Joshua Erney’s Investing Strategy – Real Estate, Stocks, and Life Insurance

My friend Josh decided to share his investing strategy with me (and everyone else on the website.) He and I have had 20+ emails going back and forth debating life insurance for investing. I’m not a fan of mixing life insurance and investing. But it’s the right thing for Josh.  I like how Josh gave a global overview of his investing strategy too, not just real estate.

Please read and comment. I sincerely enjoy reading and discussing investing strategies. Feel free to email me yours!

Introduction

My name is Joshua Erney. I live in Denver, CO, and work remotely for a company in West Virginia as a consultant specializing in software integration and API development. Like most people in Denver now, I moved here from out-of-state a few years ago, though my path to investing began just a few years before that move.

A little bit on my financial background and upbringing: I didn’t come from a financially well-off family. Growing up, my mother was an administrative assistant, eventually moving into move management, and my dad is an engineering aide at Lockheed Martin specializing in the installation, maintenance and repair of their on-site security systems. My parents rarely talked about money with me when I was a kid.

So I didn’t really start accumulating any financial education until I got out of college. For the most part, my history and outlook on investing can be traced through books that I’ve read to educate myself on the topic, and good folks I’ve met along the way. My story is short enough at this point that I can detail how I got from no financial knowledge to starting a business in single blog post. Let’s get to it!

Index Mutual Funds

Shortly after I got out of college, I moved back in with my mother and started working as a technical analyst for a consulting company. I met a friend who worked at the desk across from me, let’s call him Rupert. I quickly identified Rupert as someone who more or less knew what he was doing when it came to managing his finances. Not because he drove a fancy car (he didn’t) or lived in a big house (he didn’t), but because when he told me about his plan, it just made sense. There was nothing complicated about it. He wasn’t showing me graphs on graphs on how he was analyzing stocks and bonds and real estate, or using a bunch of crazy acronyms that I didn’t know the meaning of. I saw that as an opportunity.

I asked Rupert if he could help me, or could point me in the direction of somewhere I could get help and he sent me a link to the book “Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned In School,” by Andrew Hallam. I think I read the whole thing in one day, and walked away with some great advice about implementing a safe, simple, long-term investing strategy that I could fully understand. It gave me a ton of confidence about my financial future. If a teacher could implement this strategy and become a millionaire, and I was working in IT, could I become a multi-millionaire? Time will tell. This was the first time that I realized I could retire early if I truly wanted to.

A few months later, I quit my job in VA, picked up my remote gig in WV, and moved out CO to join the party. Excited to implement my new knowledge, I rolled my 401k, which I knew nothing about in terms of what it was, how it was structured, etc, into a traditional IRA, and purchased a trio of index mutual funds, which I felt like I knew quite a bit about after reading “Millionaire Teacher”. I started shoveling 10% of my pre-tax salary into the SIMPLE IRA my employer offered, and invested that using the same strategy.

A few months before leaving, though, Rupert moved to a larger home before having his first child. But unlike everyone else I knew who picked up and moved to a bigger house, Rupert didn’t sell his first residence. Instead, he rented it out for more than the mortgage, and generated another source of income. I didn’t do anything with this information until I read the next book.

Real Estate

After about a year and a half living in Denver, I decided I wanted to stay and be a homeowner. Knowing this was going to be the largest purchase of my life by a long shot, I bought a book on the topic, “Millionaire Real Estate Investor,” by Gary Keller (can you tell I want to be a millionaire, yet?). I thought I was excited after reading “Millionaire Teacher,” but after reading “Millionaire Real Estate Investor,” I was PUMPED. If I thought I could retire early with index mutual funds, then what I was hearing about real estate would’ve allowed me to retire in 10 years, if I was risky. The possibilities of building wealth through real estate seemed endless. My mind was on fire with what the future could hold. I didn’t just want to be a homeowner anymore, I wanted to be a real estate investor (no surprise, given the title of the book). So I started talking to the only real estate investor I knew, my landlord, who would soon become my realtor. She recommended I go to the Investor Success Summit. She hooked up my girlfriend, Amanda, and me with some tickets, so we marked it on our calendars and went.

At this point in my quest for the perfect investment property, I was more or less over-analyzing everything because I was frightened by how much about this field that I just didn’t know. But I figured I was at this summit surrounded by probably hundreds of years of combined experience in real estate investing, someone had to be able to help me. So I listened through all the presentations I could until the end of the day, absorbing everything I could. Out of all the presentations I saw that day, Charles’ presentation and personality resonated with me the most. He was incredibly level-headed, his presentation was entirely data-driven, and I could tell that it never once crossed his mind to pretend to know something that he didn’t know for the sake of his own ego. If someone asked him a question he didn’t immediately know the answer to, he said he’d find out and get back to them later. If someone asked him a question he would never know the answer to (e.g. “When do you think the housing market will see its next downturn”), he just said he didn’t know, but the data he was working with wasn’t pointing it to happening in the near future.

Amanda and I approached Charles as he was packing up from the summit. I told him my situation and asked him for his advice. I was a first-time home buyer, I wanted to buy a single family residence as an investment, not necessarily as a home, and do it somewhere in the $280 – $300k range so I wouldn’t be house-broke. He advised me to just buy something. The advice seemed way too simple at the time, but looking back, it was exactly what I needed to hear. I stopped thinking so much after that. I found a property that fit the criteria Amanda and I had put together, and pulled the trigger on a two story ranch that sits close to where I-25 and 36 intersect, funding the down payment of an FHA loan using stocks I’d acquired through a shared purchase plan offered from my previous employer.

Planning For The Next House

After I purchased the house and got settled in, I started saving up for the next one. I had already decided that I wouldn’t purchase my next property until I was confident that I could afford it without putting my other investments at risk. For me, this means having about $15K in low-risk investments that are specifically allocated to protecting my current real estate investment. While growing this money, which I do by investing about half of my after-tax income immediately after I get paid, I allocate 50% to index mutual funds, and the other 50% to stocks like AMZ, TSLA, NFLX, and CRM. When I reach $15K, I will sell the stocks and keep 50% of the $15K in cash, and keep the remaining in index mutual funds.

I choose to be a little more risky here because I like the opportunity for growth that these tech companies offer, but also because I can afford to lose if any, or all of these stocks take a massive hit on share price. This is true for a few reasons:

  1.  I don’t need the money right now, and I won’t move on a property until I have ALL of it, and am confident it’s safe. If TSLA dropped 50% tomorrow, and that pushes out the time that I can purchase my next property another 2-3 months, that’s ok with me.
  2. I work in IT so I have a few advantages, like an above-median salary, and the demand for my skill set being higher than the supply, etc. I also market myself better than most people that work in IT. This puts me in a position where I’m valued by other companies, not just the one I work for, so I have a lot of job security. This gives me a stable position to take risks from.
  3. I’m only 27 years old. I have a lot of time to build my wealth. Mistakes will be made, but I have ample time to recover, so I’d like to take some risks and have fun with it.
  4. I understand IT, more or less. I understand what makes companies like Amazon, Tesla, Netflix, and Salesforce valuable. I use products from 3 out of 4 of these companies every single day.

Business Assets

After I purchased my first property, I started looking for other ways to generate income. I was talking this over with a Lyft driver one day and he turned me onto a network marketing opportunity. I met with him and his buddy a few times, and we talked about building a business, how the company works, etc. I ultimately came to the conclusion that network marketing wasn’t for me, so I thanked them for their time and we went our separate ways. During those times we met up, however, they were telling me about Rich Dad’s CashFlow Quadrant, and how most of the money that the wealthy have accumulated is typically from the creation, operation, and sale of business assets. This really spiked my curiosity. I read the book and recognized that the potential there was awesome. Being able to create a valuable business, and the acquisition of knowledge and skill that goes along with it are incredibly valuable. Sure, creating a business is a ton of hard work, but that’s part of the beauty of it for me. Most people don’t want to work hard, but I’ve been working hard since college and I haven’t stopped, so it was just a matter of refocusing my efforts and going for it.

Again, the steady income from my job and the value of my skill set really gives me the confidence to take these risks. And I have ample time to pursue this goal because I don’t have a ton of obligations (no kids). So if I fail, so what? I’ll be right back where I started with plenty of time on my side. Or maybe even further along, because as long as I don’t touch my existing investments to subsidize my business, I’ll more than likely still come out ahead.

Around the time I decided to start pushing this, I had been emailing back and forth with Chris Lopez, and we met up for lunch. He turned me onto Gary Vaynerchuk’s books and podcasts, and I’ve been working my way through those to better understand advertising and marketing using today’s tools. Now I’m currently working with a friend to build a small business together. Once that business grows to a size I’m comfortable with, I’ll take profits from the business and invest it in stocks, real estate, or maybe another business, I’m still exploring.

Other Investment Opportunities

I’m always on the lookout for other ways to generate wealth. Based on my limited experience, I agree with Kiyosaki when he says that your wealth potential is dictated by your financial knowledge. So I try to learn as much as I can from those who have way more experience than me. There’s probably an infinite amount of ideas out there, and maybe they’re all great in some way or another, but the ultimate question is are they great for me? Is it something that interests me? Is it something that I’m currently passionate about? Can I leverage my existing knowledge while building new skills and making money at the same time? Am I comfortable with what I need to sacrifice in order to pursue this opportunity (i.e. the opportunity cost)? Is Amanda comfortable with what we would need to sacrifice? Is my financial position strong enough to take advantage of this opportunity without putting other investments at risk?

As an example, I was recently considering an indexed universal life insurance (IUL) policy as a way of achieving tax-free growth and tax-free distributions after I maxed-out my IRA contributions. I was turned on to this investment vehicle from a seminar I had attended. It seemed promising, so I decided to look into it further. I read a book about it, researched it a bit on the internet, and finally, spoke with a financial advisor about setting up a policy. I was planning to use this as a supplement to investing in S&P 500 index funds through a standard brokerage account so that I wouldn’t need to pay capital gains tax upon distribution.

Chris and I were emailing back and forth again and I brought this up to him. I wrote him this behemoth of an email detailing all the great things about the policy, but he still wasn’t convinced. I hold Chris’ opinions in high regard, so I went back and ran some numbers, comparing the accumulation and distribution qualities of the two vehicles. Long story short, what I found was that while the index funds and IUL accumulated at similar rates, the IUL’s distributions were a lot stronger because of a few unique features of the policy. Namely, tax-free distributions and something called a variable interest policy loan. Anytime I reference “taking a loan out against my policy” in the next few paragraphs, I’m referring to a variable interest policy loan.

I flip-flopped on IUL being a good investment many times while asking my advisor a lot of questions, doing a bunch of research, reading the contract a few times, asking more questions, and reflecting on whether or not this policy made sense in my portfolio. Ultimately, I decided to stick with it. Mainly because IUL would be the only investment vehicle in my portfolio (besides cash) that wouldn’t tank if the stock market or Denver RE market did. This gives me some comfort and assurance that my retirement is more or less guaranteed, even if my other investments took a big hit a few years out from a traditional retirement age of around 65. It also gives me a few other options that I’d otherwise need to be more in tune with the markets to accurately execute. I don’t really have the time or the passion to time the markets, and even if I did, I’m not convinced I’d be self-aware enough to keep my emotions in check when hundreds of thousands of dollars are on the line, or even smart enough to execute properly.

So what about those options I mentioned? Because one of the features of an IUL policy is that your funds are not directly in the market, you can never actually lose money (except to inflation, and the costs to keep your policy from lapsing). So I can be comfortable waiting for the markets to go down, like they eventually do, and still be sitting on as much cash value as I was when they were peaking. This puts me in a position where I can take a loan out against my policy, and make investments while prices are low. In another scenario, suppose the Denver RE market tanks and a few of my RE investments are suddenly at risk. I have a few options here.

  • I could try to sell the properties at a loss.
  • I can sell off some stock (probably at a loss) to protect my investments until the market comes back around.
  • If I have some cash reserves around I can use those to protect those investments.
  • Another option I have is to take a loan out against my policy (which again, did not tank in value because its not in the market), and cover costs with that money until the market comes back around.

The first two of these options go against the core investment principle, “buy low, sell high.” The last two are more financially sound, and I would probably end up using a combination of the two. But having the IUL means I need to sit on less cash (only about 6 months worth, the maximum amount of time the insurance company can delay granting me a loan after my initial request), which would just be losing value to inflation with no real shot at growth.

It’s important to state a few things here before I close out this post:

  1. This post is not advice. I’m not a financial advisor by any stretch of the imagination. I’ve set up my portfolio this way because it works for me at this time in my life. I’m doubtful the same structure would work for you, but maybe seeing my take on things will spur some ideas of your own.
  2. I’m not a real estate, stock market, tax, or insurance expert. I consider myself pretty ignorant in all of these categories.
  3. I’ve glossed over a lot of details pertaining to IUL. If you’d like to know more, your best bet is to a find a qualified agent, and do a ton of research yourself. I’ve found https://theinsuranceproblog.com/ to be particularly helpful. Just keep in mind they’re probably biased.

Conclusion

So ultimately, I’m building wealth through low-fee, low-risk investments in the stock market, real estate, and the creation and operation of business assets, with a few speculative investments on the side that I can tolerate the loss on (and since drafting this post, I have taken a loss on them, but that’s ok). I recently added IUL to my portfolio after doing enough research to determine it was right for me.

There are a couple things I didn’t address in the post: my time horizon, and goals. It’s pretty simple, I just want to be able to quit my job by the time I’m 40 and live like I’m living now, and I want to help my friends get there too if I can. I’m not trying to get the car with the chromie wheels, here. I don’t want the mansion. I don’t want the latest iPhone. I want the freedom. If the material possessions are there too, cool. I’m not even saying I’d quit my job if I had the opportunity. Truth be told, I love working, and I love the people I work with, but I love options more. Thanks for reading.

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Authors
Chris Lopez
Chris Lopez is a Denver area real estate entrepreneur and investor, as well as the host of Bigger Pockets’ House Hackerz and the Denver Real Estate Investing Podcast.
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