Who has become financially independent from Real Estate?
Investor · Scottsdale, AZ · Member since 2011 · 509 posts · 134 votes
Who has become financially independent from Real Estate?
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14yThere seems to be this idea that by investing in real estate you can have cash to travel to exotic locations with beautiful members of the opposite sex and not really have to work at all. I guess it those slides the gurus show that creates this idea. I think its a myth. Those gurus show those pictures and tell those stories to suck you into buying their courses. "See, buy my course and bootcamp and mentoring program and you can hang out in Aruba with this gorgeous woman!"
The best way to achieve that goal is to have enough money invested in truly passive investments to give you the returns you want. Passive doesn't include any direct real estate investments, IMHO. By real estate investments I mean income producing properties. Not wholesaling, rehabbing, property management, brokering or any other real estate jobs. Those are simply jobs, the exact thing the gurus denigrate while trying to convince you of the easy riches that will come from their courses. Income producing properties will always have an element of management. Either you manage them directly or you pay a manager. You're either managing the tenants or managing your PM. Not sure which is more work, but directly managing residential rentals doesn't scale and eventually you'll have to hire a PM or employees.
Truly passive investments, OTOH, require very little involvement. Bank CDs or treasuries are the seminal passive investment. Unfortunately, at 2%, you would need $5 million to produce $100K in annual income. Dividend paying stocks, corporate bonds, REITs, and similar investments hopefully pay a higher rate, but have more risk. Or, if you want to be more directly in real estate, investing in someone else' business will produce returns in low to mid double digits. You'll have a line of people out the door if you offer long term (more than a few years) real estate financing at 8%. You would only need $1.25 million at 8% to generate that $100K. Good NNN commercial properties can generate those returns, too, provide you tenant doesn't go belly up. You might manage 12% if you directly make hard money loans. But now you've over into the "job" realm because you have to deal with actually making the loans.
So, in reality most of "real estate investing" is really a self employees job. I'm sure there are numerous people here who fall into that category.
I think managing 6-8 rental properties with a full time job is possible. You're going to be dealing with a turnover every couple of months. You'll have minor items crop up that require you to deal with them on short notice. You'll occasionally have an evening interrupted. But I think managing one unit consumes about 12 hours per year, provided you don't have a major disaster (e.g., nasty eviction.) A big chunk of that is associated with the turnover. So, 6-8 properties means 72-96 hours a year, which is roughly 6-8 hours a month. Some months you'll do nothing but deal with collecting rent. Some months you'll spend all 8 of those hours dealing with a turnover. Once a year you have to get your taxes together.
109 Replies
- Rehabber · Albuquerque, NM - New Mexico · Member since 2011 · 283 posts · 38 votes14y
Well if you want my two cents on top of that, I'd only need (after taxes and everything) about $800-$1000 a month to be extremely happy. Me being my own boss is where most of the happiness would stem from.
So what's that, like 1 or 2 paid off properties? But then again I should have more just in case of vacancies. So maybe around 3. But eventually I'd like to be wealthy just like anyone else...
- Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes14y
Originally posted by Manuel Acuna:
Well if you want my two cents on top of that, I'd only need (after taxes and everything) about $800-$1000 a month to be extremely happy. Me being my own boss is where most of the happiness would stem from.So what's that, like 1 or 2 paid off properties? But then again I should have more just in case of vacancies. So maybe around 3. But eventually I'd like to be wealthy just like anyone else...
Really? 800-1000/month is barely enough to pay the mortgage/rent and the utility bills even on a frugal (not hermit) budget.
- Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes14y
Originally posted by Ryan M.:
When people 0.02 that means opinion or my opinion and at the end of day that's what all this is. IN MY OPINION that's what it takes....why because I watched my parents and grandparents do just that.Completely understood.
It was my opinion that your generalization was meaningless.
Why? Because everyone has different standards of living, different debt obligations and different goals. Just based on the responses in this thread, there are people who would be thrilled with much less than what you suggest and people who couldn't get by without much more than what you suggest.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
Not to mention cost of living varies greatly by the United States and the world.
You might have 2 people totally the same in how they live.
One's cost of living runs 3,000 a month and the others is 6,000 a month simply for the fact that each one lives in different places and the 4 bed 2 bath 1,600 sq ft house is 1,500 a month in one place and 3,000 in another.
The money made for where you live doesn't always add up equal to the higher costs either.
Georgia is one of the cheaper states for costs of living but every time I go out to eat or the grocery store it is a few cents higher.
The answer is to make more money and outpace inflation as costs are not going down anytime soon.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes14y
The title to this thread had me worried that it would end up being a gloating type thread. With thread titles like this, I guess it is inevitable.
My guess as to what the OG poster had in mind here is what it takes to have RE create your financial freedom. In answering that, you must first define financial freedom. Someone did already - when your passive income exceeds your expenses. To then drop opinions of what you need or how many you need is useless like J Scott pointed out - to each is his/her own.
If I cared to move to another state where I can buy a nice home for under $200k and have cheaper taxes, lower cost of living, etc. I could be financially free right now. I choose not to do that, I love living where I do (CA) and I pay the price for it, so I will keep my self-employed RE job for now and continue building up more passive income each month.
So to answer the question, it will take an ability to acquire properties (or notes, or some vehicle for passive income) and manage those assets. It will take the ability to step and repat until you get to a point where your passive income exceeds your expenses. Only each person can identify how many or how much that is.
Can you do it while holding down a full time job? Or course, many people on this board have or are doing it. Can you build it faster without the 9-5? Of course, but catch 22, you can't quit your job and lose your income without the ability to immediately replace it. So in there lies the challenge. Meet the challenge and go after your goals, ignore the BS spread out by others like Jon Holdman stated. Gurus and those bragging about easy riches are often liars or crooks
Jared Vidales - Your specific questions - I started in RE in 2004 at age 30. While I quit my job (previous job was self employed - had my own business) 4 years later, it was not because I had enough passive income to do so. It was because the market conditions were changing and I changed my focus to benefit from those changes which was to flip - a job if you will. So I actually traded one job for another, but the later is much more fun and has not one single cap on it as to how much I can make! That is one of the many beautiful things about RE.
So, if you can "switch" your job from the current 9-5 and into RE where you flip or do some type of active investing that replaces your current income, it will allow you to already be in the field that also has the road to the passive income. Now you can likely build that faster than you could while holding the 9-5
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes14y
Brian- I'm happy! I was also happy 10 years ago when wifey and I went fulltime rving for 6 years. I saw LOTS of people living life to its' fullest on LESS than $2500 per month-30K per year. They didn't live in a Taj Mahal, but literally played all day and partied all night. They were EXTREMELY happy knowing their pension, retirement savings, passive income, social security etc was more than they needed.
Be careful of those gurus selling consulting, boot camps etc. If you're interested in who has become financially secure from INVESTING in real estate, disregard the gurus, imo.
Rich - Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes14y
Originally posted by Rich Weese:
Brian- I'm happy! I was also happy 10 years ago when wifey and I went fulltime rving for 6 years. I saw LOTS of people living life to its' fullest on LESS than $2500 per month-30K per year. They didn't live in a Taj Mahal, but literally played all day and partied all night. They were EXTREMELY happy knowing their pension, retirement savings, passive income, social security etc was more than they needed.
Be careful of those gurus selling consulting, boot camps etc. If you're interested in who has become financially secure from INVESTING in real estate, disregard the gurus, imo.
RichRich Weese,I bet you are happy. And I bet you did enjoy that trip living frugally, albeit about 3 times more that what Mr. Manuel Acuna is satisfied with in his normal life. But I bet, in addition to saving your pennies, you worked your butt off for it and didn't coast around working part time minimum wage jobs to be in that position. And I bet you had to save up a heck of a lot more than 14K as well!
But really, I was just joking around. Sometimes I forget tone and voice inflection don't convey in print very well...
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes14y
Originally posted by Brian Hoyt:
Really? 800-1000/month is barely enough to pay the mortgage/rent and the utility bills even on a frugal (not hermit) budget.I know lots of RE investors like leverage. Me too. NOT for my residence, though. Having a place to live with no mortgage and no rent is a HUGE increment toward living off your investments. Buy a place you plan to die in. Make it the way you want. Pay it off. Don't use it for leverage. No rent. No mortgage. A large bill you just don't have each month. For me, that's better for my bottom line than a dozen rental properties.
- Member since 2012 · 32 posts · 1 vote14y
Originally posted by Jon Holdman:
I know lots of RE investors like leverage. Me too. NOT for my residence, though. Having a place to live with no mortgage and no rent is a HUGE increment toward living off your investments. Buy a place you plan to die in. Make it the way you want. Pay it off. Don't use it for leverage. No rent. No mortgage. A large bill you just don't have each month. For me, that's better for my bottom line than a dozen rental properties.What do you mean by using it as leverage?
- Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes14y
Jon Holdman,
I agree that owing nothing on your home is very valuable and comforting. Still, you will have taxes and insurance even with no mortgage.In that respect, you never do own real estate 100%. There will be rent to be paid, just call it by a different name. I know that taxes are fairly high in Texas, but to live in the place where I will want to die, that house will need to be in a decent neighborhood and accept my wife and our future two children as well. That kind of house will have taxes and insurance of about 400/month for a house valued around 150K, which is not extravagant and affords the acceptable-not fancy neighborhood. I'm intimate with these numbers because this is the house I am now looking for now that I am ready to upgrade from my current home, what's mortgage payment was cheaper than most rents (600 and soon to be 450/month after a refi 'm about to finish up).
Do you think it is more prudent to pay off 150K mortgage before using leverage to buy RE investments? I think there is too much opportunity cost in that. However, I do believe you should apply extra payments, but not put everything else on hold. I am interested in your opinion.
Yeah, you can live on 800-1000 a month. But I see it rather as surviving and not living.
I'd like to see the itemized budget for that kind of income. Something tells me it doesn't look like much fun. At least you'd have lots of time to read books!
Anyway, I'm getting WAY off topic...
- Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes14y
Originally posted by Tyler Jackson:
Originally posted by Jon Holdman:
I know lots of RE investors like leverage. Me too. NOT for my residence, though. Having a place to live with no mortgage and no rent is a HUGE increment toward living off your investments. Buy a place you plan to die in. Make it the way you want. Pay it off. Don't use it for leverage. No rent. No mortgage. A large bill you just don't have each month. For me, that's better for my bottom line than a dozen rental properties.What do you mean by using it as leverage?
Don't take out a HELOC or refinance your personal residence and pull out cash to fund an investment.
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes14y
Brian and Jon H- Here is my contrarian view to owning your OWN residence free and clear and why I don't do it. I like my contrarian view for the following reasons . I DO agree you should have A house free and clear.
1. I have at least a home free and clear.
2. I am able to obtain a better loan on OWNER OCCUPIED home.
2. I do have a sense of security with F&C home- and it doesn't have to be the residence.
3. I live in a nicer home, higher LTV, lower rate, etc and still have a F&C home if everything goes to pot.
4. If everything only goes PARTIALLY to pot, the lender probably won't want my highly leveraged home I live in. We all know people who are under water for over 3 years and lender hasn't taken the home.
5. I get interest deductions on my residence, which I wouldn't if it was F&C.
6. I still have the sense of security with other F&C home.
7. I have more $ to invest elsewhere because F&C home is not as expensive and only there for severe emergency.
8. The extra $$ to invest makes me more $$, more writeoff etc-which I wouldn't otherwise have.Just a contrarian view for BP members to digest. Rich
- Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes14y
While I can certainly make a case either way, personally I agree wth Rich that -- these days, at least -- having a mortgage on my primary residence makes more sense. With interest rates below 4% for owner occupants, I can easily earn more on the equity in my home by investing it as opposed to leaving it as equity.
From a risk standpoint, I would never leverage my personal residence anywhere near 100%, but having about 70% LTV makes me perfectly comfortable and gives me a good bit of cash that I can easily generate more than 4% returns with.
Add to that the mortgage deduction and, for me at least, keeping a mortgage on my primary residence is the right decision.
- Real Estate Investor · Atlanta, GA · Member since 2009 · 339 posts · 126 votes14y
Financial independence = you don't have to work to cover your living expenses.
In order to do that your investment income must be greater than your living expenses.
So called "passive" income is not passive unless it's money sitting in a savings account/CD/Treasury bills/annuities or the like.
Yes, these things are awful investments but they are as SECURE as you can get and that is essential if you are going to consider yourself financially independent.
Those type of things are the only really passive income producers. Rental properties are not passive.
So to reference the original question in this thread, for someone to become financially independent from RE they would have had to produce enough money through RE and then put that money in the bank to produce an income that covers their living expenses to consider themselves financially independent.
- Real Estate Investor · Atlanta, GA · Member since 2009 · 339 posts · 126 votes14y
Originally posted by Jon Holdman:
So, in reality most of "real estate investing" is really a self employees job. I'm sure there are numerous people here who fall into that category.
Agree, I fell into that category. I was a full timer for a while and this is what I discovered first hand.
However like Will Barnard mentioned it's a lot more enjoyable and satisfying to be self employed in RE than to be employed for Corporate America IMHO.
- Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes14y
Originally posted by Luis A.:
So called "passive" income is not passive unless it's money sitting in a savings account/CD/Treasury bills/annuities or the like.Yes, these things are awful investments but they are as SECURE as you can get and that is essential if you are going to consider yourself financially independent.
I disagree with that definition. Fixed income securities, even when they are backed by the government, have some inherent risk.
For example, imagine someone who stuck their $10M in a CD back in 2000 and claimed that they were financially independent because they were generating $70K per year on that money (enough for them to live on). Now, 12 years later, that same $10M is only generating $25K per year, perhaps not enough for them to live on.
So, the fact that the investment was fixed income and backed by the U.S. government made it no less risky to their financial independence than if they had put it in another investment. Sure, they didn't need to worry about losing money, but that didn't appear to be your point. Your point was that someone needs to be able to generate enough income from these fixed interest securities to claim financial independence. I would argue that even that wouldn't be enough by your definition.
The truth of the matter is that there is no way to guarantee that financial indepedence today will translate to financial independence tomorrow. But, I would argue that there is just as much chance of achieving it via real estate, dividend paying stocks, etc, as there is achieving it through CDs Bonds, Treasuries, etc.
Also, I would argue that RE *can* truly be passive. Building a business that you no longer run -- but that earns you income/dividends -- can be completely passive. Just ask Bill Gates. And that business can certainly be RE -- whether development, rentals, notes, etc, if you have a trusted management team running the business, there are generally ways you can completely extract yourself from the business.
Sure, the business could fail, the stock could tank, and you could be left without financial independence, but again, that can happen with govenrment-backed interest-bearing securities as well.
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes14y
Heh JScott- Here is further contrarian view. If 70% is good, why not 100%? My reasoning.
1. More interest writeoff.
2. More money to invest elsewhere.
3. IF you ever go down in flames, lender will go after your home with 30% equity before they go after mine with 0% equity. (no- I don't expect either of us to go down in flames-just an example for others)Luis-I have to disagree with your definition of passive income. I do have financial independence according to your definition, and I consider my rentals as passive. I do visit them once a year (maybe) and I check reports from personal asst. after he has checked all info from the mgmt companies. I don't consider this a job any more than going to Cancun and checking my condos a couple times a year. I also read many investment magazines monthly and this is not a job, and yet I spend more time doing that than RE.I receive more than enough income to live on each month, make donations, build homes (not passive but also not required to live off) and add $$ to savings and a bypass trust.
In the early stages RE was very much a job. Not now. Being able to go on this 7 week RV trip that started a few days ago with absolutely ZERO responsibility on RE is very passive imo.
Rich - Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes14y
Real estate has not made me financially independent, but it has made my life a lot less stressful with respect to money.
I have a few passions in life, and fortunately I'm involved in all of them: I love my work, I love real estate deals, especially paper deals, and I love fast cars.
Unfortunately, the last passion is an expensive one.
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes14y
JScott- what about my thoughts on 100% above?
Loc- I share both your passion (fast cars) and your understanding of the costliness of it! Rich (happy previous owner of nearly 20 "passion satisfiers")
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes14yI completely disagree with this. These are not the ONLY "passive" income vehicles. So I would agree with J Scott and Rich Weese
I don't count landlording as a fully passive stream, but it is certainly semi passive so long as you don't self manage. It is not fully passive because you must manage your PM and the books. Paper is fully passive once you purchase it, there is nothing to manage and the third party collection agency does all the paperwork and payment collection, so it is a truely passive vehicle. So are oil and gas ventures and businesses that you own but do not run or manage.
If you think that CD's are passive and are a means to financial freedom, you are sadly mistaken. I agree with Jason on his post!Further, I also agree with Rich that using leverage on your personal residence as a RE investor is a good thing (so long as you use the leverage wisely and buy assets with it, not liabilities.
Rich pointed out a ton of reasons for having a mortgage on your personal residence. To reiterate: tax benefits, cheap cost of financing (at today's rates), ability to create arbitrage from the funds, reduce equity exposure to avoid frivolous law suits, and the list goes on . . . - Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes14y
Originally posted by Rich Weese:
JScott- what about my thoughts on 100% above?I completely agree with you that from a financial perspective, that is often the correct thing to do (and since I like to look at things in black and white, I'm not afraid to admit that you're right and I'm wrong!)...I gave a vote on your post the minute I read it!
That said, as someone mentioned in the other thread, there is also a psychological component, and it's sometimes correct to go with the suboptimal financial solution in order to appease the psyche...
In other words, you're absolutely correct that 100% leveraged is financially better than 70%, though I sleep better knowing I have over $100K equity in my primary residence, and that I'm unlikely to ever be underwater on it... :)
- Investor · Orlando, FL · Member since 2012 · 431 posts · 106 votes14y
Originally posted by J Scott:
Originally posted by Rich Weese:
JScott- what about my thoughts on 100% above?I completely agree with you that from a financial perspective, that is often the correct thing to do (and since I like to look at things in black and white, I'm not afraid to admit that you're right and I'm wrong!)...I gave a vote on your post the minute I read it!
That said, as someone mentioned in the other thread, there is also a psychological component, and it's sometimes correct to go with the suboptimal financial solution in order to appease the psyche...
In other words, you're absolutely correct that 100% leveraged is financially better than 70%, though I sleep better knowing I have over $100K equity in my primary residence, and that I'm unlikely to ever be underwater on it... :)
This is where I land on this issue as well. I wouldn't sleep well knowing that I was 100% leveraged anywhere. Maybe it doesn't make perfect sense in a vacuum of low interest rates, but never having to worry even through the most recent downturn is pretty high on my life priority list. I've watched 75% of my competition go down the tubes during the past five years because of fiscal mismanagement and aggressive leverage.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes14y
Originally posted by J Scott:
... there is also a psychological component, and it's sometimes correct to go with the suboptimal financial solution in order to appease the psyche...In other words, you're absolutely correct that 100% leveraged is financially better than 70%, though I sleep better knowing I have over $100K equity in my primary residence, and that I'm unlikely to ever be underwater on it... :)
I think it's my wife that ends up sleeping better as a result of equity in the primary residence - I'd sleep just fine either way ... :D
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes14y
Originally posted by Luis A.:
...So called "passive" income is not passive unless it's money sitting in a savings account/CD/Treasury bills/annuities or the like.
Yes, these things are awful investments but they are as SECURE as you can get and that is essential if you are going to consider yourself financially independent.
...
Keep in mind that with interest rates being very low, in order to get any decent amount of income from those types of investments in this quoted piece - you have to have really LARGE sums of money in those investment vehicles. And that FDIC limits exist, so that the word "SECURE" only applies up to the FDIC limits; how much income would you get while staying within those FDIC limits? Yeah, you can open accounts in many more banks to get around those FDIC limits - then you are back to more work especially if you do the bookkeeping.
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