A lot of you have probably heard of the buzzwords like financial freedom and passive income. Every Bob and their dog is parading those two words, especially all the gurus out there. I do not like those folks, but I am going to leave that for another article.
Let’s talk about passive income and financial freedom. What are passive income and financial freedom?
What Is Passive Income? What Is Financial Freedom?
Since I started in real estate, I have bought and held onto a lot of properties that I have not sold to investors. At one time, I had about 25 single-family homes in my portfolio that my in-house property management company was managing. Was that passive income or financial freedom?
That portfolio was bringing in way more than the average U.S. salary, but I’m happy to tell you now that wasn’t true passive income. In my opinion, it also wasn’t true financial freedom. Let me tell you why—because I still got the call.
What call? “Umm, your roof just caved in because a tree branch fell off and it broke everything!” Or, “Hey, your tenant’s toilet is clogged and we can’t seem to figure out what’s wrong with it and we’re going to have to get Roto-Rooter out here. It’s going to cost $300.”
And so on.
In my opinion, true financial freedom and true passive income are when you never get that call.
So, how can you go about accomplishing something like that?
Folks who are looking to buy turnkey and who think when you invest in five, 10, 15, or 20 properties like I had for financial freedom and passive income are wrong. I think that is not true financial freedom and passive income because you’re still going to get that dreaded call. You’re still going to get that dreaded email from your property manager if you’re buying turnkey or certainly if you’re managing your properties yourself.
How Can You Achieve True Financial Freedom Through Passive Income?
I think you have to compromise on the yield or the net return on investment. Hypothetically, if you’re buying turnkey; buying, fixing, and holding; or buying, holding, and putting a property manager in place, you are going to have to go into a higher end type area, more of an A-class area. Ultimately you’re going to have to go into a market where there is huge population growth and where there are many jobs.
Also, you want something like they have in Sydney, Australia, where people are actually competing for rentals. That will make it truly passive income and true financial freedom.
Let’s backtrack a bit. So, you’ve bought in a higher end area, there’s a lot of population growth, there’s a huge demand for rentals, and there are people fighting over rentals. You’re probably going to have to pay more than you would in a lower asset class. So, straight away you’re going to compromise on that net return.
You’re also going to instruct your property manager to not bother you with any maintenance requests. I know that sucks, because you have to let go of the reins and trust them. That’s why it is so important to find the right people first before you look at the stats and demographics of an area. Teamwork makes the dream work.
OK, back on track here. So you tell your property manager that you have $1,000 in the maintenance reserve and to feel free to use it as they see fit.
This, in my opinion, will be true financial freedom and true passive income. You are going to invest a large amount of capital into buy and hold properties, and you’re going to be completely hands-off. You’re not going to have any control and trust the people in place. If you can get anywhere from 4 to 6 percent net on your investment in a true financial freedom and passive income way, I think you’re doing really well. If you want to be a little hands on, you should be getting 8 percent and up.
No phone calls, you’re sipping piña coladas in the Bahamas, and the rent is coming in.
I’d love to hear from you about this, especially from someone who has a great structure in place and has true financial freedom and passive income.
Do you think I’m right, or do you think I’m wrong?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.