4 Steps to Financial Independence Through Real Estate Investing
On this day over 240 years ago, the United States of America declared independence from the British Empire. Over 7 years later, on September 3, 1783, the Treaty of Paris was signed in which Britain agreed to recognize the sovereignty of the United States.
To commemorate our country’s Independence Day, I want to provide a strategy for you to gain your very own independence – financial independence from your corporate full-time, 9 to 5 job.
Fortunately for you, unlike the original 13 colonies, gaining your independence will be much easier. There will be (hopefully) no blood shed, and all you need to do is commit to following the tried and true 4 steps to financial independence that many investors have used to quit their full-time jobs and become full-time active or passive real estate entrepreneurs.
#1 – What is my freedom number?
The first step is to calculate your freedom number.
Your freedom number isn’t a unit or property count. It is how much income you will need to at least cover your current expenses, or be equal to the income you are currently receiving from your full-time job, or ideally, to be able to afford your idyllic lifestyle.
The best way to accomplish this is to open up an Excel spreadsheet and list out all of your current expenses. If you want to replace your current income, then your freedom number is your pre-taxed income. If your goal is to afford your ideal lifestyle, determine how much that will cost you and that is your freedom number.
Let’s say you are currently making $50,000 a year at your current job, and you calculate that you will need an additional $15,000 a year to achieve your ideal lifestyle. Your “freedom number” is $65,000, or approximately $5,500 a month.
Advice in Action #1: What is your freedom number? _____________
#2 – How much real estate will I need to achieve my freedom number?
Next, you want to calculate how many rental properties you will need to achieve your freedom number. This calculation will be based on your specific investment criteria.
For example, when I was first starting out, my investment criterion was single-family homes that cash flowed at least $100 per month after all expenses. Other investors may have an investment criteria that is a cash-on-cash return – 15% for example.
Using the $100 a month in cash flow criteria, you will need 55 single family properties in order to cash flow $65,000 a year.
If your investment criterion is to only purchase properties that achieve a 15% cash-on-cash return, you will need to invest $433,333 to achieve your $65,000 a year freedom number. That can be purchasing one apartment building for $2.2 million (assuming it is a 20% down payment loan and you have that amount of capital available), but most likely, it will be a combination of single-family homes and small to mid-sized multifamily properties worth $2.2 million in total. For example, purchasing 22 duplexes for $100,000 each.
Advice in Action #2 – How much real estate (number of units or overall value) will I need to achieve my freedom number? _______________
#3 – Create a freedom timeline
Next, you want to create a timeline for how often you will purchase properties in order to achieve your freedom number.
Timelines will vary widely, depending on your current situation, market, investment strategy, etc. I recommend having a “freedom date,” and then reverse engineering a timeline.
For example, let’s say your goal is to quit your job in 10 years. Following with the previous examples, your freedom number is $65,000 a year and you need to purchase 55 single-family residences (SFRs) that cash flow at least $100 a month. The amount of money you will have available at first to use as a down payment will be any money you have saved up, as well as money you set aside from your full-time job. So, you first want to determine when you can purchase your first SFR.
After purchasing your first SFR, you will have an additional income stream – the $100 a month. How long until you can purchase your second property? At that point, you will have an additional $200 a month towards your next down payment.
Also, at some point, you will have enough equity in your earlier SFR purchases (from appreciation and principle pay down) that you will be able to refinance to pull out capital to buy even more SFRs.
Using the amount of money you will save from your job, the added income you will receive as you purchase properties, and the money obtained from refinancing, you can create a timeline of when you will be able to purchase each of the 55 properties over a 10 year timespan.
An important note: This is a high-level timeline. Do not expect things to follow your exact timeline. Things will undoubtable change – you will set aside more or less money from your job, you will have unexpected expenses, you will achieve a higher or lower rate of return, you won’t be able to find properties that meet your criterion, etc. This is strictly a guide to show you how long it will take to achieve your freedom number so that you can plan accordingly. As President Dwight D. Eisenhower once said, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”
Advice in Action #3 – Create your freedom timeline
#4 – Start implementing your freedom timeline
Finally, after calculating your freedom number, determining how much real estate you will need to purchase, and creating a high-level timeline, it is time to actually start purchasing real estate.
One of the best purchasing strategies out there for achieving your freedom number is the BRRRR strategy, coined by Brandon Turner at BiggerPockets.
BRRRR is an acronym for buy, rehab, rent, refinance, and repeat.
- Buy – Purchase distressed rental properties (the level of distress you are comfortable with will determine what properties to look for, as well as how quickly you will be able to achieve your freedom number)
- Rehab – Hire a great general contractor to repair the property (Related: How to Screen and Hire the Best General Contractor and How to Find the Right Contractor for the Right Job)
- Rent – Lease your newly renovated property to great residents (Related: How to Create the Ultimate Tenant Experience)
- Refinance – Obtain a new loan on the property to pull out the equity created from the rehab
- Repeat – Use the money from the refinance to repeat the process again and again until you achieve your freedom number
The four-step process for achieving financial independence is:
- Calculate your freedom number
- Determine how much real estate you need to achieve your freedom number
- Create a freedom timeline
- Purchase real estate, ideally using the BRRRR strategy
Achieving your financial independence may seem daunting, but compared to the sacrifice required to create our great nation, it’s a walk in the park. However, it will require patience, effort, and resourcefulness to navigate the many obstacles along the way.
Hopefully this four-step blueprint will help mitigate the number of obstacle you will face. But it will be the launching point for you to strategize and execute your plan to quitting your full-time job through real estate investing.
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