TLDR: This is my story of how I used my big tech salary to set up an income stream before quitting to start something of my own and take big risk.
I recently quit my cushy, high-paying job in big tech to do a startup. Before I quit, I took on over a million dollars of debt.
With two kids to support, you might think taking debt right before quitting is reckless. But it's the opposite. That debt created cash flow from real estate. It also provides a roof & food for my family as I take a massive pay cut to quit and try to start something of my own.
A high salary from tech (a.k.a W2) has only one advantage; it can be easily levered out. Every other thing about it is a disadvantage. A high salary is taxed at the highest rates possible with the least amount of write-offs available.
What I did with the debt (with numbers attached)
So before I quit, I used my salary to buy (2) Two-Family homes, that's 4 units.
One unit for my family to live in, 3 are for rent.
The first home was $890k; I put 20% down. The other cost $840k; I put 25% down.
Maybe you think all this leverage is bad, but @naval says leverage amplifies judgment.
Here is how the rental economics work out, the homes produce $1,350 after payments, and my family lives for free in one unit.
Monthly payments combined are ~$9,500 (Mortgage+Tax+Insurance)
3 long-term leases, rent for:
- $4,000 unit 1
- $4,500 unit 2
- $2,350 unit 3
$10,850 rent - $9,500 expenses = $1.35k left and my family lives for free in unit 4.
A Quick backstory about me.
Far from being born rich, I came up as an immigrant, grew up poor in The Bronx, NYC.
Kept a full-time job in a restaurant since the age of 16. Paid for college from that restaurant to earn a CS degree.
I am lucky, but I worked hard for it too.
After, I landed my dream job as a developer. I worked hard at that and was promoted to run multiple engineering teams.
Recently I quit, to take on more risk.
It has always been my dream to start something or join something super early and help start it with others. The pandemic made me realize that I have to try and do this. But quitting big tech is risky, especially if you have a family as I do. But there are ways to make it less risky.
Chances are you can do this too; there are cheaper areas and homes to do this in. In addition, real-estate is not the only way to set up a fairly stable income stream while you try many other very risky things.
About those income streams.
In his book Antifragile, Nicholas Taleb advocates for setting up a bar-bell strategy when taking risk.
The bar-bell strategy is, on one side, fairly stable income, this is real estate for me, or it could be some other boring cash-flowing business. And on the other side is a startup, the SaaS, or whatever other highly scalable, but very prone to randomness, business you want to take big risk on.
Daniel Vassallo, who also quit big tech to try and fend for himself, speaks about this in terms of Small Bets.
For Daniel, that more stable normal distribution income stream is his freelance work. For me, it's real-estate, but there are others.
Another way to gain leverage over a high salary before quitting a tech job is to buy a boring business.
There are people on Twitter teaching how to buy other cash flowing businesses like laundromats with debt; I learned a ton from @Codie_Sanchez
Another great one I learned many things about cash-flowing businesses from is @sweatystartup, Nick Huber.
He buys storage facilities but also keeps an eye out for all sorts of cash-flowing businesses. If you are about to quit tech to try and start something and want to de-risk things for yourself and your family, you should follow and learn from these people.
Back to my Debt.
Although there are many types of cash-flowing business, real-estate is the easiest to get into.
Real estate is the easiest type of income to set up on a W2 job because banks won't question income from a W2 job if you've had it for at least two years. They'll loan the max amount for mortgages your salary can support. Even with 3.5% down, they'll allow 49% of your W2 to go to mortgages. There is no limit to how many mortgages you can take either, as long as your W2 income can support it.
The advantages of real estate are numerous in the US. Tax breaks, building equity monthly, living free, etc.
When you have business debt, and especially real-estate debt, you get to write off all of that income, and it can spill over and help you write off other income from other sources. Real-estate also depreciates according to the tax code, which is another big write off, but according to reality it appreciates nearly every day. This is because the tax system views people providing housing to people very favorably. There are a lot of breaks in the tax code for this, too many to list here.
Also, the risk is lower than any other type of business with real-estate because the mortgages are government-backed and to understand why you need to understand the American Mortgage.
This can all get tricky; you can go down the rabbit hole and try to understand House Hacking; that's a term you can look up if you want to understand more. There are entire communities on this like BiggerPockets.
I went down that rabbit hole for a bit, but these days I don't worry or need any of that; these homes are incredibly simple to manage. I bought in great areas with great schools where the rents are very high; my tenants make more money than me, the risk they won't pay is very low because they have more to lose than me.
Then there is the question of maintenance, which we had a recent flood from Ida damage large parts of New York. Insurance covered all of the damage; someone came did all the repairs.
For small repairs, the small amount of money I make over the mortgage is more than enough to cover them, and I use the same guy all of the time; I found him on Google.
I chose to do long-term rentals because I wanted to focus my time on building something big and not managing real-estate. I could have bought Airbnb's and probably made a lot more money, but I would've traded off a lot of my time.
Most people leaving to do their own thing from a high-paying tech job will lose their ability to borrow money the moment they hand in their badge.
My hope with all this transparency is that it helps people. I also know that this is not very popular in tech circles but my hope is to make it a little more popular.
This article started out as a very well received Twitter Thread, that I am reposting here.
The good side of Twitter seems to be people sharing good ideas and helping each other.
Follow me on there @LBacaj for more like this and lessons from my journey.
Memes and Motivation Newsletter
Get the weekly Memes and Motivations Newsletter by Louie Bacaj.