Traditional FI vs Real Estate FI
Ah yes, the road most frequently traveled in the FIRE community. Let’s start with traditional FIRE, which stands for Financial Independence Retire Early.
If you’ve ever done a little Google searching on the concept of financial independence, you likely have come across the “rule of 25”. The great and powerful rule of 25 is what most people call your “FI number.”
The most famous blogger in the FI space, Mr. Money Mustache-- who, ddid not in fact have a mustache at the time of the blog's founding-- talks about this rule in-depth in his article, “The Shockingly Simple Math Behind Early Retirement.”
The rule of 25 is simple: You figure out how much annual income you need per year to live. Say you could live off $40,000 per year, or $3,300 (ish) per month.
To figure out how much money you need to save before you can retire, you multiply the money you need each year by 25.
$40,000 X 25 = $1,000,000
Phew, barely needed to break out my calculator for that one. Yes, it is in fact that easy to figure out.
The rule of 25 is based on rock-solid principles. It assumes a safe 7% rate of return, with a 4% annual withdrawal rate. AKA you can take out 4% of your nest egg per year and still remain comfortably retired.
Which brings us to the next thing you may want to be aware of, which is “the 4% rule”.
The 4% rule states that you can safely withdraw 4% out of your portfolio over time, as the money withdrawn mostly will be from interest and dividends.
This number is based on historical stock and bond data from the last 50 years. This means a person has to be mostly in index funds or bonds and not opt for other riskier types of investments (a bit of side eye to those crypto fans... )
How do I save up this nest egg?
In order to retire, or even better, retire at an early age, you need to save up this pool of money. I don’t know about you, but saving $1M sounds daunting. Compound interest will help you out a ton, as most of the money will come from the interest you make-- but still. Gulp.
There are a few ways to go about tackling this beast.
For starters, the less money you need to live off of per month, the less money you will need per year. This drops your FI number. If you could live off of $2,000 per month, you would need half as much, or $600,000.
This is why many people in the FIRE (financial independence, retire early) space are super frugal. Doing “no-spend” years, biking to work, cutting the cable cord.
All. The. Things.
Well kids, the frugal lifestyle just is not me. I love pretty things on a budget, but less so on the frugal side of life.
So, how fast could someone save up a million dollars?
Good news, there is a calculator for that.
For example, if my current annual income is $112,000 and I save $70,000 a year, living off of $42,000 a year, I’ll have a savings rate of 62%. That means I could retire in 11.7 years. This would put me in my 40s. Eh.
Cue me saying “There has to be a faster way!”
In case you haven’t noticed, I am the most impatient person ever. Plus these numbers, calculators and fancy blogs have one thing in common: Super saving with stocks, bonds and index funds.
My answer was real estate.
Personally, I find that my good friends over at The Stealthy Rich sum it up in an amazing way:
“Appreciation (real estate goes up in value over time), income (rent each month), equity (over time, the mortgage gets paid down and you have money "stored" in your properties), tax efficiency, and leverage (using money that is not yours aka DEBT).”
Sadly, the last word on this list made me avoid exploring the topic of real estate for a very long time.
Leverage, aka: DEBT.
Big, scary amounts of debt made me wary of real estate for some time. SO so so many real estate blogs and podcasts brag about the heavy use of debt. Debt was my enemy for so long in my personal life, while we trudged through Baby Step 2. It became difficult to see debt as something that could have any positive attributes in my personal finance world. But my husband loved the idea of real estate. As did my financial advisor I saw at the time.
I started to realize there can be conservative approaches to debt in real estate, while still using some amount of “leverage” to build a little empire faster.
I learned that long-term, buy and hold, single-family homes could be the secret ingredient to hitting financial independence before I'm 40.
Perhaps while also living life a bit along the way. Taking vacations. Not having to side hustle. Having a fancy drink with dinner, instead of water. Maybe even splurging on the occasional item from Lululemon guilt-free. You know, the finer things.
FI with Real Estate
In the anything-goes world of real estate -- figuring out my “FI” number was trickier. There are just so many ways one can go. There was no simple "rule of 25" that everyone could follow.
Here is how I did it: I simply determined how much I need to live on each month. We will say that is $3,300. Now, let’s see how FI can be achieved with single family homes.In my area, I shop for houses below $90,000. To keep things simple, we will say rent for these 3 bedrooms, 1 bath homes is $1,100 per month.
Next, there is a VERY basic rule of thumb (yes, another rule of thumb for you today) that says 50% of the gross income you make in real estate will go towards your expenses. Let’s put that a different way. The 50% rule means that you will only keep HALF of the rent you collect after you set aside money for vacancy, management, taxes, insurance, and maintenance. This DOES NOT include mortgage costs. Yikes. So...
-$550 50% rule/expenses
-$350 mortgage payment
=$200 cash flow (aka money in my bank account)
At this rate, I would need 17 houses to roughly make $3,000 a month. Holy shirtballs. That was also not a great number for me.
So, being the debt adverse-ish person I am, I decided on another path…
FI with PAID FOR Real Estate. Let’s try this out:
-$550 50% rule/expenses
-$0 mortgage payment
=$550 cash flow (aka money in my bank account)
Ah yes, now we are talking. That will take only 6 houses.I am not sure about you, but 6 houses sound significantly LESS like a job than 15 houses.
Um, how will you ever pay cash for 6 houses?
Yep, BUYING 6 $90,000 homes cash also sounded rough. At least now, I am down to saving up *just* $540,000.
FI with PAID FOR Real Estate using the Rental Debt Snowball.
This is where the magic happens. And it involved me getting over the idea that ALL leverage is bad leverage. Enter the AMAZING Rental Debt Snowball. I was first introduced to this method by one of my FAVORITE bloggers in the real estate space, Coach Chad Carson. This method just clicked, and brought me back to my Dave Ramsey roots. I mean, I still remember the end of the snowball journey, and all of the momentum we had built up.
Here is how it will work for us. First, we save cash. Then, we use the cash to buy houses, 20% down, on conventional mortgages with low-interest rates. Once we hit our target of 6 houses, we would be cash flowing about $1,200 per month. Then, we would attack whichever house has the smallest mortgage. We will say that will be house 1.
+ house 1 mortgage payment (like normal)
+ all $1,200 of cash flow towards the loan principal
+ extra money we are able to save from our earned income
Once one house was paid off, we would start attacking the mortgage on house 2.
+ house 2 mortgage payment (like normal)
+ house 1 mortgage payment money (yay! it's paid off)
+ all $1,200 in cash flow
+ extra money we are able to save from our earned income
And so on, and so on. Until every house is PAID FOR. Now that is momentum.
Finally, a plan I could get excited about. A plan with true debt freedom and financial independence with real estate. Yas. With 6 paid for homes covering our core living expenses.
I fell in love with this concept and the rest… well, it will be Nerds Guide To FI history.
Sarah Brandenberger is the founder of Nerds Guide To Financial Independence, a brand dedicated to showing that financial independence is possible through real estate investment. She began her debt free journey in 2017 and quickly became a voice for budgeting and personal finance information as she and her husband paid off over $100,000. They discovered real estate investing and now own four properties while help others towards the path of FI.
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