{"id":177355,"date":"2024-09-09T14:50:43","date_gmt":"2024-09-09T20:50:43","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=177355"},"modified":"2024-09-09T14:51:18","modified_gmt":"2024-09-09T20:51:18","slug":"five-year-plan-for-earning-financial-freedom","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/five-year-plan-for-earning-financial-freedom","title":{"rendered":"A 5-Year Plan for Financial Freedom With Real Estate (That Anyone Can Replicate)"},"content":{"rendered":"\n

What<\/span> drew me to real estate investing in my 20s <\/span>was the prospect of financial independence<\/span>: having enough passive income from investments to cover my living expenses.<\/span> <\/span><\/p>\n\n\n\n

I didn\u2019t want to work for 40 to 50 years before retiring, like the average working stiff does. I wanted to reach financial independence by age 30. <\/span><\/p>\n\n\n\n

Spoiler alert:<\/span> That didn\u2019t happen. At 43, I still work\u2014but my work looks plenty different today than it did 20 years ago.  <\/span><\/p>\n\n\n\n

You can reach a form of financial freedom within a few years. But it requires you to both think and act differently than you do today. <\/span><\/p>\n\n\n\n

If you want a life less ordinary, try this extraordinary plan to reach financial freedom within five years.<\/span><\/p>\n\n\n\n

Redefine Financial Freedom<\/span><\/h2>\n\n\n\n

First:<\/span> If you have to <\/span>actually<\/span> cover every dollar you spend with passive income from investments (true financial independence), you\u2019ll have <\/span>a hard time<\/span> getting there in five years.<\/span> Fortunately, you don\u2019t need to do that.<\/span><\/p>\n\n\n\n

I\u2019ve interviewed dozens of people who reached financial independence and retired young with real estate. The <\/span>\u201cdirty little secret\u201d of the FIRE movement<\/span><\/a> is that everyone goes back to work. <\/span><\/p>\n\n\n\n

Why? Because there\u2019s only so long you can watch TV on the couch or sip pi\u00f1a coladas on the beach. If you\u2019re reading this, you\u2019re not a beach bum. You\u2019re driven enough to dream of financial independence and invest aggressively to get there.<\/span><\/p>\n\n\n\n

Accept it: After the initial high of traveling the world for a few months, you\u2019ll settle back down and ask, \u201cWhat\u2019s next?\u201d <\/span><\/p>\n\n\n\n

Dream Work Still Pays Active Income<\/span><\/h2>\n\n\n\n

Inevitably, you\u2019ll go back to work. But that doesn\u2019t mean you\u2019ll go back to your high-stress job. You\u2019ll do it on your <\/span>own<\/span> terms, doing your dream work. <\/span><\/p>\n\n\n\n

That could mean starting a business, working for a nonprofit, or doing creative work. But whatever your dream work looks like, you will earn some active income <\/span>doing it<\/span>. <\/span><\/p>\n\n\n\n

The question then becomes, \u201cHow much does my dream work pay, and am I content to live on that?\u201d If that answer is yes, stop reading this <\/span>right now and <\/span>go<\/span> quit your job. Seriously. <\/span><\/p>\n\n\n\n

If your dream work doesn\u2019t pay enough to cover the lifestyle you want to live, you now know how much of a shortfall you need to cover with passive income. <\/span><\/p>\n\n\n\n

Most of us want what I call the <\/span>five freedoms<\/span><\/a> in our dream work:<\/span><\/p>\n\n\n\n

    \n
  1. Freedom from financial stress: <\/span><\/strong>You aren\u2019t chewing your fingernails worrying about keeping food on the table each month.<\/span><\/li>\n\n\n\n
  2. Time freedom:<\/span><\/strong> You set your working hours.<\/span><\/li>\n\n\n\n
  3. Location freedom: <\/span><\/strong>You can work from anywhere in the world.<\/span><\/li>\n\n\n\n
  4. Work freedom: <\/span><\/strong>You are pursuing your dreams with fulfilling work.<\/span><\/li>\n\n\n\n
  5. Financial freedom: <\/span><\/strong>Eventually, you want to reach true financial independence. <\/span>But as long as you have the other four, this <\/span>just<\/span> makes you feel better about retiring one day.<\/span><\/li>\n<\/ol>\n\n\n\n

    Again, you don\u2019t need to reach <\/span>full<\/span> financial independence to be financially free and fulfilled. <\/span>You <\/span>just<\/span> need to be able <\/span>to comfortably pursue your dream work<\/span>.<\/span> <\/span><\/p>\n\n\n\n

    Take Calculated Risks on Real Estate<\/span><\/h2>\n\n\n\n

    When you aim to quit your day job at 30 <\/span>or<\/span> 40<\/span> or<\/span> 50 instead of 65, you can pursue higher-return investments. In the absolute worst-case scenario, you can always keep working. <\/span>You don\u2019t have to switch to Treasury bonds and accept paltry returns <\/span>just<\/span> to squelch risk.<\/span> <\/span><\/p>\n\n\n\n

    I know real estate investors who consistently earn average annualized returns over 20%. They\u2019ve done hundreds of deals over many years, and their annualized returns stay remarkably consistent. <\/span><\/p>\n\n\n\n

    Again, the average person can\u2019t count on those returns. But you and I aren\u2019t the average person, are we?<\/span><\/p>\n\n\n\n

    If you know that investments with high returns and low risk (<\/span>asymmetric returns<\/span><\/a>) exist and that skilled investors know how to earn them consistently, the conversation reframes around \u201chow\u201d rather than \u201cif\u201d or \u201cshould.\u201d <\/span><\/p>\n\n\n\n

    This<\/span> is <\/span>exactly<\/span> what we do in our Co-Investing Club: We meet as a group of real estate investors to vet passive investments together. And then we go in on them together to keep each of our personal investments low. <\/span><\/p>\n\n\n\n

    Having 30 sets of eyeballs on an investment doesn\u2019t remove all risk, of course, but it does reduce it. We each try to poke holes in these investments from as many angles as possible as we discuss and vet these together.\u00a0<\/span><\/p>\n\n\n\n

    In our case,<\/span> we aim for at least 10% on fixed-return investments and at least 15% returns on equity investments.<\/span> You may <\/span>decide you<\/span> prefer to invest actively instead.<\/span><\/p>\n\n\n\n

    Choose an Investment Strategy<\/span><\/h2>\n\n\n\n

    Over the last 21 years in the real estate industry, I\u2019ve known:<\/span><\/p>\n\n\n\n

    Set a Target<\/span><\/h2>\n\n\n\n

    Assuming your dream work doesn\u2019t pay enough active income to cover your target living expenses, you need to supplement it with a little passive income. Or you could just spend less and save yourself some headaches. Just sayin\u2019.\u00a0<\/span><\/p>\n\n\n\n

    Imagine you want to live on $6,000 per month. Your dream work pays $5,000 per month. In this scenario, you need another $1,000 <\/span>per month<\/span> in passive income (assuming you won\u2019t budge on the target living expenses). <\/span><\/p>\n\n\n\n

    Now, you have a target for passive income. How much money do you need to save to achieve that?\u00a0<\/span><\/p>\n\n\n\n

    It depends on the returns you expect to earn from your investments. If you can <\/span>reliably<\/span> earn 12% on your investments, year in and year out, you need $100,000 (12% of $100,000 is $12,000\/year, or $1,000\/month). <\/span><\/p>\n\n\n\n

    The average person doesn\u2019t earn 12% returns on their investments<\/span>, of course<\/span>.<\/span> And even if they <\/span>did <\/span>earn<\/span> an average of 12% over the long term, you can\u2019t <\/span>actually<\/span> withdraw that much each year from volatile investments like stocks.<\/span> A <\/span>market crash early on<\/span> would wipe you out (called the <\/span>sequence of returns risk<\/span><\/a>). <\/span><\/p>\n\n\n\n

    That\u2019s why retirees only withdraw 4% from their portfolios, even though the S&P 500 has returned an average <\/span>around<\/span> 10% since its inception<\/span><\/a>. Retirees can\u2019t afford any real risk of their portfolio emptying within 30 years, so they have to play it extremely safe. <\/span><\/p>\n\n\n\n

    Luckily for you, real estate can help. <\/span><\/p>\n\n\n\n