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This article was last updated April 3, 2024.
Don’t want to rely on your day job to pay the bills? Me neither.
With enough passive income, you can cover your living expenses and retire early if you so choose. It’s called financial independence, and once you reach it, you gain complete control over your time. Work as much or as little as you like, doing work that’s meaningful to you.
In the old-fashioned retirement strategy, you build a nest egg 25 times higher than your annual spending and withdraw 4 percent of it each year. Follow that 4 percent rule, and your nest egg is nearly certain to last at least 30 years.
But that means saving up $1 million for every $40,000 you want to spend each year in retirement. It’s a lot of savings for a small income each year.
So how can real estate help you get there faster?
Try these seven approaches to reaching financial independence with real estate. Better yet, combine several of them for even faster results.
1. Bend the 4 percent rule with rental properties
While I still invest in stocks, real estate works wonders for retirement investing.
Imagine you buy a rental property for $100,000 that pays $1,500 in rent. After property taxes, insurance, repairs, property management fees and vacancy rate, you earn $800 in average monthly cash flow. For those of you who hate math, that comes to $9,600 each year: A 9.6 percent yield.
Now imagine you finance 80 percent of the purchase price, adding a mortgage that costs you $480 a month. That leaves you with $320 in monthly cash flow or $3,840 per year. That comes to a 19.2 percent yield on your $20,000 investment.
Unlike slowly spending down your nest egg, that rental income doesn’t diminish. It will keep flowing in forever — in fact, it will rise over time as rents go up. Rents don’t just keep pace with inflation after all, they’re a primary driver of inflation.
And that says nothing of appreciation. The property will cause your net worth to rise each year as opposed to slowly draining your stock and bond portfolio.
Best of all, rental properties are recession-resistant assets. If a recession hits and your stock portfolio crashes, your rental income will keep flowing. Rents don’t fall during recessions, even when home prices dip.
2. House hack
For nearly all of us, our greatest monthly expense is housing. It often eats up 25 percent to 50 percent of your income. But it doesn’t have to.
I haven’t paid “full price” for housing in over a decade, and for the last eight years, I’ve enjoyed free housing.
The classic house-hacking strategy involves buying a multifamily property, such as a duplex or fourplex, moving into one unit and renting out the others. Ideally, the rents from your neighboring units cover your entire mortgage payment plus extra for repairs and maintenance.
You can even use conventional mortgage loans to finance them or FHA loans. The terms of your loan require you to live in the property for one year, then you’re free to move out and keep the property as a rental (and do it all over again).
Multifamily properties aren’t the only way to house hack though. I’ve house hacked by renting rooms to housemates. My business partner has rented out storage space, even went so far as hosting a foreign exchange student. The monthly stipend covered most of her mortgage payment.
A friend of mine house hacked by renting out a bedroom/bathroom suite on Airbnb. She found that if she rented it for two long weekends a month, it covered most of her mortgage. But before you try this at home, research market rates on Airbnb (use an Airbnb estimator tool). You want to make sure the juice is worth the squeeze as not all areas work well for Airbnb.
By eliminating your housing payment, you not only free up more money for investing, but you also reduce how much passive income you need for financial independence.
3. Recycle your down payment with the BRRRR strategy
Think you need millions of dollars to reach financial independence? Or even hundreds of thousands?
It’s possible to use the same down payment over and over again to build your rental property portfolio, which means that you only need to save up a single down payment. But it does require some labor on your part.
The “BRRRR” strategy stands for buy, renovate, rent, refinance, repeat. As you probably figured out, it involves buying a discounted fixer-upper, creating equity by renovating it and then renting it out. But here’s the kicker: When you refinance, your loan amount is based on the after-repair value. That means that if you created enough equity, you can pull your original down payment back out of the property when you refinance.
This frees you to rinse and repeat the process, adding another cash-flowing property each time. With each new property, you add another source of income and another property to appreciate in value over time.
Just watch out for negative cash flow on BRRRR deals. The numbers can sometimes be tight if you refinance to pull out as much cash as possible. Make sure you pinpoint the fair market rent with precision or else you can find yourself losing money each month rather than earning it.
4. Compound your rentals with an SDIRA
With a Roth IRA, your money grows and compounds tax-free. You pay no further taxes on your money, no matter how much it grows.
That makes Roth self-directed IRAs (SDIRA) a perfect fit for the BRRRR strategy. You can use the same SDIRA funds over and over to keep growing your portfolio.
That will require you to create a real estate LLC for investing, perhaps even one for each property. You simply instruct your SDIRA custodian to invest money in the real estate LLC that you created to buy each property. That also provides some asset protection as well, as people love to sue landlords, despite the fact that they offer a much-needed service.
5. Dollar cost average with REITs or crowdfunding
If you don’t want to become a landlord, you still have plenty of options to reach financial independence with real estate investments.
Set up automated recurring investments to take place every month or even every week. You can invest in publicly traded real estate investment trusts (REITs) or in real estate crowdfunding investments, which are equally passive.
You don’t need to invest much, either. Check out these ideas to invest in real estate without much cash.
The key is consistency: You keep investing on a regular interval, rain or shine. It’s called dollar cost averaging, and over time it means your returns will reflect the overall market performance. It prevents you from losing money trying to time the market — a temptation that all too often ends in disaster.
6. Double your money every 3-5 years with syndications
Many real estate syndications aim for a 2X equity multiple, meaning they aim to return double investors’ initial investment. The timeframes vary, typically ranging between two to seven years (most often four or five).
Sound too good to be true? As high as the returns often are, most investors can’t afford to access real estate syndications. These private equity real estate deals have historically been a vehicle for the rich and usually require a minimum investment of $50,000 or even $100,000.
You can pool money with other like-minded investors to reach that minimum, however. Our real estate investing club does exactly that, so each member can invest smaller amounts in these group real estate investments.
While you’re waiting for your money to (hopefully) double, you still earn passive income. Most real estate syndications pay yields in the 4 percent to 7 percent range.
7. Pursue infinite returns on syndications
In the BRRRR strategy, you aim to pull your money back out of the property when you refinance. If you do that, then every dollar you earn from that property represents an “infinite” return on your investment of $0.
It turns out that you can do the same thing with real estate syndications. Sometimes syndicators refinance these apartment buildings rather than selling, and when they do, they return investors’ capital to them. You get some or all of your money back, but you still keep your ownership interest in the property.
That frees up your money to reinvest over and over again, setting you up for infinite returns on the same investment capital. Consider using a Roth self-directed IRA to really capitalize on these, just like with the BRRRR strategy.
Final thoughts
You don’t need millions of dollars to reach financial independence and retire early (FIRE). You do need a plan, and you do need to consistently invest as much as possible.
My wife and I save and invest around 65 percent of our household income. We quadrupled our net worth in four years and plan to reach financial independence within the next few years. If a 65 percent savings rate sounds unrealistic, start by just freezing your current spending. Don’t succumb to lifestyle inflation as you get raises or earn more passive income. Over time, your savings rate will jump upward with each pay raise and with each stream of passive income that you add.
And, of course, consider adding some recession resilience to your portfolio with real estate. Stock market crashes are a real threat to retirees’ nest eggs, but real estate remains a far more stable investment.
G. Brian Davis is a real estate geek and co-founder of SparkRental.
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