How will trading up get me to financial freedom?

Objective: become financially independent and/or retire at age 40. I am 32.

I am a beginner investor. I have 2 duplexes. My first duplex which I bought in 1997 has equity of about 250K-300K. It is currently producing a small about of cash flow, 15K a year after all expenses.

My situation is I wanted to trade up the property and get into units of 5 or greater. I prefer 8 units. After doing a quick analysis, if I trade up, the new property will make less cash flow than what I am making with the duplex. In addition, there is no equity.

I have always thought that trading up was a good thing. I know it is a good vehichle to defer taxes. But how will trading up get me to my objective?

Another thought was to get another 1 bdrm built on the property, making it a triplex. This will in turn generate even more cashflow.

Any thoughts and ideas would be appreciated.


Howdy Joseph:

Leverage is the answer to your question. Sell the duplex and get cash rich. With that much cash you could easily buy 10 duplexes with $20,000 down each and even at retail prices with inflation that is headed our way you will do great. I just saw a 30 unit building that the total price was only $400,000. With 50 % down (terrible leverage) you could do well with it too. I owned over 50 units with zero down but lost them because of my bad management. They appreciated from $25,000 per house to over $60,000 per house in 5 to 6 years.

Good luck and thank you,
Ted P. Stokely Jr
11505 Sw Oaks
Austin, Texas 78737
512-301-9171 home
512-587-6177 mobile

Thanks for the quick response. However, I am from CA. Here many of the units with 20% down will only get a person little cash flow.
I want to get an 8unit complex when I trade up. 8units cost from $800K and above. With some quick analysis, I will generate less cash flow that what I am currently making.


Hi Joseph -

First of all, you may have to define the phrase “become financially independent” a bit better. Are we talking freedom to work where and when you choose? Is it simply a matter reaching a financial “magic number” ? What type of lifestyle do you envision for yourself?

While it may seem trivial to some, I’ve found that the concept of “independence” means different things to different people.

What is your risk tolerance? Or, in other words, how badly do you want to reach your goals? I mean, the equity you mention is a nice chunk of play money, but how would you feel if it were suddenly taken from you?

If you read your morning newspaper to read that the city/county/state had decided to condemn your property? How about the local investigative reporter for the TV news doing a special on your abilities (or lack thereof ) as a landlord? Maybe when you answer the door you find a Marshal (or somebody else equally unappealing) handing you a summons or notice of a lawsuit?

All of these things have happened to me in my RE career. And they can happen to you.

How would you feel? What would you do?

You might want to spend some time thinking about your answer.

If your stomach lurches at the mere thought of any of these, then you may want to rethink your plans. As a general rule, the faster you want to go the more dangerous the journey becomes. Getting to your destination is too often reduced to an unpredictable equation combining both speed and luck. Luck you can’t do anything about, speed you can. Pay attention to life’s speed bumps – you might learn something.

Ted mentions the use of leverage in his answer to you, but it seems that it wasn’t the answer you were seeking. Are you interested in cash flow or do you want that “independence” thing? They don’t necessarily go hand in hand, you know.

As for you living in California, congratulations. Few other places have offered the easy appreciation it has in past years.

Elsewhere on the board, there is an MBA student wanting to research gov’t policies that have affected the RE market. California would be a good place (maybe not the best place) to start. After all, past use of “straight notes”, multi-layered mortgage properties, little or no personal liability for purchase money mortgages along with a few other “small adjustments” skew the normal demand and distribution curves right out the window.

Ever tried to get a zoning change request through the California Coastal Commission? Nah, I didn’t think so. Anyway, …

Of course, that “easy appreciation” hasn’t always been the case in the short term. In most instances, the penalty for that appreciation has been a lack of cash flow (as you mention).

So what keeps you from investing elsewhere? Or in something other than small multi-unit properties? What is your exit strategy for those buildings anyway?

Usually, they’re too small for the big players – REITS, etc – and too big for your normal “Mom&Pop” just getting started – unless of course, you’re going to play banker and finance their acquisition of your pride and joy.

Here’s my point – this is an interesting game which richly rewards those who can think for themselves. Eight years is plenty of time to make some real money for yourself, but the strategy you choose needs to fit you, your market, and your timetable.

On the other hand, you could always rely on dumb luck. Hey, don’t knock it – it works for some – just look around.

Take care,

Eric C

Hey -

This just came across my email - timely, eh?

Wealth is not his that has it, but his that enjoys it." Benjamin Franklin

You take care now,

Eric C