Hi everyone! Today I was listening to a couple podcasts and I kept hearing about the concept of the "freedom number". I tried to search Google on the topic and I got a lot of irrelevant links. I would like more information on this concept so I can determine my number for financial freedom. My goal is to determine the number of rental properties I'll need to acquire in order to quit my job.
Thank you in advance.
I did it a different way. I made a spreadsheet and listed out ALL my expenses. This included any annual expenses such as car registration, insurance, etc. Also you need to take into account any expenses your employer currently covers for you through your job like taxes and health insurance. Also look at how much you budget for "fun stuff" such as vacations, dining out, etc. (Or where you'd ideally like to be.)
That's your "number".
Then I made another list with how much rental income I was bringing in. I compared the income to the expenses, and watched as the income number grew. Initially when I bought my first rental property, I thought "how cool would it be if I could 'retire' in 10 years?" Then I wound up leaving my job after just 4 years. It was both a scary and exciting experience at the same time.
Having that goal in mind really helps!
It's how much you would net cash-flow to live comfortably - whatever that means to you (going part-time, retiring, etc). So if you need to make $5K a month to meet your and your family's needs for housing, food, activities, health insurance - that's your freedom number. You work backwards from there. So if $5K is the number, that's $60K annually. If your cap rate on real estate is 6%, you'd need about $1mm in equity invested. It gets a little more complicated leveraged vs unleveraged, but broadly that's the easy way to look at it. So if you buy a $1mm property (or 10 x 100K single-families, and on and on) that grosses $100K in rent and then your net CF after taxes insurance maintenance cap-x, and so on - is $60K, there's your freedom number. That $1mm investment churns out, after alls said and done, that $5K for you in perpetuity.
My goal is to determine the number of rental properties I'll need to acquire in order to quit my job.
You can work backwards to determine this:
1. How much income per month do you need to quit your job?
2. How much startup cash do you need to generate that amount of income (you can assume a decent rental these days generates a 10-12% cash-on-cash return)?
3. How many rentals can you buy with that cash?
So, here's how the numbers might work out for you:
- You decide you need $5,000 per month in income to quit your job
- To generate $5,000 per month (which is $60,000 per year) at 10-12% return, you need to start with $500,000 - $600,000
- With $500-600K, you can likely buy 5-10 rental free-and-clear or 20-40 rentals with leverage (depending on your appetite for risk and time/effort)
@Mary Carter Thank you! I'll be sure to check it out on sound cloud.
@Ryan Gillette @J Scott Thank you both for the breakdown. Using real numbers helped to illustrate it better for me. Now I know how to find my number. I've got a lot of research to do!
While I agree with everything said above, the way I found mine was more like this (same idea, but easier to break down).
To replace mine and my wife's income, we need bring in about $7k per month
Makes out to be $84k a year
Based on the rental market around my area, good rentals that cash-flow $2-300 a month aren't overly hard to come by, especially given the lower than Colorado average prices
Going conservatively, we would need 35 units. Less if we can make more cash-flow per month
Now, where it can get interesting is any other ways we opt to supplement that income. House flipping, wholesaling, ect. Could all be used as play money, and added into your freedom.
It's all a break down of where you want to be to maintain your life.
Now, could we survive on half of that? Probably, but I want to not only replace where we are, but exceed where we are in our lives.
Thanks @Mark Graham II. That's a very simple and concise method of finding my freedom number as well. I've been researching my area and it seems like rentals are the way to go so far.
I did it a different way. I made a spreadsheet and listed out ALL my expenses. This included any annual expenses such as car registration, insurance, etc. Also you need to take into account any expenses your employer currently covers for you through your job like taxes and health insurance. Also look at how much you budget for "fun stuff" such as vacations, dining out, etc. (Or where you'd ideally like to be.)
That's your "number".
Then I made another list with how much rental income I was bringing in. I compared the income to the expenses, and watched as the income number grew. Initially when I bought my first rental property, I thought "how cool would it be if I could 'retire' in 10 years?" Then I wound up leaving my job after just 4 years. It was both a scary and exciting experience at the same time.
Having that goal in mind really helps!
Personally, I prefer the term "F#$& You Money" :) There are lots of personal finance blogs out there that talk about similar topics, my favorite being Mr. Money Mustache ... REI is just one possible vehicle to get there, with endless variations therein. In addition to the tactical and analytical aspects of achieving this number, there is a lot of philosophy behind it ... below are a few of my current thoughts on the subject (none of which I came up with and some may disagree on):
I'd love to hear if anybody has anything to add to or disagrees with the thoughts above ...
@Dawn Anastasi I like the idea of making a spreadsheet. After listening to podcast 151 on my way to work this morning, it seems to coincide with what Clayton Morris was talking about. He mentioned listing your expenses for a six month period for example. I downloaded his freedom number PDF and I'm going to work on it this weekend.
@David Faulkner Those points do give me a lot to think about. As a beginner, I'm still learning and absorbing. I'd like to see if anyone has something further to add as well. With my limited experience (meaning no experience! lol) it's probably not my place to agree or disagree yet. I will be excited for the day when I can jump into heavier conversations to offer my input!
I like the idea of making a spreadsheet. After listening to podcast 151 on my way to work this morning, it seems to coincide with what Clayton Morris was talking about. He mentioned listing your expenses for a six month period for example. I downloaded his freedom number PDF and I'm going to work on it this weekend.
I've actually been tracking my expenses for years, so I have a pretty accurate picture on what I spend on groceries, car maintenance, etc. Sometimes there are fluctuations in spending, so I take an entire year and average it out. You'd rather over-estimate than under-estimate.
I have been doing this for 12 years, and still feel like I have a lot to learn, which is why I like to hear alternate views and get into discussion with folks that have a different perspective as me; BP is a great place to do that. The day you think you know everything and stop learning is the day you will lose money, and then you will likely get back to learning the day after. Life is a cruel teacher, she gives you the test followed by the lesson. A dumb person already knows everything and can't be taught anything. A smart person tries it out and learns from their experience. A wise person learns from the experience of others. You strike me as a wise person ... keep studying and doing and I'm sure you will do well.
Personally, I prefer the term "F#$& You Money" :) There are lots of personal finance blogs out there that talk about similar topics, my favorite being Mr. Money Mustache ... REI is just one possible vehicle to get there, with endless variations therein. In addition to the tactical and analytical aspects of achieving this number, there is a lot of philosophy behind it ... below are a few of my current thoughts on the subject (none of which I came up with and some may disagree on):
I'd love to hear if anybody has anything to add to or disagrees with the thoughts above ...
This rings true for me, great post. I like the term "forced appreciation" for adding value.
While I'm eventually looking for passive cash flow, I'm currently working on building my "small pile of cash into a big pile of cash" like you describe. I recently learned the phrase "building a cash mountain" that has some awesome Scrooge McDuck swimming through the money bin imagery to it.
I really liked finding out how many doors I needed to reach my freedom number! Assuming that they would be $100 per door, hopefully a bit more. But it really put a tangible number in my mind! 25 doors :)
@David Faulkner, I am with you on loving the idea of F#$& you money. The position of F#$& You as portrayed in The Gambler by John Goodman's character continues to inspire me.