Achieve FIRE Through Real Estate Investing
/If you’ve been in the real estate investing world long enough you’ve likely heard mention of the FIRE movement. If not, FIRE stands for Financial Independence Retire Early. While there are various versions of FIRE, at the crux of the movement is the ultimate goal of achieving financial freedom through aggressive saving and savvy investing.
What is financial freedom?
Essentially, financial freedom is the point when your annual expenses are covered by the income - ideally passive income - you are generating. Individuals achieving this financial feat gain the freedom to choose to continue to work their jobs (many do), or quit their 9-5 and pursue their true passions.
How does FIRE work?
Because FIRE begins by taking stock of your current financial position, there are some tangible steps to take in formulating a specific gameplan:
Determine the number ($ amount) you need to cover your annual expenses.
Most people don’t know how much money they need for retirement; so they work until they’re eligible for social security, leaving themselves roughly thirty years to enjoy the fruits of a lifetime of work.
Establish passive streams of income:
Invest in retirement accounts and/or low cost index funds
Start a business venture (what skills and passions can you monetize?)
Invest in real estate
Traditionally offers higher % return on investment than stock market
Less volatile than the stock market
Potentially lower barrier of entry than starting your own business
Adhere to the 4% rule: draw 4% from your investment portfolio each year in retirement to meet your annual expenses (with the principle and interest earned meeting those annual expenses for the rest of your life).
Project your living expenses in retirement (including housing, food, transportation, taxes, healthcare, etc.) and multiply this number by 25 (100%/4% = 25).
Example: if your annual expenses are projected to be $60k, then the total amount of income you’ll need in retirement is $1,500,000 (60,000 x 25).
Achieving financial independence is not as difficult as it may seem. Once you see the $ amount of income you’ll need in retirement, you have a real goal to shoot for. By practicing sacrificial saving and taking advantage of a wide array of passive income sources, anyone who is willing to delay instant gratification and stay the course can replace their income from their job. The question is, what is the best and most efficient way to reach FIRE?
How you can achieve FIRE through real estate investing
Buy and hold: purchase a property and rent it out for an extended period of time. This approach creates wealth through monthly cash flow (rent), or simply holding the profit as it appreciates for future gain. Holding the property and paying off the mortgage decreases the principal balance while increasing equity
House hacking: when you purchase a small multifamily property (2-4 units), live in one unit while you rent out the other units, thereby covering the mortgage and expenses with monthly rent, and essentially living for free. This method of real estate investing is FIRE proof as it allows you to drastically cut your expenses and save that extra money.
House flipping: many people have made some fast money when they successfully purchase, rehab, and sell a property. If you are particularly handy (or know someone who is) you can purchase a foreclosure, make it livable, and turn a profit. While many investors are attracted to the allure of making some fast cash, flipping successfully requires the right skillset and the ability to find buyers in a timely manner.
Real estate investment trusts (REITs): if you desire a more hands off approach you can elect to put your money into a REIT. These investment equities are run by companies who own and operate rental properties. While these investments can promise high dividends, they are directly affected by the market, meaning they may underperform in the short term, but provide strong returns long term.
These are only a few of the many ways to use real estate investing to achieve FIRE. As with all investing, a diverse portfolio is key to long term wealth building. Making sure that your financial ducks are in a row, and saving for unforseeable expenditures is crucial to protect yourself from financial disaster.
Things to consider before getting into real estate investing:
Do your research: you should never embark on a business venture without understanding the inherent risks, as well as potential rewards.
Educate yourself: take advantage of the plethora of free and/or low cost resources (i.e. articles, blogs, podcasts, books, online courses, meetups, etc.). Nothing could be more antithetical to FIRE than squandering hundreds, even thousands, of dollars on conferences and guru guarantees.
Math is king: when it comes to buying that first property, don’t be led by emotion. Run the numbers and trust the math. Numbers don’t lie, but our emotions are often very misguided.
High upfront costs:
Houses are arguably the most expensive purchase a person will make in their lifetime. The traditional 20% down payment alone is enough to prevent most people from ever purchasing their first rental. One popular investing sentiment is that, “Great deals aren’t found, they’re made.” What this means is that you’re not likely going to find an immaculate turnkey property selling well below market value. You need to educate yourself on the process of finding and analyzing properties, understanding what numbers reflect a great deal. You need to do extensive research to familiarize yourself with creative financing strategies, so that you spend less and make more when you purchase.
Sweat equity: real estate investing is no walk in the park. Aside from all the knowledge you must possess, there is the labor you will need to put into fixing up a property, especially if you’re flipping a house purchased under market value. Of course, you can always pay a professional to do the heavy lifting, but that may not be the most cost effective way to save money.
Little liquidity: unlike the stock market which allows you to sell stocks when you need cash, real estate investing is less liquid as it requires you to sell your property before you can cash in. The good news is that you will have some liquidity from the monthly cash flow to offset while you build equity over time.
Work with a team: most aspiring real estate investors should never attempt to embark on this journey alone. There are simply too many roles and too many hats for one person to wear. So it’s in your best interest to put together a strong, investment-minded real estate team that consists of: your real estate agent, a lender, accountant, contractor or handyman, and a property manager. Yes, you will need to pay each of these professionals. But the money they will ultimately save you in the long run is far greater than what it will cost you for their services. And this is another great principal of FIRE: surround yourself with good, talented people who can help you in your journey.
Ultimately, combining the forces of real estate investing with the FIRE mentality can be a powerful wealth building tool, and your ticket to financial independence. Learning how to buy smart and leverage a great property can lead to the best source of passive income. Be mindful that real estate investing, like FIRE, is a long term - even lifetime - process. Very few achieve life changing success over night. It’s important to remember that using real estate to achieve FIRE means that your standard of living should not rise with your income. If you make hundreds of thousands of dollars in real estate investing, while drastically increasing your spending, you won’t have much to show for all your hard work. But, if you can live a similar life in success as you’re living now, you will be well on your way to FIRE, and a lifetime of freedom.