Another Aha Moment for Financial Freedom!!

Another Aha Moment!!I had my first aha moment when I figured out that there was a way out of the rat race.  I realized that reaching financial freedom and retiring early is not just a long-shot dream – anyone can do it!  That was a real eye opener for me, so I’ve been putting my nose to the grind and working on making this happen.  I’ve been building up my 401(k) plan, Roth IRA, and savings accounts.  I also bought my first rental property a number of years ago.

Then, a couple of months ago, I bought another rental property – a duplex.  I was unfamiliar with all the nuances of multi-family properties though, so I did what I always do – started learning.  And in that education process, I stumbled across the BiggerPockets website.  Holy cow, that site is a one-stop shop with a wealth of information on real estate!  On the site, I also found their podcasts that they do on a regular basis.  Now, I’ve never been a podcast kind-of-guy, but I do like to learn, so I downloaded a number of them and listened to them in the car while driving to work… and now I’ve become addicted.  I’m like an old man driving around listening to these guys ramble on, but it’s entertaining and full of valuable information.

My latest aha moment

Why am I telling you all this?  Because, I stumbled across one podcast that put things into a different perspective for me and that gave me a new aha moment.  Instead of just thinking about rental properties generating cash flow in general, the guest talked about doing the math to figure out how many rental properties you need to own to quit your job.  As you might know from my previous posts, I have a distrust for the stock market and I hate that I have so much reliance on it… especially if I’m going to retire early and have that much longer that I need to count on it.

So this small, yet powerful, piece of advice was very valuable.  In essence, the idea is that you first figure out your monthly expenses to be financially free.  For me, this is probably around $40,000 per year, but I’m going to shoot a little higher with $45,000 just to cover my bases.  Divide that by twelve to get your monthly expenses… $45,000 / 12 = $3,750.  So $3,750 per month would be my number to be financially free and still live comfortably.

Now you can figure out the number of rental units needed to make this happen.  In my situation, I’m going to be conservative and say I can pretty easily get around $650 on a rental after all expenses are paid.  So all I need to do is take my $3,750 per month of monthly expenses and divide that by the rental income of $650.  $3,750 / $650 = 5.7, which we’ll round up to 6.

Ta da… 6 is the number of rental units I would need to make this happen.

Let’s talk about this for a second.  First, notice I said units and not properties.  I currently have a rental house and a duplex, so that’s actually three units (each theoretically giving me over $650 per month in net income).  Hey, I’m halfway there!!  As a side note, in hindsight, I believe I will always buy multi-family rental properties such as duplexes from now on – the ROI on them is much stronger than on single family homes like my first property.

Second, my figure of $650 per month was with the assumption that all mortgages are paid off on the rental units.  My rental units are not paid off and it will probably be a little bit before they are.

So what does all this mean?  Did I just come across a useless formula that I’ll never be able to make work for me?  Not necessarily… this is just an opportunity for creativity. Here are some random thoughts:

  • As much as I distrust the stock market, I still do have quite a bit of money in my retirement accounts.  So I don’t really need to reach that 6 number of rental units to get by.  I can use some of the money in my retirement and taxable accounts to supplement my rental income.
  • I could also do a Roth IRA Conversion Ladder after I leave my job and start using that money to pay off the mortgages more quickly.  Then I can live off the rental income without needing to rely on the stock market.
  • Rents inevitably go up over time.  An extreme example was mentioned by a guest in one of the podcasts I’m listening to.  His first rental property purchase was a duplex he bought in 1998 for $240,000.  He’s now getting over $3,000 per unit in rent on each side – that’s over $6,000 per month in rental income from one place! In other words, that $650 per month number I used for my rental income figure might not be that relevant over time.  With a fixed mortgage cost, the sooner I purchase properties, the sooner I can see more profit per month coming in.
  • I’m slated to have my first rental property paid off in 8 years (the single-family home).  At that point, I’m going to use the additional profits from my rental income from that house to help pay off my residence and the duplex.  The more properties I have, the more of a domino effect this should have to get the mortgages paid off even quicker.  One of my financial mentors was able to do just that and has all 5 of his rental houses paid off and now brings in a very generous income per month on his properties.

Based off of these thoughts, I’m going to continue pushing forward to try to accelerate the process and put myself in a much better position for the day I give my notice at work. Once we get the current duplex filled and let the dust settle for a couple of months, I think we’re going to start looking at picking up another duplex.  I’m going to keep this process going as long as I can.  I will also continue to utilize a property management company because I’m really not looking to create a job for myself out of this – I just want another solid passive income stream.

So that’s my new thinking based off my new aha moment.

What are your thoughts and how many rental properties would you need to cover your expenses and let you live financially free if you decided to go down this path?

Thanks for reading!!

— Jim

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10 thoughts on “Another Aha Moment for Financial Freedom!!”

  1. Nice work! I like the idea of a duplex/multi family home for rent. Love the bigger pockets pockets podcast too. I’ll continue to cover them in my weekly reviews. I’ve got to start exploring the forums (registered but not really looking at them).
    How do you go about paying off the mortgages? Do you throw all the extra money at the principal? Thanks for the post.

    1. Thanks, FD – I think the easiest method is still to make an extra payment a year to start with. I take my regular monthly payment due (say $500), multiply it by 13 payments per year (gives us $6,500), and then divide that by the 12 payments we’ll actually be making (which makes the payment $541.67). That alone will shave 4 years off a fixed 30-year loan. I usually go a little higher though just to tighten things up a little more. In this example, I would probably pay around $575 or maybe $600 if I could make that work.

      My rental house doesn’t give me a ton of extra cash flow right now, but that will be paid off in a handful more years. The duplex should generate enough cash flow to help pay itself off much faster. Once the rental house is paid off, it will accelerate the paying off of the duplex. When/If I buy another duplex, the cash flow from both current properties should make paying off that next duplex even faster… it should be like a domino effect and hopefully I should be free and clear a few years after giving notice at my job in a number of years.

      — Jim

    1. Honored to have you visit my site, Josh!! Thanks for providing such great content – I hope my comment about being like an old man listening to you guys didn’t offend you. 😉

      — Jim

  2. We’re definitely wary of putting all of our eggs into one basket, which is why we plan to rely on a number of different investment tools including rental property and a 401K. I like the equation and agree that it’s something to think about as everyone else discusses the stock market. The whole point of early retirement is creating a unique life, as opposed to another cog in the machine, right?

    1. Hi Harmony!! Yeah, the stock market’s really taken a big hit recently which is tough for those nearing retirement and great for those of us that aren’t there yet so we can keep buying cheap. But either way, it’s hard to really enjoy seeing our 401(k) balances drop like a rock in water.

      I definitely agree with using creating a unique life through early retirement… with freedom of time comes an opportunity to make great things happen!

      — Jim

  3. We sometimes talk about doing more real estate investing (we currently have one rental single family house), but so far haven’t had the time to think about it seriously or to do the actual work of fixing up and renting out another place or two or ten. But I definitely see the wisdom of the idea! And if you have enough padding built in there to afford to pay a property manager, then it seems like a great source of passive income. (Though I think the taxes work out better if you manage them yourselves — read that in a landlord tax guide, but it’s been a few years!)

    1. You would definitely make our better if you were considered a “real estate professional” by managing them yourself. However, I’m in a boat similar to yours where I just don’t have the time to do it (nor do I want to). My goal is to run the show, but not need to worry about any of the day-to-day on these.

      As a side note, the duplex that I just bought was rent-ready for the most part so I didn’t really need to do any fixing up on it… and not fixing is my specialty!! 😉

      — Jim

  4. I still haven’t been able to convince myself that rental properties are the way I want to go but I understand the appeal to people who have them! Having that income flowing in each month would definitely be nice to count on.

    I agree that it is important to have multiple streams of income if you want to retire early! It is hard to just rely on one stream for such a long period of time.

    1. When I bought my first property I was much younger and more apt to be willing to jump into things. Looking at what it sounds like from the outside, it can be kind of scary to get into rental properties, but I’m very glad I did it. And I will tell you, if I had a resource like BiggerPockets before I started, I would be in much better shape than I am now. If you’re considering the idea, but just nervous about the thought of it, head there and check out their podcasts and forums – that site has helped me tremendously!

      Regardless of which vehicle you go after, multiple income streams is definitely key so all your eggs aren’t in one basket. I’m learning the dividend side now to try to grow that stream.

      Good luck to you!

      — Jim

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