What does FIRE (Financial independence Retire Early) look like with real estate investing??

The FIRE (Financial Independence Retire Early) movement has been increasing in popularity over the last decade, and needless to say I am a firm believer of the concept. The idea of being able to sustain ones lifestyle through income generated passively gives one tremendous opportunities to explore passions that would otherwise have taken a backseat to the daily grind.

The FIRE realm is again broken down into lean FIRE, fat FIRE and obese FIRE. Lean FIRE is when one estimates annual expenses close to $50-60k to sustain one’s lifestyle in retirement. Fat FIRE is more generous requiring about $60-100k in annual income to sustain one’s post retirement lifestyle and you may have guessed that obese FIRE means your annual post retirement needs exceed $100k. I have a blog post where I discuss how much you need to FIRE if you have a pure stock / bond portfolio. The general consensus is that you need around 1.5 million dollars in your retirement account invested in a combination of index funds and bonds to allow safe withdrawal of around 4% annually (which also equals anticipated annual return – inflation) to hit lean FIRE. If you are shooting for fat FIRE that nest egg should be around 1.8-3 million dollars and over 3 million dollars if the desire is to obese FIRE.

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Now those who are self employed find that they hit those goals much faster since they can stash away more in their retirement accounts pre-tax. But I think one has to give serious thought to what the alternative out there is (especially if you are on a W2 and a much better candidate for multiple conventional loans), and this is where I think real estate investing gets very exciting. Let’s talk numbers!

Working backwards, say you are looking to lean FIRE… and would like an annual income of 60,000$ from your rental real estate portfolio, this translates to around $5K monthly. In previous posts we ran numbers for how to arrive at net income from a rental. Suppose you are invested in a high cash flow market and have a net income of around 500$ per rental property per month… that means with 10 rental properties you are all set to lean FIRE. So how much money then do you actually need to invest in each property to generate the 500$ net income? Again this will vary depending on your market and your initial down payment. But assuming a 20 – 25% down payment that keeps you leveraged and increases your overall return on investment, in a good cash flowing market, an initial investment of around 50,000$ should be adequate. Which means that with around 500K you are all set to lean FIRE. Now, in a High Cost of Living Market or in a market where it is not typical to see a 10-12% return on investment you may need more initial capital to lean FIRE. But there are so many strategies to explore such as BRRR (Buy, Rehab, Rent, Refinance, Repeat), house hacking, living in a property for a year before renting it out (thereby making you eligible for less money down and more attractive loan terms) that give you the opportunity to put less money down to own a rental. In my experience, I have found that in the markets I choose to invest in, 50,000$ gets me a nice rental that cash flows around 500$/ month.

Now it is important to factor in annual increases in rent… With my first rental, I immediately cash flowed around 400$, but with increasing rents and having refinanced it at a lower interest rate, I now cash flow over 500$. And through retirement, its important to remember that your rents will at least match inflation, therefore all you have to do is keep cashing those checks. It is also important to remember that although cash flow is key to rental investing, a big portion of your return on investment is from building equity through property price appreciation and debt pay down and you can easily tap into this equity by choosing to refinance and pull out the built equity. Tapping into the equity you have built in your rentals is also a means of equity stripping which helps with asset protection. If you tap into this equity and pull out your initial investment, then you are essentially in the territory of infinite returns (cash flow/ 0$ investment = infinite returns). And that is a very sweet deal….

I think its worthwhile to mention at this point that each individual is only allowed 10 Conventional loans including your primary residence, but that usually easily translates to 20 Conventional loans for a two income household. And once your conventional loan options are exhausted, portfolio lenders and non-recourse loans are out there to explore.  Single Family Homes as rentals are my preferred property type given the ease of acquisition, smooth operation, property value increase historically and the increasing demand for Single Family Home rentals. That being said, I do see many favorable points to making the jump to apartment complexes with around 60 units or more, this is another sweet spot where ease of maintenance and operation make this a favorable option for those with the resources. But more on this in a later post…

Ideally you want to be diversified- therefore it would be nice to have a retirement account nest egg that can fund part of your FIRE, and a rental portfolio that feeds the rest. Here’s to getting closer to those goals and to a rapid FIRE….

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