The 3 Principles to Achieving Financial Independence Through Real Estate Investing
Escape the corporate rat race and gain financial independence.
That is the main goal of many who decide to enter the real estate investment game. However, it’s much easier said than done.
Fernando Aires, who designed computer chips in the tech industry for over 25 years, was able to achieve the coveted financial independence and leave his full-time job in 2014. In our recent conversation, in regards to quitting his job through real estate, he said, “the key for me has been to buy enough properties, mostly with long-term fixed rate financing and some cash, in order to achieve this parity with my corporate income.”
For Fernando, it was a long process, but the juice was definitely worth the squeeze. Along the way, he discovered some tricks that enabled him to expedite the process.
What are those tricks?
#1 – Tax Benefits
Firstly, Fernando didn’t pursue zero or little money down loans or a creative strategy or really anything fancy. “Most of my properties are financed,” he said. “I try to get as much long-term fixed financing as possible, so by itself the property doesn’t generate lots of cash flow. My typical cash flow for financed properties is about $250/month.”
That’s $3,000 a year. With having corporate salary of a quarter of a million dollars to replace, that’s a lot of properties. However, he was able to slash the amount of money he needed to replace his salary with nearly in half because of the tax benefits real estate offers. “With income property, due to depreciation, which is the best tax write-off that you can imagine, you end up paying very little in taxes when you take that into account,” Fernando said. “When I was working for Apple in California, I was roughly paying 50% of my income to the government, which means that I only need to make about half gross that I was making in corporate America in order to be at the same point, due to the tax situation.”
Right off the bat, the tax advantages of real estate will allow you to have a “freedom number” that is significantly less than your current pre-taxed income from your corporate career. This involves hiring an accountant who has experience in the real estate niche you are pursuing (here is a video where I outline exactly how to find the best accountant)
#2 – Appreciation
Another thing that accelerated Fernando’s financial independence was appreciation. “Appreciation is certainly something that comes into play,” he said. “Over time, the properties have appreciated and some of them I’ve been able to do an equity strip from the properties due to the things that I’ve made, and you can also do an equity strip from the properties and you don’t have to pay any taxes when you borrow money against the properties.”
In other words, the equity that was created by appreciation can be pulled out, tax-free, to use as a down payment to purchase additional properties later on in the business plan. This is money on top of the cash flow from your portfolio and the money you are saving up from your corporate job.
Fernando also benefited from another form of appreciation – inflation. And since he was leveraging the properties with debt, meaning he was able to control 100% of the property by putting less than 100% down, the benefits of inflation were compounded.
“A quick example for most of my properties is if you put 20% down on a property with a long-term financing fixed rate in place, which is what I recommend, you’re essentially leveraging your money 5 to 1. Five times 20% is 100% of the property. What that means is if the property goes up by let’s say 5% a year – basically tracking inflation numbers that we’re given – you’re actually making 25%, because it’s five times your leveraged money.”
When taking the compounded effects of appreciation/inflation into account, Fernando’s returns far exceeded what he could achieve investing in the stock market.
“If you add that 25% with a relatively low cash-on-cash return of 8%-10%, your already at 30%-35% for a property that is leveraged. Try to beat that with buying any stock. As a matter of fact, I’ve compared – since I’ve worked to Apple – Apple stock’s annualized return from 2012 to 2015 with my real estate portfolio, and my real estate portfolio beat the Apple stock,” Fernando explained. “My numbers were 14.8% averaged over the period, and Apple stock was 12.1%… So it’s just no comparison.”
Without the advantages real estate provided from a tax, appreciation, and leverage perspective, Fernando would not have been able to achieve his financial freedom, or at least not as quickly and efficiently as he did.
If your goal is to replace your current income with real estate, you must become familiar with these three principles. Like Fernando, it will increase both your chances of achieving financial independence and the speed at which you will be able to do so.
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