properties, my philosophy was I'm gonna manage the manager. Okay. And I came from corporate America, and how would I manage my team?

So I manage my team, we have kind of weekly check-ins, we have kind of performance goals, and we have things that to make sure that we are aligned on what the vision is. So I said to myself, let me take some of those same principles and apply it to my real estate portfolio. So my real estate property manager, we had weekly check-ins. we we kind of said, here's the goal for how we want to manage this property. and we wanted to make sure that we had the right way to think about any kind of deviations from that plan, large rate, large repairs.

Extended vacancies, how do we deal with those things? And so for me, putting in place that system is important to make sure I can I can manage that property manager like I would manage my team in corporate America. As far as any kind of tools, the one of the the the biggest tools that helped me evaluate the financials of all my properties across all three states was a platform called Stessa, S-T-E-S-S-A. It's actually a free tool. It's owned by Roofstock, and think about it as Quicken or Mint.

For real estate professionals. Because it allows you to kind of put in all the information from the property management statements into one platform and run reports on every single property, every single city, and look at the NOI, net operating income, look at the the revenue and vacancy rates across all the properties. And so it's a quick and easy way for me to see across my portfolio what property's doing well, what properties not doing well. And so Stessa was a was a cool tool for me.

The second tool I used was was Gemini, which is an AI tool. And so when you have three different property managers, they have three different types of financial statements. But to get that into Stessa, you have to kind of make sure that every statement looks the same. So you have to kind of reconcile that and reformat it. So instead of reformatting it by hand, I built a script in Gemini to help automatically reformat all those statements till I can kind of put it in Stessa. And so using AI or using Gemini was a great tool for me to help me automatically reformat.

all these statements from the property management firms. Love it. Love it. So you're doing out of state. There's also an element of like, when it's time to pull the trigger, are you flying out to look at properties? And I know this probably evolved over time as you got more comfortable in your underwriting and your analysis, but help for folks that are really, you know, I can't operate in my backyard. It's too expensive. I do need to look at other properties. And I'm not gonna put put your your sacred goats out there, but AJ was really looking everywhere for for yield. You know, there were places

random towns in the Midwest, right? That he that he discovered and found his his return profile and leaned all the way in. So he was willing to really get out there and and and and do some scrubbing and scrounging to find those returns. But how did you operate just the the physical having to go out? Was that a thing? Was it more so a thing at the front end? Like kind of help us understand that part. That's a great question. So initially, yes. And that's why I decided to to to find a place where I can get there and back in one day. Cause I again I had a job

I had a family. I couldn't kind of go to the East Coast. And so I went out to New Mexico, went out to Texas, and I went out there to meet the realtors. I went out there to walk the neighborhoods. We're out there to meet the property manager. We're out there to meet bankers as well, contractors. And so that initial kind of for the first few years, before I kind of made any investments in a market, I wanted to make sure I stepped in the market myself, walked the property, walked the the area.

to see what's happening there. Once I did that, I felt comfortable with the people on my team and I felt comfortable with that market as well. And sometimes I walked away feeling uncomfortable with that market as well, based on that that on-site visit. As I got later in my real estate career, I started to rely on videos, right? So I'd have a video zoom call with the property manager, I'd have the contractor kind of do a video walk of the property. I'd have the realtor do a video walk of the property as well. And so it was less important for me

To kind of physically go out to the Midwest to kind of to see those properties. But initially, yes, I went out to the properties and had to had to kind of walk it myself. And, you know, let's let's you know, let's be real. I I know that because everybody's like, okay, this you're making this sound too easy, AJ. I mean, you're telling us that you found this multi-state portfolio, you found all these team members, you're meeting with them weekly, you're you're doing you're doing video walkthroughs. Give us some of the headaches that you had to kind of go through, whether it was

having to cycling out t you know, team members, dealing with really difficult situations on the property. give us some of the hair so that people have a a you know, they're coming in eyes wide open in terms of what what they're getting themselves into. So it's not all rainbows and and fairies. But it's not please hopefully you don't get that impression. So the downside is the biggest downside or the biggest headache for me is

Having a property manager that's not aligned with my approach. Right. And so I've had have had headaches there. So for example, in e each of the markets, I've been in New Mexico, Indiana, Wisconsin. In each of those markets, I had to switch property managers at least once or twice because they weren't aligned with my philosophy. Luckily in Texas, I've had the same property manager now for close to 20 years, which has been fantastic. But finding a good, reliable property manager.

that's going to be consistent has been the biggest operational headache for me in managing property, real estate property out of state. And so that's why I try to put so much work up front to make sure I did the diligence to make sure it's the right property manager. The second biggest headache is finding a reliable contractor. So I'm actually gonna go to court in two weeks because I'm being sued by my contractor. He did work in a property mine that I didn't authorize him to do, and he wants to get paid for that.

And so we're gonna go to court to settle that in the court. And so that's a big headache for me to kind of go to court and state my case and kind of in front of a judge. And so finding a good reliable contractor can be hit and miss. That's why I try to take the time to invest up front to do my my due diligence, but you're gonna you're gonna have to kiss a few frogs with the contractor. So I think the biggest the second biggest thing is a reliable contractor. and the last thing I would say is that my strategy initially to try to find a market that does appreciation.

and cash flow was completely flawed. And so I said to myself, the way I should change it though is I should say, okay, this market will be for appreciation and this market will be for cash flow. So my overall portfolio has a mix of both. But you can't find, at least I couldn't find, a market that can do both appreciation and cash flow. So for me, I had to adjust my strategy to make sure, okay, I'm going to identify Texas as appreciation. I'm going to identify Indiana, Wisconsin for cash flow.

And the totality of those those markets in my portfolio will give me the the best of both. Love it. And so your your your metric for cash was fifteen percent cash on cash. What was your appreciation? How do you think about the appreciation benchmark? So I thought about appreciation based on job growth, income growth, et cetera. If I could find a a market that could support five to ten percent appreciation on the top line of the property, five to ten percent CAGR on appreciation.

That would be in my mind a good appreciation market. And it has to be supported by job growth, population growth, income growth, et cetera. But that that was my my my benchmark for appreciation. And you never went bigger. You stayed with what, maybe three unit, you know, three units or or lower pretty much in your portfolio. Why why was that? Good question. So so the biggest property type in my portfolio is actually a single family home.

And I want I like that because a single family home, at least two bedroom, at least three bedroom, single family home attracts a family. And a family is sticky. It's hard for them to kind of move. If you have a one bedroom, one bath apartment, you're gonna attract a tenant that's very transient, that can move every year. And then one of the biggest expenses you have as a a landlord is turnover. And so I wanna attract, you know, the the the wife, the husband, two and a half kids, the dog, I wanna attract the family that can be planted in my property for as long as possible.

And so the reason why I anchored on single family homes is because I wanted that to attract that kind of family. I do have an I do have a couple of duplexes. I have a one triplex, but those triplexes are all two bedroom or more. I don't have any one bedroom, one bath units in my property because it's just it's just too much turnover in those in those units. So think about so when you think about the property type, think long and hard about what kind of tenant do you want to attract. And you want to make sure you tr you track a tenant that's going to be there for the long term. Got it.

The number, right? At the end of the day, there was a number that that you identified that would be the number that you would step away from corporate and enter into early retirement. How did you calculate that number? What what was the the calculus that went into that? Well, the first thing was it was a a long conversation with my wife. I said, Hey, this is something that that I'd like to do. I think we'll be okay. And I said to her,

Let's look at how we spent money before and how we want to kind of spend money going forward. And there was definitely a an uptick because I told her that in this next chapter, I want us to be comfortable, but I want us to also ball out a little bit, you know? And so we kind of said, look at our historical spend over the past several years. Let's make sure the kids are taken care of college wise. And let's kind of have a twenty to twenty five percent bump on that spend historically in this next chapter. And that was the number.

And we said, okay, can we comfortably kind of pull down interest, dividends, cash flow, and get to this number with with a small buffer going forward with with some certain degree of certainty? And the answer was yes. And once we kinda answer that question of yes, I say, Okay, let me let me work two more years to make sure that that things are good. And then once we kind of worked that two more years, that's when he kind of pulled it pulled the trigger and did the

into the next chapter. But I think it was a discussion about historical spend. You gotta have that baseline. And the question you have to answer that's unique to everybody is how do you want to spend the next chapter? Do you want to spend the next chapter with the same historical baseline spend? Maybe yes, maybe no. Do or there's some things you want to do, like travel or pick up new hobbies that you need to afford with that next chapter. So we had to think about what that next chapter looked like. And for us it was travel, and spending time with the with the family, with the family. But

But we wanted to kind of that's how we kind of thought about having that number that that we thought, okay, is the number that we have and can we support it? And the answer was yes. Yeah. And I know from knowing you that you also had a portfolio, as you mentioned, there's dividends, there were there were mortgage notes. We'll we'll we'll have more conversations, kind of focus on those things a little bit later. But real estate was really the dominant lever for you to to you know to to get you where you wanted to go from a cash flow perspective.

We we gotta wrap it up. I could talk to you all day, AJ. And and something that you touched on before in one of our conversations, and these are kind of like the last words that you will leave the audience with here, was that a big part of you stepping away from corporate was your identity, right? And a lot of people kind of really intertwine who they are in their mind, right? And outwardly with whatever company they happen to be out, you know, at with at the time. And so can you speak a little bit around as you kind of think.

you know, how what what words you would leave our audience with the mindset shift that you think is kind of the first, you know, call it phase of this transition into owner from earner. Yeah, I think for me, I think that developing my, my why, like, like, like, I was so into my career. I was so into technology that I I felt like I almost lost myself into it. And

And I realized that, you know, after through some some prayer and discussions and just it took years to kind of get this out of me was what what is my true purpose? Why did God put me on this planet? Was it to to develop a strategy for these emerging tech companies? I realized that was not the purpose, right? And I said to myself, What is that purpose? And is it and and so in order for me to realize that purpose, I had to step away and and craft that next chapter. And so for me,

It was really about what's my purpose driven life and what does that look like? And that's really helped me to to go from that W-2 employee that was really kind of fully invested in that in that approach to somebody that's doing something that's that's in my mind much more fulfilling, much more rewarding in the next chapter, which is kind of more tied to my purpose. And so I think that people need to kind of figure out what what's your why? Why are you here? Why are you doing what you're doing? And if it if if that's what you're currently doing in that W-2 job, stay there, fantastic.

If it's not, there's a path to escape. There's a path you can kind of get on to break free from the W-2 check to build a more fulfilling life outside of that. And AJ is is living proof. And so with that, that's a great way to kind of end this session. audience, give Brother AJ a round of virtual applause. Thank you for being so open and transparent and kind of sharing your journey, inspiring others. I'm looking forward to future collaboration on this mission to move earners to owners.

you you kind of are the the the poster boy in my mind of someone who locked into a strategy, executed, and I think a lot of folks can learn from from the the trials and tribulations you've been through. So with that, we're gonna go ahead and end it. Thank you, brother AJ, for an incredible discussion about your journey, building a real estate portfolio while working, corporate and full time. With that, we will go ahead and end it. Thank you, AJ. We'll talk to you soon. Thank you very much, man. Good to talk to you, man.