After I hit my $100,000 savings target and published my ‘coming out’ essay on the benefits of the frugal life, I got a flood of messages from like-minded people who’ve been quietly doing the same thing, including an old school mate who I hadn’t seen since he joined the navy.
While I was quite chuffed with hitting six figures by age 25, he totally blew me out of the water. Having successfully tapped into the property boom in our home city of Auckland, he’d managed to become a millionaire at the tender age of 24. It’s a pretty epic story, so I’ll hand over to him from here.
(Note that being a sailor, a bit of colourful language follows. All figures are in New Zealand dollars unless otherwise specified.)
Introducing the 24 Year Old Millionaire
At the time of writing I had total assets valued at $2.6 million and total debts of $1.3 million [RICH: This is a net worth of ~US$1 million]. So I was sitting comfortably on 50 per cent equity, with four rental properties and an apartment that I live in. This was done over a period of six to seven years, starting with an unexceptional salary.
I come from a very modest background with no financial mentor or guidance. My parents have never been in a position to help financially – they can barely manage themselves. I have no tertiary qualifications. In fact I barely passed NCEA Level 3 (twelfth grade, for you international folks) and failed every paper in economics.
What I did have was a goal to own my own house by 21, and become a millionaire by 25. I reached both of these goals a year earlier than I’d planned.
Here’s a bit more detail on how it all played out.
I worked a part-time job at a supermarket in my last years of high school. This developed into full-time hours – and then some – while I was finishing school and starting the process of joining the navy. I was clocking up 70+ hours a week (I think I hit 84 one week) over seven days. Day and night, any department and any task in the store, I put my hand up for. I was exhausted but was pocketing a tidy sum even on my minimum wage. I still found time to go out on a Saturday night, but starting a shift hungover on a Sunday was testing. However that was good conditioning for a navy life of excess drinking and then working the next day.
I joined the navy at 18 years old, with an ambition to travel the world on the government’s dollar. I had saved about $20,000 through my work over the years and minimised expenses by living at home (mum still charged me rent but it was modest). The navy proved to be an excellent environment to save money. Although my salary was low, my expenses were far lower. You can essentially live on the base and eat for two-fifths of fuck all, which basically meant my measly $33,000 starting salary was all disposable income.
The other huge advantage was the promotion track and pay rises were fast for anyone who was willing to put in the work. Having done 70 hours a week for the last 6 months, long hours didn’t worry me in the slightest. So I got on with it, got my qualifications in navigation and warfare and started working my way through the ranks.
Stepping on the property ladder
By 2011 I had saved enough for a deposit on a house. I went to the bank I had been with since the age of five and thought I would have no problem getting a loan. How wrong I was – they laughed me out the door and told me 19 year olds don’t buy houses. The expectation was that I had to basically blow any bank manager who would give me the time of day to get the loan, as the global financial crisis was still at the forefront of everyone’s mind. With a stroke of luck, I found out the manager of another bank branch was ex-navy, and knew a bit more about how we did business. She looked at my savings record and said, “How much do you want?” I cheekily replied “$300,000”, and was pleasantly surprised when she printed me a pre-approval.
After a bit of searching and learning how sales and purchase agreements worked, builders reports, registered valuations etc, I managed to make a successful offer. My investment rule was ‘Does the rent cover all my expenses?’ If the answer was ‘yes’, then it was a good buy. I managed to rent my first property out for $350 a week, which covered property management, insurance, rates and the loan repayments. Any increase in value was just a bonus.
Each additional purchase had its own little story and risks associated with it, but I pretty much repeated this same process. I learned the value of having a good team of advisors. I had a lawyer die on me halfway through a purchase once. But essentially I stuck to the basic principle of ‘does it pay for itself?’, all the while using my increasing salary to reduce debt.
Rules to live by
In summary, my investment rules were:
- Purchase an investment that has good cash flow and yield. Don’t bank on capital gain.
- Have a team of good advisors – lawyers, accountants, building inspectors, property managers, bankers.
- Don’t over leverage; allow some fat in case there is a downturn (this is where the bargains are).
- Don’t waste your money. By all means have a holiday if you need one (I got to travel the world for free with the navy) but I would have forgone any travel to get my foot on the property ladder.
RICH: Holy smokes! That’s one hell of an impressive achievement. What lessons can we learn from my friend’s decisions? How does investing in property compare to the share market? There are a few elements to break down here, so let’s explore them in a bit more detail.
Lesson 1: The power of leverage
This was one of the most crucial factors behind my friend’s rapid success. Leverage refers to investing not only your own savings, but money you’ve borrowed from elsewhere. This is unusual for most investments, but completely normal when it comes to property – it’s called a mortgage.
Let’s say you buy a home with a 20 percent down payment, and get a loan from the bank to cover the rest. That means you’ve borrowed $4 for every $1 of your own cash. You get all the upside on the bank’s share too, so if house prices increase, your return on investment is multiplied by 400 per cent.
This is amazing, but obviously it’s a double-edged sword. If the market falls, any losses you make also get multiplied several times over, to the point where you could end up completely underwater on your house.
Here’s an example from the Beginner’s Guide to Investing:
The choice of whether to use leverage – and how much – comes down to your personal risk tolerance, and I’m a bit less brave than my friend.
With the benefit of hindsight it looks like a no-brainer, but you never really know if any given investment will go tits-up. Property ties your fortunes to one asset (or a few at the most) all exposed to the same economy and the same housing market. You don’t have anywhere near the diversification of something like a passive index fund, which buys you a tiny slice of thousands of different companies.
Of course, fortune favours the bold. There’s no reward without risk, and property investors are generally more willing to lay it on the line. With that being said, my friend was no crazy speculator – he was careful to mitigate risk by only buying cashflow-positive properties, and used his salary to keep debt under control.
UPDATE: I’ve written another post exploring whether my friend got lucky, or ‘made his own luck’.
Lesson 2: College is not the be-all and end-all
When everyone else headed off to university, my friend did his own thing. By the time we’d finished slogging through Marxism, postmodernism and umpteen other -isms, he’d already graduated as an officer.
While I was still paying off my student loan, he was traveling around the world for free, already owned several properties, and was well on the way to becoming a millionaire.
The societal obsession with going to college is dumb. Higher education does make sense for a lot of people, and graduates earn far more over the course of their lifetimes than the average worker. But there are plenty of alternatives – the trades, the military, self-employment – which are just as lucrative, without the crushing debt.
Seventeen-year-olds are not known for making brilliant decisions, and too many kids are pressured to go to university just because it’s the status quo. If I could go back and do things over, I’d definitely think about it long and hard.
Lesson 3: Goals are crucial
My friend is a naturally thrifty sort of guy, and disciplined enough to put in the hard yards. But he also had extremely specific goals.
Life is a constant series of trade-offs: Do you want more time, or more income, or less stress, or this shiny car? Mostly we’re not even aware we’re making these decisions, which is how we end up following along with what everyone else does.
The first step towards saving serious money is having a dream or vision that lights a fire under your ass. Suddenly, you become acutely aware of all of these trade-offs. Whenever you’re about to spend money on Expensive Thing XYZ, a burning sensation in your nether regions will remind you of your dreams of quitting your job/buying a house/going traveling.
(If you haven’t quite figured out what you want in life yet, I found this self-authoring exercise really helpful).
A big thanks to my friend for sharing his story, and congratulations! My own decisions about what trade-offs I’m willing or unwilling to make are already pretty deeply ingrained, so it’s good to get some outsider perspectives. There are lots of different pathways to financial success, and I’m looking forward to sharing more case studies soon (if you’ve got an interesting story to tell, feel free to email me or drop a line in the comments!)