Financial independence through real estate investing

This is a companion article to the article on “Should I be investing in real estate”. I talked briefly about why investing in real estate could be interesting. One of the reasons was around real estate being a strategy for financial independence and/or early retirement. I want to offer some real numbers here to show how that is possible and what it would look like. 

Start with the end in mind

As Stephen Covey says in “The seven habits of highly effective people” – begin with the end in mind. In this case, begin with how much monthly income do you need for your financial independence goal? This starts with your estimate of your monthly living expenses. Then, ask yourself what portion of those monthly expenses do you want covered through real estate income? Some people may say they want 100% of it covered, others may say I want my basic expenses (housing, transportation, food) which could be around 60% of your expenses. Others may say I want 150% of it covered – simply because they want to hedge this number. You decide what that needs to be. For illustrative purposes, let’s use this imaginary household whose annual estimated expenses are around $80,000 and they want 100% of it covered through real estate income. As of today, they don’t own any real estate. 

How much money will I make on each property?

So the next question to answer is how much money can you expect to cash flow from each property? Depending on where and what kind of properties you invest, the numbers can be very different. But for purposes of illustration, lets just say you are investing in single family homes that are $150K each and you are putting down 25% as down payment. So again for illustrative purposes, let’s assume the below kind of cash flow for this home. 

How many properties will I need to cover my expenses?

Now with the above example in mind, there are two different ways you can calculate this:

1. Buy fewer properties but pay off the mortgage in an accelerated manner – this means you are not looking for immediate cash flow but focused on getting to payoff in a much shorter time than the 30 years.
2. Buy as many properties through mortgages to cover my expenses – this means you are not worried about paying off the mortgages but want to actually start living off the cash flow. 

Let’s look at the 2 different scenarios and explore the numbers:

Buy fewer properties but payoff mortgage quickly

Let’s continue on the same example from above – 

So now step back and look at that. Hmm…to be financially independent, you don’t need to have a real estate empire of 100 properties or some crazy number like that. You need 8 paid off properties in this example. 

Now your obvious question is – how long will it take to pay off 8 properties? Do I need to wait 30 years?  Well let’s do some more math here. In the above example, let’s say you just want to take that extra cash flow of $395 per month and put it into principal pay off each month. Guess what happens? You will now pay off the property in 13 years (a whole 17 years before the end of your 30 year fixed mortgage)! And that too, without paying a single penny more out of your pocket. Of course, this assumes zero vacancies and you still will incur some capital expenses in certain years that will reduce this cash flow during certain years. But that will at worst set you back by a year or two. 

Now obviously, if you want to be more aggressive and pay off more each year, then you are going to reduce it even further. Say on top of this, you want to pay off an additional $5K per property for principal payoff. You will pay it off in less than 9 years! And it  can be even lower depending on how much more aggressive you want to get. But you get the picture now. 

But let’s not stop here. Let’s examine the other scenario

Buy as many properties through mortgages to cover my expenses

So if you don’t care so much about paying off the mortgages early you would need 17 properties to get you the cash flow needed to cover your living expenses. Now, that is a lot of properties and it’s going to take more work and management. But again, it’s not a 100 properties as you may have thought. One note here is that conventional 30 year mortgages won’t be given beyond 10 properties. After that, you will need commercial loans or other forms of financing which will carry higher interest rates and definitely smaller periods compared to 30 years. 

So how do I get the downpayment for each property?

This is a more involved question. The above examples assume a downpayment of around $37,500 per property. Thats a lot of money and certainly not something that’s sitting around for everyone. There are numerous examples out there showing how you can get properties for no money down. But I won’t go into all that. That’s not been my strategy. I simply use the more boring and traditional way to do this – save money each month and set it aside for real estate. Now, if you are fortunate to have a high enough household income this will be easy for you. If not, this will take longer. But nobody said creating wealth happens overnight. It takes dedication and patience. 

Concluding comments

As you can see from above, while there is some number crunching to do, you can absolutely design this the way you deem appropriate. This was simply an illustration to show you how this could be done. Many people will use real estate as one way to supplement their income and not necessarily rely on it 100%. That is your personal choice and depends on what works for you. Personal finance is personal after all. 

Thank you for reading and I wish you success in your financial journey. 

Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.