It’s what we all want, right? Of course, “freedom” can mean different things to different people, but I would say a general definition of financial freedom is:
Not having to work for income because you have passive income that exceeds your expenses.
Sounds exciting! But I think for most it sounds like a very big goal too. Great goal, and you shouldn’t change it, but I think most people assume it is a distant future goal versus one that can happen soon or quickly. It’s true it won’t happen overnight (unless you are already loaded), but it may not be as overwhelming of a goal as it probably seems.
Quick! Without giving it too much thought, how many rental properties (single-families or duplexes or something small) would you need to own right now to be financially free? Okay, what number did you come up with? (Seriously, I told you “quick!”. Stop thinking about it and just come up with a number.)
Remember that number.
How to Analyze a Real Estate Deal
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Mapping for Financial Freedom
Figure out your expenses.
I’m going to come up with a fictitious person whose expenses are as follows:
Car payment: $200
Utilities and Insurance: $200
NOTE: Clearly my fictitious person doesn’t live in LA (ask my bachelor studio in Venice with no kitchen). Some of the numbers may be off of course and some expenses left out, but you get the drift.
Find rental properties and know their cash flow
Let’s say you find killer properties in Houston. I love Houston, great market, not the highest on the cash flow thanks to high Texas property taxes and sometimes the insurance, but an excellent market for buy and hold properties even still.
These killer properties cash flow $700 each per month, after all expenses, on an all-cash purchase.
Determine how many of those properties are needed to cover your expenses.
If you are earning $700/month/property, how many do you need to cover your monthly expenses?
Three. And that even leaves an extra $100/month for savings!
Determine how much money you need to buy the necessary number of properties.
These properties all happen to cost $100,000 each. So if you only have to buy three of them, you only need $300,000. Let’s even go crazy here and round it up to $350,000 just for whatever miscellaneous expenses.
My fictitious person can be financially free for the low cost of only $350,000!
Do I need to repeat that? $350,000! Yes, that is a lot of money for the average Joe but if you really think about it, isn’t that a surprisingly low number for financial freedom? Financial freedom. Revisit the definition of it above. Financial freedom is a big deal.
What if my fake person doesn’t have $350,000 as most of us probably don’t? Well good thing my person qualifies for a mortgage! Great! Let’s see what financing does…
Go through the exact same steps as above but adjust for the financing in the cash flow step and the total amount you need to have to buy the properties. Assuming 20% down and a 5% interest rate for the loan on a $100,000 house, you’re looking at about $430/month for a mortgage payment on each house. Let’s round that up to $500 for fun. Subtract that from the $700/month cash flow on an all-cash buy and you now have a cash-flow of $200/month/property. Considering that $200/property, you would need 10 properties to cover your $2000/month in expenses. I’m going to leave the numbers there and not add in extra for a buffer just so the numbers are even. I’ll address buffers later. So 10 properties with $20,000 down payments (remember that 20% down for the loan) and I’ll say an extra $5,000 per property for closing costs. Oh and my properties don’t need rehabs so the purchase numbers stay simple. $25,000 per property for 10 properties is $250,000.
My fictitious person taking out mortgages can be financially free for the low cost of only $250,000!
I must be kidding, right? Nope. Not even a little bit.
Three or ten properties have my fictitious person financially free. Even at 10, I bet you didn’t guess a number near that low for yourself! If you live in LA (like I do) and eat only expensive vegan food (like I try to) and drive a new Rover (like I certainly don’t), 10 properties won’t cut it. But let’s say you do live large and your monthly expenses are $4,000/month versus the $2,000/month we calculated for before. That means you need either six or 20 properties that are cash-flowing in Houston. That means an investment of $500,000 or $700,000. Again, that’s a lot of money but when you think of it in terms of being all that you need to have financial freedom? Come on! Is that not insanely low?
Of course there is the reality of rental properties that they don’t always perform perfectly. It is incredibly smart to have a buffer for unexpected repairs or who knows what. So add a couple more properties to those numbers. It doesn’t change them much! Relatively, at least. Now if you are going completely out of control and want to live the total Hollywood life of LA, and buy a house in the hills, and buy the Lotus instead of the Rover, you’re on your own for all that. Do your thing and adjust accordingly. Or what if you live an average lifestyle, as does my fictitious person, but you want to travel to exotic places regularly or feed homeless children out of your own pocket? Just take any large chunks of money you want to spend in a year and divide it by 12 to make it a monthly expense and add to your calculations.
I get that all of this is easier said than done. You likely don’t have that much money sitting around, and getting 10 mortgages can be tough, and not every property will cash flow perfectly at $200/month. But the reality is that it isn’t near as hard as you thought it would be either, is it? Do you see that it likely won’t take as much as you thought it would to become financially free?
What was the quick number you came up with when I told you to? Was it anywhere close to three or 10 properties? Would you have ever guessed financial freedom could be accomplished with such a low amount of investment? I bet you didn’t.
One other way to look at becoming financially free was explained to me a couple years ago by my mentor. Granted, this was when it was easy to get properties needing no work that cash flowed $500/month after a mortgage, but bear with me. He told me to look at it like- if I bought one property, boom my groceries were covered every month. Buy another one and boom, my utilities and insurance payments each month were covered autonomously. Finish it off with two more, and boom my housing and car payments were covered every month! I’m a partier so I still need that entertainment expense covered, so one more property. Five properties, that’s it and my basic expenses every month were covered. With each property I bought, I crossed off an expense line that I no longer needed to pay on my own. I was floored at how much faster I could have my essentials taken care of.
Well, so what’s the verdict? Is it easier than you thought it could be?