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What drew me to real estate investing in my 20s was the prospect of financial independence: having enough passive income from investments to cover my living expenses.
I didn’t want to work for 40 to 50 years before retiring, like the average working stiff does. I wanted to reach financial independence by age 30.
Spoiler alert: That didn’t happen. At 43, I still work—but my work looks plenty different today than it did 20 years ago.
You can reach a form of financial freedom within a few years. But it requires you to both think and act differently than you do today.
If you want a life less ordinary, try this extraordinary plan to reach financial freedom within five years.
First: If you have to actually cover every dollar you spend with passive income from investments (true financial independence), you’ll have a hard time getting there in five years. Fortunately, you don’t need to do that.
I’ve interviewed dozens of people who reached financial independence and retired young with real estate. The “dirty little secret” of the FIRE movement is that everyone goes back to work.
Why? Because there’s only so long you can watch TV on the couch or sip piña coladas on the beach. If you’re reading this, you’re not a beach bum. You’re driven enough to dream of financial independence and invest aggressively to get there.
Accept it: After the initial high of traveling the world for a few months, you’ll settle back down and ask, “What’s next?”
Inevitably, you’ll go back to work. But that doesn’t mean you’ll go back to your high-stress job. You’ll do it on your own terms, doing your dream work.
That could mean starting a business, working for a nonprofit, or doing creative work. But whatever your dream work looks like, you will earn some active income doing it.
The question then becomes, “How much does my dream work pay, and am I content to live on that?” If that answer is yes, stop reading this right now and go quit your job. Seriously.
If your dream work doesn’t pay enough to cover the lifestyle you want to live, you now know how much of a shortfall you need to cover with passive income.
Most of us want what I call the five freedoms in our dream work:
Again, you don’t need to reach full financial independence to be financially free and fulfilled. You just need to be able to comfortably pursue your dream work.
Assuming your dream work doesn’t pay enough active income to cover your target living expenses, you need to supplement it with a little passive income. Or you could just spend less and save yourself some headaches. Just sayin’.
Imagine you want to live on $6,000 per month. Your dream work pays $5,000 per month. In this scenario, you need another $1,000 per month in passive income (assuming you won’t budge on the target living expenses).
Now, you have a target for passive income. How much money do you need to save to achieve that?
It depends on the returns you expect to earn from your investments. If you can reliably earn 12% on your investments, year in and year out, you need $100,000 (12% of $100,000 is $12,000/year, or $1,000/month).
The average person doesn’t earn 12% returns on their investments, of course. And even if they did earn an average of 12% over the long term, you can’t actually withdraw that much each year from volatile investments like stocks. A market crash early on would wipe you out (called the sequence of returns risk).
That’s why retirees only withdraw 4% from their portfolios, even though the S&P 500 has returned an average around 10% since its inception. Retirees can’t afford any real risk of their portfolio emptying within 30 years, so they have to play it extremely safe.
Luckily for you, real estate can help.
When you aim to quit your day job at 30 or 40 or 50 instead of 65, you can pursue higher-return investments. In the absolute worst-case scenario, you can always keep working. You don’t have to switch to Treasury bonds and accept paltry returns just to squelch risk.
I know real estate investors who consistently earn average annualized returns over 20%. They’ve done hundreds of deals over many years, and their annualized returns stay remarkably consistent.
Again, the average person can’t count on those returns. But you and I aren’t the average person, are we?
If you know that investments with high returns and low risk (asymmetric returns) exist and that skilled investors know how to earn them consistently, the conversation reframes around “how” rather than “if” or “should.”
This is exactly what we do in our Co-Investing Club: We meet as a group of real estate investors to vet passive investments together. And then we go in on them together to keep each of our personal investments low.
Having 30 sets of eyeballs on an investment doesn’t remove all risk, of course, but it does reduce it. We each try to poke holes in these investments from as many angles as possible as we discuss and vet these together.
In our case, we aim for at least 10% on fixed-return investments and at least 15% returns on equity investments. You may decide you prefer to invest actively instead.
Over the last 21 years in the real estate industry, I’ve known:
There’s no right or wrong way to invest in real estate. There are just easier and harder ways to invest.
As a recovering landlord, I no longer have any interest in active investing. I’ve had my fill of night-and-weekend phone calls, of tenants showing up at my front door at 9 p.m. I don’t want to wrangle slippery contractors, property managers, or housing inspectors.
Today, I only invest passively. I spend most of the year traveling overseas and want to take full advantage of my location freedom and time freedom.
Other investors feel differently. You do you.
Your first decision comes down to whether you want to invest passively or actively. If the latter, you need to choose a niche and learn everything you possibly can about it. Become an expert in that niche, and you’ll start earning consistently high returns with decreasing risk.
Or invest passively with other investors who have mastered their niche. One advantage to this strategy is that you can spread your money among many different niches, choosing experts within each to invest your money with.
You have an investing strategy, and you have a financial target. When do you want to hit that target?
To continue the example, say I’m confident that my passive real estate investments will average at least 12% each year. I want to earn $1,000 a month from those passive investments, so I need $100,000 invested. If I want to quit my day job and switch to my dream work within 18 months, I need to invest around $4,850 each month to get there.
Play around with numbers with the Investor.gov savings goal calculator.
Of course, the less you spend each month, the more you can invest, and the faster you’ll reach your financial freedom goals.
My family and I live and invest from overseas, enjoy free housing through my wife’s employer, don’t have a car, and even get paid flights home to the U.S. each year. We aim to live entirely on her modest salary and not-so-modest benefits while saving and investing all of my income. In doing so, we’ve grown our net worth at warp speed.
What would it take for your family to get rid of a car, house hack to score free housing, or stop spending so much on meals outside the home? To get the creative juices flowing, try these nine ways to save money you’ve never considered.
When I was younger, I used to try to get clever with tactics like timing the market. Every time I got cute, it cost me.
Today, I practice dollar-cost averaging with my real estate investments. I invest $5,000 (or more, if I can afford it) each month as just one more member of our Co-Investing Club. Over time, I’ve become a fractional owner in thousands of units spread all over the country.
I don’t need to try to time the market or predict the next hot market or asset class. I just keep investing, month in and month out, across many different cities and asset types.
And it’s working. My passive income and net worth have both exploded since I started.
With a high savings rate, high returns, and controlled risk, you can build enough passive income to supplement the active income from your dream work—all within a few years.
Most people do the opposite: They spend almost every dollar they earn while working a job they don’t love. They don’t control when or where they work, and their work neither inspires nor fulfills them.
Don’t be like most people. Live an extraordinary life on your own terms. Real estate can help you get there as an investing vehicle, but only to the extent that you make your broader life freedom goals the target rather than just running on the earn-more/spend-more treadmill.
Find the Hottest Deals of 2024!
Uncover prime deals in today’s market with the brand new Deal Finder created just for investors like you! Snag great deals FAST with custom buy boxes, comprehensive property insights, and property projections.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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