Frugal or Fiction: You can make so much money from real estate
How do you know whether financial memes are trustworthy? That’s the focus of our new Frugal Living segment: Frugal or Fiction. Check out Frugal Living on Apple Podcasts, Spotify, Google Podcasts, Amazon, Anchor.fm, iHeartRadio, or anywhere you go to find podcasts.
Genny Blauvelt, our audio-editor intern this season, came up with a clever way to evaluate financial memes. It’s a new segment on Frugal Living, and we’re calling it Frugal or Fiction. In this first-ever episode, we discuss a screenshot from Instagram.
View this post on Instagram
The post challenges readers to buy a new rental property every year, so they can make $192,000 per year in passive income after a decade of accumulation. Is that possible? We’ve recently discussed the FIRE movement, which relies on passive income. Here’s what we learned from the show.
Claim: It’s better to chase passive income opportunities than active income opportunities
Evidence: FIRE relies on passive income. It’s how we retire.
Verdict: Passive income is real. It’s just not usually fast or easy.
Read a Transcript From This Episode
A normal day at the office? Not my office, not lately at least. My name’s Jim Markus, and I’m a frugal podcast producer. Frugal is the lifestyle, and frugal is the podcast. There’s nothing normal about podcasts. We’re in the media business they call social. And skeptics are hard to come by. You asked me, it pays to be skeptical. I ask questions. That’s who we’re talking about today. Fiction, frugality, the blurry borders that fence the pastures of social media. This wasn’t my idea though. The show’s audio editor intern came up with this clever game herself. And you know how she did it? She asked questions. Here’s our conversation.
I felt like we kept coming across a similar theme in a lot of the guests we were interviewing in terms of the incredibly large amounts of information that we now have access to. We have [been] bombarded by a lot of different information. And it used to be that you could kind of dismiss very unprofessional-looking information. Like, anything that looked a little sketchy, you could dismiss that as not being real or not a viable idea.
You know, at the start of the internet, it used to be, “These are the appropriate formats and these are the sketchy websites.” And you could dismiss them. You could tell them apart. But now with social media, everyone wants to share so much information that it’s a lot harder to tell the true and the false apart. And that goes with everything but especially life hacks. Life hacks are a big thing that we see on social media now. And sometimes it’s a Reddit thread. Sometimes it’s a Pinterest post. And sometimes it’s an infographic. Sometimes it’s a YouTube video. They’re all over the place. And it’s really hard to tell which ones are actually a good idea and which ones are not.
And luckily, most of them are like cooking hacks or cleaning hacks. So you can try them without too much worry about repercussions, you know? If they don’t work out, great. Your brownies are flattened. That’s a bummer. But your life’s not ruined. But something I’ve been seeing a lot on social media is just a lot of financial hacks and money hacks. And those are the types of things that are a lot harder to try out without messing up your life, you know? If I try a tax hack, I might commit tax fraud? They’re not really something you can just try on a whim on a Saturday afternoon ’cause you saw it in a Tumblr post.
So I’ll see a lot of videos that they give you the really good headline of the hack and the 15 seconds that they have for the TikTok or however long those are. But then they don’t have time to go into depth on the actual idea and whether it’s practical and whether… You know, maybe it is true, but maybe it’s kind of difficult to accomplish. So I just got to thinking with all this multitude of information that people are throwing at you, it’s hard to differentiate real from fake and maybe all the experts that I work with and that we know could help figure that out.
There’s all these claims on social media. Some are really low stakes. “Hey, you know, maybe you can use, like, a different type of oil in your brownies.” And it doesn’t matter if you screw up. And some of them are really high stakes. Like, “I claim my kids on my taxes.” And, you know, maybe you’re worried that, you know, you’ll end up in jail because you claimed your kids on your taxes and they’re like four and a half years old. It seems like those are the kind of claims that you’re looking for. You know, financial hacks that seem too good to be true, but maybe they are?
Yeah. Especially now that I’m working on a frugal podcast, all these claims of financial hacks and money hacks, they definitely draw my attention more than they used to. And now I have resources to tell me the answers to my questions about whether they’re actually real. And even if they are true, are they reliable? Are they practical? Are they legal?
You know, there’s some ones that I’m like, “I think that’s possible.” But I don’t know if it’s legal or ethical or both. So now I not only, you know, have the sounding board and the access to ask these questions and have actual informed individuals respond and tell me whether these are good ideas or just terrible hacks that you see online and you should never trust at all.
And what should we call this new section of the show?
Well, I thought we would have to call it Frugal or Fiction because our theme of our podcast is frugal life hacks. So if these hacks are indeed true, then they are frugal and they are valuable to put on our podcast and advertise to our listeners. But if they’re not, then they are utter fiction and we should report them as what they are, which is fake. I want the rubber stamp of is this frugal or is this fiction?
How do you imagine an episode is structured? If we’re gonna make this a unique, kind of, theme episode that might come back and might recur, how does that episode look? Like, how do you play the game?
The game is really one of expertise. Every episode, you know, I want our guest to be prompted with, “Hey, this is the social media post that I found.” Whether it’s Reddit, Tumblr, Instagram. “This is the life hack that I found on it. Can you give me your expertise on whether it’s accurate or not?” So it’s kind of a game of expertise but also a little bit of a guessing game, I guess? ‘Cause depending on the guest, you know, they might know a lot about the subject but not necessarily the hack. So they can give us their best estimate based on their life experience and everything. So the game is, “Here’s a life hack. Tell me what you know about whether it is frugal or fiction.”
Can I be your first expert?
Absolutely. You’re already my first expert in most things. You’ve got a lot more knowledge in terms of frugality and, you know, all your different jobs that you’ve had and expertises. So you’re already my first expert. So you’re more than welcome to keep being it.
One of the biggest things I see right now on social media for my age group and demographic is all about active versus passive income. And I don’t understand what those terms are. I don’t understand the difference between them. But almost every video I see of a young entrepreneur talking about how they get their income is telling me whether it’s passive income or active income.
And whichever one they’re promoting is the one that they say is best and that I should be pursuing. And I don’t know what they are. And I don’t know if there’s actually any truth to whether one is better than the other. So for the first episode I found this post, this tweet by Jullien Gordon who seems to be an entrepreneur of some type.
And he said, “I chased the highest-paying job until I learned this. Buy one fourplex every year for 10 years with monthly rents of 1,000 a door, which equals 40,000 a month in revenue and 16,000 a month in positive cash flow. That’s 192,000 a year in passive income forever in just 10 years. Active income ain’t it.”
So he seems to be promoting the passive-income lifestyle. But honestly I don’t know what most of those words meant at all in this tweet. I don’t know what a thousand dollars a door means. Is that, like, apartment? I don’t know what he’s talking about. What is the difference between positive cash flow and negative. And what is passive income? And is it actually better than active income? <music>
This episode, as always, was brought to you by Brad’s Deals. There’s a community of people here scouring the web for the best deals on everything. The site is B R A D S D E A L S.com. Thanks for listening. <music> I love this tweet because it’s one of those “this seems too good to be true” kind of tweets. But it also seems like, “That seems like it’s describing a business model that people probably actually do.” So let’s start by saying–what is he talking about? What is this “a thousand dollars a door” thing? What is positive cash flow? What is he talking about?
He’s talking about real estate investments. So he’s saying buy one fourplex, right? So fourplex is, like, you’ve heard of a duplex. You know, it’s not a single-family home. It’s, you know, a building with two different residences in it. A fourplex is the same thing with four in it. So, you know, maybe it’s a small, like, a four-flat in Chicago where there’s, like, three stories and then a basement unit. That might be a fourplex.
And when he says a thousand dollars a door, he means that’s the incoming rent he’s getting from each person. So a thousand dollars a door. He’s saying buy one of these buildings every year for 10 years. So you’re going to end up with 10 of these buildings. So a thousand dollars per tenant, times four tenants, times 10 buildings. That’s 40 tenants each paying you a thousand dollars a month. That’s what he’s saying.
A $40,000 a month in revenue. That’s the eye-catching part of this tweet. That all makes sense so far, right? Then it gets complicated. Then he, kind of, like, tips his hand a little bit and says, “That equals $16,000 a month in positive cash flow.” There’s no math behind this. We don’t know what his expenses are. We don’t know how much he’s paying on his mortgages for these places. We’re looking at this in an idealized world. In the real world, if you have a fourplex and you have four people in it–And we’ll just talk about just one.
Let’s not even say 10 of them over the course of 10 years–You have four of them. You need to find four tenants. You then need to try to keep those four tenants, one, paying their rent on time every month forever, and two, never moving out. Because when one tenant moves out, chances are you’re not going to have someone in ready for the day they move out.
You’re probably gonna have at least a month of, you know, time between tenants. Time for you to go in and make some necessary repairs, updates, repaint, clean it before your next tenant moves in. So this ignores all of those things. This ignores you finding people and the time it takes to find a tenant. This ignores the time of empty units. The most important thing this ignores is any kind of building costs or building upkeep. If your water heater blows… You know, like, for a single-family home that might be $10,000.
For a multi-unit home, that could be significantly more. Same with your roof. What about tuck-pointing on the outside of the building? There’s all sorts of costs that go into maintaining a building. And those costs don’t decrease when you have 10 buildings. They increase tenfold. Maybe you can get a discount in bulk, but the labor doesn’t work that way. Like, you need people to make repairs for you? Your costs are gonna go up a lot when you start expanding your business. I’m not saying it doesn’t work. What I love about this is he’s describing an actual thing people do to make money. He’s just simplifying it in a way that it’ll fit in a tweet.
So he’s saying that’s 190, $2,000 a year in passive income forever for 10 years. This is the one point we disagree on. What he’s describing isn’t exactly passive income. Unless he’s hired a property management company to take care of all those things I just described, what you described is just you created a job. You created a business for yourself. That’s not a bad thing. I love entrepreneurs. And I love people who build businesses. But what he’s created is a property management business and a real estate business buying and selling fourplexes. If that’s what he wants to do, that’s awesome. But that’s also potentially a full-time job, which is active income. That’s him going out and earning all of that rent.
If it’s passive for him, that means his costs are gonna be higher. He’s gonna find a property management company to deal with all those headaches for him. And, you know, maybe that’ll work. Maybe that can be hands off. Maybe he can be sipping drinks on Maui while all these people are doing work for him.
But the revenue he’s getting for that property isn’t going to be going directly into his pocket. He’s gonna be paying someone to deal with that. So this specific tweet does describe a real thing. But not all the information’s there to call it the actual truth. That said, I’m still gonna call this frugal. I’m still gonna call this a true thing. You can do this. If you wanna go out and buy a property, you can do that.
If you wanna live there for a year or two to claim, you know, resident status so you can pay lower property taxes and then move out into a new property. And buy a new property, you know, two years later or a year later. And then do that again. And then turn your first one into a, an investment property. You can do that. That is a thing a lot of people do. It is very common. And it could be a very reasonable way for you to pay the rent on or the mortgage where you’re living while someone else is paying the mortgage on the property you just moved out of. You can argue that it’s a passive way to make money. But it’s not truly passive.
So before I close the book on this with a final verdict, I wanna talk about what passive income really is. When I think of passive income, I think of dividends. I think of investing and the dividends that you get from your investments. A company that pays dividends is paying part of their profits back to their shareholders. When you’ve bought enough, when you have 100,000, 500,000 invested in the market, the dividends you can get are pretty sizeable.
And when people talk about, like, early retirement, they’re talking often about living on the dividends alone. That doesn’t require property maintenance. That doesn’t require you having to find new tenants. That doesn’t require you having to do anything. You’ve invested. Your investment tracks the market then as well. And then you’re living off of the money that they’re paying you every quarter. That’s passive income. Like, that’s real passive income.
And that is absolutely true and absolutely frugal. It’s more complex. You don’t have to invest in, you know, one specific exchange traded fund. A lot of companies pay dividends. But a lot of tech companies and a lot of, like, the popular meme stocks don’t. So before you invest, look at, “Have they paid dividends in the past? Have they ever paid dividends? Tesla, Facebook, Twitter?” No, they do not. They just don’t pay dividends because people wanna buy their stock anyway. They think the stock is gonna go up in value and that’s good enough for some people.
Other companies, like Ford, have been around forever. But Ford doesn’t necessarily think Ford’s gonna be worth twice what it is next year as it is this year. I’m only gonna buy Ford if they give me money to do so, if they give me part of the profits they make for being Ford. And that’s why people invest in certain stocks. So those dividends, investment dividends, are passive income. Property and investing in real estate? You could argue. Like, there’s a contingent of people who would say this is passive income. I would say that’s more active unless you’re, you know, pawning off a lot of your landlord duties onto someone else.
Based on what you’ve said, I would agree that it is frugal. It just lacks the context. Which is what happens with a lot of these social media posts is it’s lacking the context of, one, how is he buying all 10 of these complexes? Where’s that original money coming from?
So I guess if you have that high-paying job that allows you to buy 10 complexes, then he would probably be able to pawn off all the expertise. So that would be passive income and it would be great for him. But that’s assuming a very high-benefiting initial job to begin with. Or, very wealthy family. So frugal without context.
One other thing we just glossed over is, “Buy one fourplex.” Qualifying for a mortgage of a multi-unit property? I mean, maybe you’re buying in a very low-cost-of-living area where, like, you can get a fourplex for not some insane amount of money. But try doing that in Chicago and we’re gonna talk about a million dollars at a minimum. I can’t afford a million-dollar fourplex right now.
So in order to be frugal and make a great passive income, I have to start off as a millionaire.
I mean, you don’t have to be a millionaire, but, you know, you’ve gotta be able to qualify for a millionaire’s mortgage. And the fun thing there too, is, like, the money you’re spending on this fourplex, if you put that in the market, if you just invested in, like, a real estate investment trust, if you invested in a company that does this kind of thing, what kinda dividends are you looking at with no effort at all?
It might be worth more to look at investing this money than investing in real estate. But then again, who the hell knows? Like, if property prices raise, then this could be a great long-term investment.
It’s one of my problems that I have with a lot of social media hacks that I see is I feel like financial hacks should be made for people who need financial hacks. But sometimes a lot of the hacks I see seem to involve already having a stockpile of money. So I feel like the people that can afford to do these hacks don’t actually need the financial hacks. So it just feels sometimes a little annoying that the audience that they’re catering to isn’t necessarily the audience that can execute these life hacks.
Yeah, I think you’re totally right. It’s great to see people raking in money. But if you’re targeting, like you said, if you’re targeting an audience who wants to do what you do and is just kind of the average Joe on the street, they’re gonna need more information than, you know, “Buy one fourplex every year for 10 years.” So again, is this frugal or is this fiction? I think this is frugal. <music> So there it was written in black and white on a website full of lies. One person generating $16,000 a month with real estate investments? Could it really be that easy? If so, why the hell wasn’t I doing it already? Today’s episode was edited by Genny Blauvelt. I’m Jim Markus. And boy does my voice hurt. Thanks again for listening. <music>
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Frugal Living is a podcast for smart consumers. How do you spend less and get more? The show, sponsored by Brad’s Deals, features interviews, stories, tips, and tricks. Jim Markus hosts season five, out now.