There are many paths to financial independence, and in this blog post I’m going to discuss how real estate investing can offer advantages for those pursuing FIRE (Financial Independence, Retire Early). FIRE is a movement that emphasizes achieving financial independence and retiring at a relatively young age. The goal of FIRE is to accumulate enough savings and investments to cover living expenses, allowing individuals to have greater control over their time and pursue activities they are passionate about, rather than being solely dependent on traditional employment for income. The movement encourages frugal living, high savings rates, and intelligent investment strategies to accelerate the path to financial independence.
Your FIRE Number
The first step is to determine your FIRE number. Determining your FIRE number involves calculating the amount of money you need to accumulate in order to achieve financial independence and retire early. While the specific methodology may vary depending on your individual circumstances and goals, here are some general steps to help you come up with your FIRE number.
Start by determining your anticipated annual expenses in retirement. Consider factors such as housing, utilities, transportation, food, healthcare, travel, hobbies, and any other regular expenses you expect to have during your retirement years. It’s important to be realistic and account for inflation. Next, decide on a safe withdrawal rate, which is the percentage of your investment portfolio that you plan to withdraw each year during retirement. The commonly recommended safe withdrawal rate is around 4% per year (the 4% rule), although this can vary depending on factors such as your risk tolerance, investment allocation, and time horizon. Then calculate your desired income by multiplying your estimated annual expenses by your chosen withdrawal rate. For example, if your annual expenses are $40,000 and you plan to withdraw 4% annually, divide $40,000 by 0.04 to get a target portfolio size of $1,000,000.
Consider any additional factors that may impact your FIRE number. For instance, if you plan to have mortgage-free housing or expect significant healthcare costs, you may need to adjust your target accordingly. Conversely, if you anticipate additional sources of income in retirement, such as rental properties or part-time work, you might adjust your FIRE number downward. Also, don’t forget to factor in taxes. Account for taxes on your withdrawals from retirement accounts and any other taxable income. Depending on the tax rules and your specific circumstances, this can impact the amount you need to accumulate to meet your desired income.
Regularly review and reassess your FIRE number as your circumstances change. As you approach retirement, consider consulting with a financial advisor to fine-tune your plan and ensure your goals align with your financial situation.
Real Estate and FIRE investing
Real estate investing can fit into your FIRE investment strategy very well, and many individuals pursuing FIRE incorporate real estate as a part of their investment portfolio to generate passive income and accelerate their path to financial independence. Real estate offers several potential advantages for FIRE investors including, cash flow, appreciation, leverage, diversification, and some tax benefits.
Rental properties can generate ongoing rental income, which can supplement or replace traditional employment income. Positive cash flow from rental properties can contribute to covering living expenses and help achieve financial independence. Real estate properties also have the potential to appreciate in value over time. Property values may increase, allowing you to build equity and potentially sell properties for a profit in the future.
Real estate investing often involves the use of leverage through mortgages. By using leverage, you can control larger properties or a greater number of properties with less initial capital, potentially increasing your overall investment returns. Real estate provides diversification within an investment portfolio. It has different risk and return characteristics compared to traditional stock and bond investments, offering a potential hedge against market volatility. Real estate investments offer various tax advantages, such as deductions for mortgage interest, property taxes, depreciation, and other expenses. These tax benefits can help optimize returns and reduce tax liabilities.
Real estate investing does come with its own risks and considerations, however. Property management, maintenance costs, market fluctuations, and the potential for vacancies are factors that need to be carefully evaluated and managed. It’s important to conduct thorough research, consider local market conditions, and develop a sound investment strategy when incorporating real estate into a FIRE investment plan.
Resources for learning real estate investing
There are various resources available to help you learn about investing in real estate. Here are some popular and reputable sources that can provide valuable information and education on real estate investing:
Several books offer comprehensive guidance on real estate investing. Some highly recommended titles include the following. Note, the following book links are Amazon affiliate links, and we may earn a small commission if you purchase from Amazon after using them.
- “The Book on Rental Property Investing” by Brandon Turner
- “Rich Dad Poor Dad” by Robert Kiyosaki
- “The Millionaire Real Estate Investor” by Gary Keller
- “The ABCs of Real Estate Investing” by Ken McElroy
- “The Complete Guide to Real Estate Investing” by Steve Berges
Numerous websites and blogs focus on real estate investing and provide educational content, tips, and resources. Some popular platforms include:
Podcasts are another great way to learn from experienced real estate investors and industry experts. Notable podcasts in the real estate investing space include:
- BiggerPockets Real Estate Podcast
- The Real Estate Guys Radio Show
- The Investing in Real Estate Podcast with Clayton Morris
- The Rental Property Owner & Real Estate Investor Podcast
There are also a number of online platforms and educational institutions offering courses specifically tailored to real estate investing. Some popular ones include:
- Local real estate investment clubs or associations may also offer educational courses or workshops. In my area, there’s an Oklahoma City full-service property investment group that provides real estate investment opportunities, provides real estate consulting, and property management services.
In addition to books, blogs, podcasts, etc., attending local real estate investing networking events, meetups, or seminars can provide opportunities to connect with experienced investors, gain insights, and expand your knowledge through in-person interactions.
There is no single “correct” path to FIRE for anyone, and real estate investing is just one of many investment vehicles of which people may choose to take advantage. At the end of the day, you must decide where your interests lie and how you can invest in something that aligns with them. I hope you find these resources useful and that I’ve helped you ignite your path to financial independence!