FI & Real Estate: Rental Income and the FIRE Movement

What does financial independence mean to you?

For some, it means they can buy what they want. For others, it means they can do what they want.

The Financial Independence, Retire Early (FIRE) movement is built on the idea that we should value our time, our lives, experiences and relationships over more “things” and status.

This idea can be achieved by changing your relationship with money. Instead of spending, save and invest. Until you are longer bound to continue earning (the “RE” part).

This article takes a quick look at the FIRE movement and some more resources to learn more. Then, we will look at why real estate could be an ideal investment to pursue financial independence.

What is the FIRE Movement?

The FIRE movement is heavily influenced by the 1992 book Your Money or Your Life by Joe Dominguez and Vicki Robin. The book was edited for a new edition in 2018 by Vicki Robin.

The new edition has a vastly updated section on investments and lots of other updates.

The movement had a revival starting in the early 2010s, and has become a popular lifestyle movement amongst the millennial generation.

Here is the simplified premise and tactics of FIRE. If you want to know more, I recommend you read or listen to the whole book.

FI: Financial Independence

FI is achieved by aggressively saving a large portion of your income, first toward an emergency fund and then toward income producing investments.

The goal is, essentially, to get your passive income to be higher than your expenses, and have an emergency fund.

At that point, you have achieved financial independence.

To get there, the focus is on 2 strategies. Number 1: maximize your income. Number 2: ruthlessly eliminate unneeded expenses.

Once you achieve financial independence, it is not guaranteed you will stay there without discipline. The focus is on sacrificing big expenditures on “things” that are not needed.

It is also smart to invest in things that are not so high risk that you lose that income.

RE: Retire Early

Once you are financially independent, you do not necessarily have to keep working. After all, your lifestyle is covered by your investments.

This is where the “retire early” portion of the FIRE movement comes in. This is when you get to live your life how you want, as long as you are disciplined enough to stay financially independent.

Many people travel, move somewhere rural or exotic, take up hobbies, build something, write something, start a website, write a book…the possibilities are really endless depending on what you like.

Or Not?

Financial independence does not mean you immediately need to quit your job. You might genuinely enjoy what you are doing, and feel as though you are working toward something important.

The benefit now is that you are not working because you MUST. You are going to work because you want to.

And if you want to do something else that pays less, that is ok. You are no longer bound by money.

Further Reading

So is the FIRE movement for you? Only you can decide. It is, self admittedly, not necessarily the way to build the highest possible net worth throughout your life.

And honestly, it is not for everyone. But the books and content related to FIRE are interesting, thought provoking and can help you reassess how you use your money, and to what end?

Here is some further reading.

Your Money or Your Life – Start here. The flagship book for the FIRE movement.

Reddit r/financialindependence – This subreddit is the best place to connect with others who have achieved financial independence, who are on the road to FI or even are just getting started.

Mr. Money Mustache – Not your typical finance blog. This is a blogger that has achieved FI and helps others do the same with some informative – and highly entertaining – content.

Can You Achieve FI With Real Estate?

The quick, and hopefully obvious, answer is yes. In my (slightly biased) opinion real estate is well positioned as an investment for financial independence.

And that can start sooner than you think.

Thinking Outside The Box With Your Primary Home

Saving money and maximizing your income means always asking yourself, where can I save more money? Where can I earn passive income?

Before you buy your primary home (the one you will live in) ask yourself this: is there a way you can turn that partially into an income producing property? I wrote another article on how I wish I had done this.

“House hacking” or renting out rooms, buying a property with another attached unit, buying a home with land and renting the land out, these are just a few options.

There are tons of opportunities with your primary home, pick the right one for your area, budget and tolerance for giving up space.

Rental Properties

Buying and holding long term rental properties is the preferred method of investing if you are looking for passive income and to achieve financial independence.

This would include properties that are used for long term rentals and also vacation rentals or other types of rentals, such as for events.

Some types of rentals are more hands on, while others are more passive. For example, a long term lease with good tenants is more passive than a year round beach vacation rental.

Almost all real estate investments can be made passive by hiring a property manager. They usually charge a percentage of the monthly rent or monthly fee.

Of course, managing the property yourself allows you to learn more about the process and also save. But later on, you do have the option to pass that off.

What About House Flipping?

Flipping homes is a way to make money now, so can be used to maximize your income. But after a flip that money is back in your account.

Flipping can also bring on extra risk depending on your skill level and how “tight” the margins are.

If you are passionate about flipping, go for it. But flipping requires time and energy, and the FIRE enthusiasts would say use the profits from flipping to fund a more passive approach (like rental properties).

Cash (Flow) Is King

The best real estate investments have a positive cash flow after accounting for all expenses and debt payments.

Let’s say your mortgage payment (principal and interest), taxes, insurance, HOA/condo fees, maintenance, etc, averages out to $2,000 per month. You will need a property that averages more than $2,000 in rent per month (account for vacancy) to have a net positive cash flow.

Remember, FI is achieved when your passive income is greater than your expenses. So if you follow this method you want to make sure rentals are cash flow positive.

Debt & Down Payments

For obvious reasons, the FIRE movement generally views debt as negative. If you have lots of debt, there is a much higher chance that you will have to continue earning to meet those obligations.

With that said, real estate is much more inaccessible if you do not use any mortgage debt, and it lowers your cash-on-cash return.

Many low debt advocates recommend looking at putting down as much cash as your are able for mortgage loans, and consider looking at a 15 year loan instead of 30 year.

Watch Your Equity

The real estate market, just like any financial market, is subject to economic factors outside of your control.

These can be either positive or negative. The real estate market is not immune to downturns.

With that in mind, it is a good idea to have a “cushion” of equity. When you see you have gained some equity in a property, it can tempting to tap that cash via a second mortgage.

In the event of a market downturn, you could find yourself with very little equity, or even negative equity. This is not a good spot to be in if you are focused on achieving financial independence.

Summary

Rental real estate can fund your retirement (or early retirement), and is well suited to do this.

The real key is to make sure the expenses required to operate the rental is lower than the rental income (positive cash flow). You also want to make sure you keep a cushion of equity (principal balance vs. market value).

Another way to make income from your real estate is to rent out a portion of your primary residence.

Pros & Cons To Using Real Estate to Achieve FI

Your Money or Your Life, along with other FIRE content, identifies a selection of investments for passive income. I have used real estate as my chosen investment.

But no investment is perfect. Here are some pros and cons to owning rental investment properties.

Pros:

• Potential for large monthly cash flow.

• Huge amount of options: commercial, residential, multi-family, land, vacation rental, etc.

• Increase net worth with appreciation.

• You control the asset.

• Potential tax advantages.

Cons:

• Rental properties do require a time commitment, or paying a property manager.

• It is not as “liquid” as other investments, selling a property takes some time.

• Some tenants can be a headache.

Conclusion

The FIRE movement has become more popular over the years. And it is easy to see why: people are realizing how valuable that there time really is. And you might not want to spend it being forced to work longer than you need to.

Real estate is a great option as an investment strategy because of the monthly cash potential if you are trying to achieve financial independence. Many FIREs also use their primary residence to bring in some income.

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Will Rodgers

Will Rodgers is a real estate expert, creator of this site and partner at the Alper Real Estate Group. Will has been sought after by many major publications for his expertise and creates sought after content for buyers, sellers and investors.