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How many rentals do I need to reach my Freedom Number?

September 22, 2017

 

What does Financial Freedom mean?  It’s the ability to live comfortably without having to work e.g. trade hours of your life for money.  So what’s wrong with working for a living?  Most people work at jobs they “tolerate” simply to sustain a lifestyle and put away a little savings for retirement.  I say they tolerate their jobs because most wouldn’t be there if their income didn’t depend on it.  I often ask, “If ,at this instant, you didn’t have to worry about money for the rest of your life, would you show up to your job tomorrow?”.  What do you think is the most frequent response to my question is?  What’s YOUR answer to my question?  


Your Financial Freedom Number is the amount of passive income that you must generate in order to be financially free.  Everybody has their own personal Freedom Number based off of how and where they live.  I live near Santa Maria, CA were compared to places like Indianapolis, IN the cost of living is relatively high.  For me, I’d like to think having $70,000/yr or $6000/mo is reasonable.  


If I stopped working today, how long could I live my current lifestyle?


So how do I generate passive income?  Just Google “passive income generators” and browse the results.  You’ll find things like blogging, atm machines, AirBnB, ebooks.  These are all valid options.  However those people that have read and been influenced by “Rich Dad, Poor Dad” will know that Real Estate is where it’s at.  So I’d like to take you through the exercise of simulating my Freedom Number using passive real estate investments.  

 

Step 1)  Determine my Freedom Number
So I want to generate $6000/mo of passive income to cover all of my living expenses.  You will want to look at your accounts and add up all your expenses for the past 6 months to a year.  While you're doing that ask youself, "If I stopped working today, how long could I live my current lifestyle?".  Of course, you will want to add 10%-15% to that expense total.  Do you really think you expenses will stay the same over the next few decades?


Step 2) Identify some markets that you would like to purchase real estate in
Due to the over-priced California markets, I tend to look towards the Midwest such as Indianapolis, St Louis, Cincinnati, etc.  The price points there are so much more affordable than Santa Maria, CA.  I like Irvington, IN because it’s an up and coming area so let’s use it in this example.  Using Trulia.com, the average home is $154,000 and the average rents are $700/mo.  Now I want to answer how many units do I need and how much capital to get them?


Step 3) Calculate what it costs to purchase and rehab a target home
I don’t want to turn this article into a course on calculating the costs of acquiring and rehabbing a property.  Real estate investors find distressed properties and purchase them at very low prices.  For example, the Maximum Allowable Offer on a $154,000 home might be $77,000 e.g that’s 50% of the fair market value!  
If we use a Hard Money Lender to finance the acquisition and rehab it will essentially cost us $39,691.  So for every $40,000 you invest into acquire an investment property you will get $700/mo.  


Step 4) How many investment properties do I need to fulfill my Freedom Number
We would be living in the land of butterflies and fairies if all $700/mo of rent went directly into your bank account.  Unfortunately, there are expenses that are associated with owning investment property like mortgage, utilities, taxes, insurance, vacancy.  As an investor, you have to account for all of these and they vary based on the property itself.  A good rule of thumb is the Cash Flow is 55% of Gross Scheduled Income. In this, case our Cash Flow would be $385/mo.  


Results
So this results in needing at least 16 homes to generate $6000 a month of passive income.  We said it takes $40,000 for one home so that’s $640,000 in total capital required to reach my Freedom Number. 


I encourage you to take a look at your retirement plan and determine if accumulating a mountain of money is the best strategy.  I also encourage you to determine what Freedom Number you will be comfortable with.  Now divide your Freedom Number by $365/mo.  How many houses would you need?  Now multiply the number of houses by $40,000.  How much capital would you need to get to Financial Freedom?   Do you think you could attain Financial Freedom using this method within 15 years? If not, how many close can you get?


I have to warn you that this is an extremely simplified model.  It only illustrates that one’s path to Financial Freedom through real estate is finite and attainable. You might feel that having $640,000 in investable capital is a formidable task.  Please remember that you just need to start with $40,000.  In reality, you wouldn’t limit yourself to one market, one type of property, and you can leverage your existing portfolio to acquire more assets.  There are also market forces and tax strategies that work for you. 


So how do you get started?  It begins with educating yourself about “real estate investing”.  Search Google and Youtube for articles and videos on how to get started in real estate investing.  Ask friends and family if they know anyone that has a portfolio or if they are interested in partnering up with you 50/50.  It’s easier to get $20,000 than $40,000.  Lastly, find a local real estate investor association (REIA) and meet local investors. 

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