FIRE construction with real estate investment

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The point of early retirement isn’t about sitting on the beach for the rest of your life sipping margaritas. This allows you to choose meaningful work on your terms without worrying about the income from it.


Before FIRE (financial independence, early retirement) became a trend, I worked as a loan officer dealing with hard money loans for real estate investors. I saw them build portfolios of rental properties and it dawned on me: With enough rental income, you can cover your living expenses.

And then you could quit your day job and do, well, whatever you want.

But, while conceptually simple, it doesn’t make it easy to do. What exactly is needed to achieve financial independence with real estate?

Why real estate is for passive income

Real estate has many inherent benefits for generating passive income and achieving FIRE.

First, it generates a steady income. You buy a property once and it pays you cash flow forever and ever. In the traditional retirement model, where investors build a portfolio of stocks and bonds, they plan to sell off assets over time to generate enough income for a living. If you’ve ever heard of the 4% rule, you get the idea. But the very concept of “safe withdrawal rates” is based on the reduction of your portfolio. You are not required to do this with the lease.

Second, rental income rises with inflation. Or rather, rent leads to inflation as it rises over time. This makes rental properties an excellent inflation hedge.

Thirdly, the property has excellent tax benefits… You can deduct or amortize every conceivable expense, including travel expenses, your office, and even the building itself.

Fourth, you can use other people’s money to build your own portfolio of income-generating assets. Apart from home lease loans, you can get creative with cutting back on the cash you need to set aside for rent

Fifth, you can predict the rental cash flow. You know the rent, the rent on your property, and you can predict the average long-term cost of all other expenses. For example, you can estimate the annual home maintenance costs, plus the average cost of capital expenditures such as replacement of windows

Finally, property rentals offer excellent diversification over stocks. More on this later.

3 phases of earning rental income

Most real estate investors seeking FIRE go through three stages.

At the acquisition stage, you buy as many income-generating properties as possible. Most people use real estate rental loans invest as little of your own money as possible and build your portfolio as quickly as possible. As they scale, they can move from residential real estate to commercial loans and real estate, such as apartment buildings. Some investors also flip houses at this stage to increase your investment capital.

This first phase is the most risky because you have the least experience but invest with the maximum amount of debt. High rental mortgage debt also limits your cash flow from each property.

Tenement house with giant calendar,
Image courtesy of Morning Brew from Unsplash.com.

During the consolidation phase, many investors stop buying new properties, or at least slow down. They use most of their cash flow and savings to pay off rental property loans. With each loan they pay off, their cash flow rises sharply. Some investors sell part of their property, using the accumulated capital to pay off existing real estate debt.

As you pay off some real estate rental loans, your cash flow increases. At some point, you find that you can cover your living expenses with this cash flow. Welcome to the third stage: financial independence!

Asset protection when creating a portfolio

Unfortunately, the more assets you have, the more targets you will have for lawsuits.

And homeowners see more lawsuits than most professions.

Start simple strategies to protect your assets from legal action… This includes keeping your business assets – your property is owned by a legal entity with its own bank account. Never, ever pool assets from your business and personal accounts, otherwise plaintiffs will be able to successfully breach the corporate veil in a lawsuit.

Start small with an LLC. But as you build your portfolio of rental properties, consider adding another layer of protection by placing your assets in trust

Real estate rental loans can also help to some extent. If every property is fully mortgaged, there is nothing for lawyers looking for an ambulance to do.

You can get protection through shared ownership real estate.

Talk to an asset protection attorney before moving on as one mistake can ruin your efforts and leave you vulnerable.

Diversification: a mix of income for FIRE

I love the rental income, but it definitely doesn’t make up my entire income.

Your real estate income should be one piece of the puzzle, one piece of a larger whole. To achieve financial independence and early retirement, you need passive income from a variety of sources.

In addition to rental income, I also receive passive dividend income from stocks. Although I have several dividend-paying stocks, most of my dividend income comes from index funds… They give me wide access to the stock market, and do not make me too dependent on any one stock.

I also make money through private banknotes by lending them to other real estate investors I know and trust. And I diversify further with crowdfunding real estate investments, which give me access to large residential developments and commercial buildings that I can never buy on my own.

Finally, I plan to continue working and earning an active income long after achieving financial independence. I personally enjoy writing and teaching real estate investing, which I can do on my own schedule. For you, post-FIRE work may include consulting, working with nonprofits, or starting your own business.

The point of early retirement isn’t about sitting on the beach for the rest of your life sipping margaritas. This allows you to choose meaningful work on your terms without worrying about the income from it.

Final thoughts

As you begin planning your own path to financial freedom, keep your goal in mind.

Set a target monthly income for your investments, both in real estate and others. Start working on this slowly but steadily. Remember, the beginning marks the hardest phase before you have a lot of passive income to reinvest and snowball.

This raises an important point: don’t waste your investment income on yourself. Don’t succumb to lifestyle inflation as your passive income and income from work soars. Continue to reinvest it in income generating assets to increase your income.

Finally, don’t move the target. It is too easy to pursue even more income and assets. Instead, decide what “enough” means to you and accept it as soon as you become financially independent.

What are your goals for financial independence? How do you plan to achieve them?

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