Personal Finance

How to Achieve Financial Freedom By Calculating Your “Rat Race Number”

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written

Do you dream of quitting your job with real estate and escaping the rate race?

If so, you’re not alone. It’s probably the main reason we’re all in real estate.

But have you ever sat down to calculate your “Rat Race Number”? This is the number that would allow you to be financially free so you can do whatever you want.

That’s what this post is about. And it has two parts:

  1. How to calculate your Rate Race Number, and
  2. How to best get there with real estate (and in your lifetime).

What is the “Rate Race Number”?

If you’re already familiar with Robert Kiyosaki’s CASHFLOW board game, then you know that the Rate Race Number is the amount of passive income you need to cover your fixed monthly expenses. Once you’ve achieved that, you are financially free and can do whatever you want (like quit your job, travel more, spend time with family, pursue non-profit aspirations, whatever).

There are two ways to achieve your Rate Race Number:

  1. Increase your passive income, and
  2. Decrease your expenses.


How to Calculate Your Rate Race Number

The process of determining your Rate Race Number is to figure out what you’re CURRENTLY spending and what you could do to decrease those expenses.

Step #1: How Much Are You Spending Currently?

The first step is to determine how much you’re currently spending.

If you’re not doing this, then start doing this right now. It’s at the core of sound personal financial management. I’ve been doing this every single month for at least seven years.

A great tool to use is It’s an online and mobile app that makes it extremely easy to track what you’re actually spending and prevent you from spending more than your budget allows.

If you’ve been using an app like Mint or Quicken to track your expenses, then create a monthly report that shows you how much you’re spending in each area.

If you haven’t been using a tool like that, then create a spreadsheet from ALL of your expenses in the last 6 months and assign categories to each expense.

I’m not going to describe this process in this post since I want to talk about GETTING to your number with real estate, so I’m going to assume you’re able to figure the rest of this step out yourself.

Step #2: How Can You Spend Less?

Next, look at each category and figure out what you could do without.

This is a really painful step, I know.

We love the way our life is! We’re used to the french vanilla caramel macchiato each day. We love our 1,800+ cable channels. We love our brand new cars and houses. I get it. I love ’em, too.

Related: BP Podcast 151: Finding Your “Freedom Number” with Clayton Morris

But think about this: How badly do you really want to be financially free? If you really want that, then could you do without some of these things you’ve grown accustomed to?

Think about this: A reasonable rental property should put at least $100 per month in your pocket after all expenses. So for every $100 you save per month, it’s about the same as purchasing one rental property.

So don’t skip this step. Really ask yourself what expenses you can do without and what changes you could make (and tolerate!) to save money.

I've been through this myself, from tweaking my spending to actually down-sizing my house. I've been through the pain. I can tell you it's not pleasant, and I didn't want to do it. But once I did, I was happier because it got me closer to my real goal: financial freedom.

What are you prepared to do?


What’s Your Number?

Let’s assume you recorded your ACTUAL spending and made some changes to reduce your monthly expenses by 20 percent each month.

And let’s say you determined that you could live with $5,000 per month if you really tightened your belt. That’s $60,000 per year.

Now, let’s not forget about taxes!

If your fixed costs are $60K per year, then you need to make MORE to pay your taxes.

Assuming that you’re paying 30 percent in taxes, then divide your net Rate Race Number by 70 percent to get your gross Rate Race Number:

$60,000 / 0.70 = $85,714 = $7,142 per month

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This means your passive income would need to be about $7,000 per month for you to be financially free.

How Will You Get There?

For many of you, this may be the first time you’re doing this exercise.

Eye-opening, huh?

Once you have your Rate Race Number, the next question is how will you get there?

You now know that you need $7,000 in passive income each month.

What real estate strategy will get you there the quickest?

If you're flipping houses right now, then you know that there's very little passive about that (I flipped over 30 houses, so I know a little bit about this!). So flipping houses is NOT going to be the kind of activity that generates passive income.

What about building a rental portfolio? This certainly qualifies as a passive income activity, so put a check mark there.

How many houses would you need to get to $7,000 in monthly income? This depends on your market and how good of an investor you are. Let’s say you’re consistently able to get $200 per month in cash flow (after expenses, including vacancies and repairs!) from your rental houses.

That’s great!

But at $200 per month in passive income, you would need 35 houses to retire. That’s a lot of houses. Do you have the capital for that? How long would it take for you to build such a portfolio? Do you even want that many houses? Have you ever thought about this?


A Better Way?

I think there’s a better way to achieve your Rate Race Number, and that is by investing in multifamily properties. Here's why I like multifamily properties better than single-family houses:

  • They’re easier to scale. You can acquire multiple units with just ONE transaction. Then you can add multiple units again with just a SECOND transaction.
  • They’re easier to finance. Multifamily properties are the easiest business in the world to get financing for. It's also the cheapest. And many times you don't have personally guarantee those loans.
  • They make it easier to outsource the management. The multi-family business model INCLUDES a professional management company. With SFH investing, it really only makes sense to outsource the management once you have several units. Otherwise, it can really eat into your cash flow.

But How Do I Get Started with Multifamily Investing (Even If I Don’t Have the Capital)?

I’m not going to answer this question directly in this post. Instead, I’m going to point you at all of my blog articles I have published on the Bigger Pockets since early 2014. That’s all I write about, and I answer questions like these:

So if you’re interested in exploring this strategy further, then check out all of my articles, as well as from others.

The More Important Question

Rather than figuring out how to get into apartment building investing, the more important question to ask yourself right now is this:

How will you achieve your Rat Race Number with real estate?

If your Rate Race Number is $7,000, then will you get there with wholesaling? Flipping houses? SFH rentals?

Or will you need to take a closer look at another strategy (like apartment building investing)?

If the answer is "no" and "yes" and you decide that you should take a closer look at commercial real estate, then you can create a plan.

My goal in this article is NOT to tell you how to do it, but to compel you to ask the right questions.

Make sure that your ACTIONS line up with your GOALS.

For most people, they don’t. Most people say that want something (like $7,000 of passive income), but their actions will never get them there.

Don’t be one of those people.

Sit down and figure out your Rat Race Number. Then figure out how you’re going to get there. Change any current behavior or course of action that will NOT get you there. Start new behaviors or a course of action that will.

Related: If You Ever Hope to Reach Financial Freedom, Master This Concept

Be more intentional in your life.


Now It’s Your Turn

I’d love to hear from you. If you’re comfortable, post a comment below and answer these questions:

  1. What is Your Rat Race Number?
  2. What can you do (or have you done) to decrease your expenses?
  3. What have you done to achieve your Rate Race Number?
  4. What changes do you think you would need to make to get there?

Thanks for your time to read this post, and I would love to hear from you!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
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    Replied over 4 years ago
    Michael, You are correct to point out the importance of understanding the “number” and the impact of expenses on your “number”. Your approach is counter to many of the talking heads in the financial industry, however, in my opinion the expense based approach you used is correct. Many of the financial industry folks like to take 85% of income, which is silly. For some people 85% of income is far more than they need, for others the need more than they bring in. One eye opening factoid is to take the price of that monthly expense, multiply by 300 and that is what you need to budget for savings to cover it in retirement from a more stock based portfolio. (12 times a year multiplied by 25 for the 4% safe withdrawal rule). Getting ones expenses under control is IMNSHO the most important factor in securing financial independence early. The only debt we have is on our investment properties and our living expenses are about $30K a year. This does not include the $$$ I’ll need to spend to send the kid to college in the fall, but it is all our utilities, property tax, food, clothing, gas, insurance and entertainment. Your point considering taxes is also worthwhile of investigation, one should understand their tax rate and how much they will pay to our mutual uncle. I’ve investigated taxes significantly in the past years and especially now that I will retire from the JOB in about a month. We need to understand our effective tax rate and consider the differences between passive income, investment income, business income and deductions associated with all of the aforementioned types of income. For example, I will not pay FICA on my investment income, reducing my effective tax rate by about 7.65%. However, if your REI is through a different kind of structure or entity, you may be required to pay self employment tax of 15.3%. Another expense people sometimes miss when considering financial independence is medical insurance. Depending on your family size and income, this can have a major impact on your expenses. Thanks for putting this article together, Michael. It’s incredibly important to understand the magnitude of the goal before setting about achieving it.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 4 years ago
    Hi Kevin – those are great points! Many people forget these kinds of savings and expenses and they SHOULD be built into your Rat Race Number. In that sense there may be several Rat Race Numbers: # 1: The “bar bones” number: the expenses you have right now and can’t avoid or reduce. Then there’s # 2: where you’re covering the savings and expenses you just identified. And then # 3: your next level dream number, where you’re not just scraping by but perhaps raising your living standards.
    Nick B. Investor from North Richland Hills, Texas
    Replied over 4 years ago
    Michael, you are incorrect about taxes. Rental income is tax deferred indefinitely if done correctly. Moreover, you may have depreciation higher than your net income and write that additional paper loss off of your regular income.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 4 years ago
    Nick – that is an EXCELLENT point! You’re right, if you’re deriving your passive income largely from rental income then your taxes may in fact be lower. Another reminder to check with your CPA about these things 🙂
    Luis Melendez Investor from New Britain, Connecticut
    Replied over 4 years ago
    @nickb I’ve heard of that before that rental income is tax free. It was actually mentioned by Robert kiyosakis tax guy in a YouTube video I watched. Do you know how that’s possible though. I’ve heard also that it wasn’t completely tax free. Do you have any insight into that?
    Nick B. Investor from North Richland Hills, Texas
    Replied over 4 years ago
    It is not tax free but tax deferred to be precise. However, you can defer taxes until you die and then your heirs inherit the property on a stepped up basis. Here is a oversimplified example: You bought a property for $4M with $1M downpayment and $3M loan. This property has $100K annual cash flow (NOI-debt service). That’s your rental income. To see how much of it is taxable, you need to deduct depreciation. Let’s assume that the land is worth $1M and the structure is $3M. Now divide $3M by 27.5 and get $109090. That’s how much tax deduction you may take from that annual cash flow. If you do that, the net taxable income becomes -$9090 which you can deduct further from your earned income. But wait, there is more! You did not pay taxes now but you are not off the hook. Once you sell the property you will have to pay taxes on all your previously depreciated value. What’s the solution to that? 1031 exchange. You sell you property for $5M (you increased the NOI and now it is worth more, right?) and use the proceeds to buy a bigger property. This will restart the depreciation cycle and defer your taxes once again.
    Nick B. Investor from North Richland Hills, Texas
    Replied over 4 years ago
    DISCLAIMER: I am not a CPA and the example above is for education purposes only.
    Dave Chapa Rental Property Investor from Katy, TX
    Replied over 4 years ago
    Michael, What a great reminder! We spend a lot of time crunching numbers in our due-diligence before buying a property. Likewise we should spend a lot of time, as you pointed out, to crunch the numbers before we jump in to RE full time while leaving our W-2 job behind. We have to be real about the numbers! It’s finding that realistic number to live, and also to be able to build the RE at the same time. For me, yes, I could live off less money. However, can I still buy properties with only being able to pay my bills? NO! So, I will leverage my W-2 to build enough passive that will allow me to continue to buy RE and live of the passive income. This will take me a little longer but the end results will give me more breathing room, especially in a down turn market.
    Luis Melendez Investor from New Britain, Connecticut
    Replied over 4 years ago
    @nickb that was awesome. I never really understood how it works fully but with that small explanation I understand it a lot more. That’s why I love bigger pockets thanks a lot man. Btw great article Michael I always follow your articles and videos
    Jim W. Investor from Sagamore Hills, Ohio
    Replied over 4 years ago
    Great article! I’ve owned a rental house for a while not and when I decided to get my next property, I made the same realization that multifamily might be the way to go. I just purchased a duplex a couple months ago and I feel I made the right move. Hopefully I can purchase another one of these in the near future to keep building the passive income stream. — Jim
    Theo Hicks Rental Property Investor from Tampa, FL
    Replied over 4 years ago
    Another great article Mike! I have recently done this exercise because my goal for 2016 is to quit my job and become a full-time real estate investor. I need to get an additional $3000 a month in passive income this year and I am there. Calculated my expenses to determine how much money I can save and I should be purchasing my last unit in December to reach my goal! Wish me luck
    Ricardo Cortes from Dallas, Texas
    Replied over 4 years ago
    awesome dude, i need to crunch my number and figure our my Rat Race #.
    Cory Mccarthy Investor from Fenton, Michigan
    Replied over 4 years ago
    Great article Mike with the added benefit that not only did I learn some things from your article, I also learned some stuff from several of the posted comments. Thanks so much!
    Account Closed from Evansville, Indiana
    Replied over 4 years ago
    ?In acknowledgement I want you to know we have Government Approved loans,pm so I can send you more Information’s.!
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied over 4 years ago
    Love the name Rat Race Number! By sacrificing and reducing expenses I was able to exit the RR quie a while ago but it wasn’t easy. Especially at first. You are so right about limiting expenses to get there faster. I may have been brewing my own coffee and eating sandwiches for lunch, but it was better than clocking in somewhere. Thanks for the article, Michael!
    Edis Baftjari from Manalapan, New Jersey
    Replied over 4 years ago
    Nick B., thank you for the explanation on the tax deferring, but can you please elaborate on the inheritance on a stepped up basis? Thanks,
    Nick B. Investor from North Richland Hills, Texas
    Replied over 4 years ago
    Let’s say an investor bought a property for $1MM. 30 years later he dies and the property is worth $5MM at that time. His heirs inherit the property and sell it for $5MM. Their tax bill is zero because their base (what they “paid” for the property) is equal to the value of that property at the time of the owner’s death. That is $5MM in this example.