How do you retire with real estate?
Early retirement without having to rely on Social Security has now become part of the American dream. A recent survey showed that 43% of millennials expect to retire before they turn 65. Moreover, a Bankrate Survey showed that 61% of millennials don’t want to be working when they are 61 years old. Yet most people don’t know how they’ll manage to retire early. A majority of the people who have managed to retire early did so by investing in real estate.
One of the people who have done it is Chad Carson (AKA Coach Carson), author of Retire Early with Real Estate. In his book, he talks about how he began investing in real estate at age 22, and 15 years later, he was traveling around the world and mastering Spanish.
Early retirement allows you to pursue your dreams. If your dream is to wake up for a morning run at the Table Mountains in South Africa or a stroll in the sun-soaked beaches of Lanai, Hawaii, then it’s time you start your journey to retirement by investing in real estate.
Starting Out in Real Estate
Starting out in real estate requires you to calculate your financial independence number. As in, what do you want your retirement look like? Does it involve traveling the world trying out the latest roller coaster rides, or sailing across the seas to see the world? Or do you want your retirement funds to cater to all your family’s expenses? Having a mental picture of your finances will help you see what adjustments you need to make before investing in real estate. Most people want financial independence. Yet, to retire early, you need to increase your savings rate, so that you’ll have enough funds to invest into real estate.
How much money do you need to invest in real estate? The answer to this question depends on the real estate investment strategy that you choose. You may need as little as $5,000 to fix-and-flip a single-family home. Alternatively, you could need to invest as much as $300,000 to get into commercial real estate.
It all starts with increasing your savings rate and lowering your expenses. Investing in real estate requires a more substantial outlay of cash compared to other investment strategies.
How to Get Started
There are a few things that you need to have in place before considering investing in property, as these steps will help you achieve retirement faster and help you stay focused on investing:
Live on a Budget
If you’ve never lived on a budget before, now is the time to start. A budget is essentially like your pathway to retirement. It helps you stay on track with your savings goals so you can continue to funnel more money into your investments.
Reduce Non-Mortgage Debt
Unless you’re already tremendously wealthy, acquiring investment properties usually requires taking on debt. As this is the case for most investors, it’s important to reduce your other debt obligations, such as credit card debt, car leases or loans, etc. to ensure you don’t stretch your cash flow too thin.
Ramp Savings, Reduce Expenses
Even thought that investment properties are usually purchased using mostly debt, every property still requires a significant down payment, so as part of living on a budget, work to reduce your living expenses and increase your savings levels. This will help you gather a down payment faster and therefore onto the road to retirement quicker.
How To Retire with Real Estate
Real estate investing has its ups and downs. Remember the great recession in 2008 and 2009 and how it led to foreclosures and defaults that eliminated homeowners’ financial security? Ask anyone who has succeeded in real estate, and they’ll tell you that it’s no walk in the park and like any investment needs to be approached with a plan and an understanding of what you’re doing.
That being said, the the main risks in property investing is taking on too much leverage, not understanding the financials fully and not completing the necessary due diligence. Below we’ve outlined the necessary steps to ensure you purchase the right property the first time.
1. Do The Math
Real estate investment can take a small or large portion of your investment portfolio. You can start with a small, simple portfolio and build up depending on your financial goals. When thinking about how much to invest in real estate, you can do the math based on these variables:-
a) Expenses in early retirement (E).
b). Wealth Invested in Real Estate (W).
c). Cash-on-Cash return on that wealth or conservative Income Yield (R)
The formula is:-
W x r = E
E /R = W
Let’s say, theoretically, that you require a minimum of $65,000 annually of passive income for your annual expenses. Let’s assume that you find properties with a 10% cash-on-cash yield. This means that you need equity/wealth worth $650,000 in real estate.
You can vary the figures depending on your financial situation. For instance, if you need $200,000 annually for financial independence, it’s best to invest $2 million instead of $650,000.
Yet leveraging real estate for your financial independence requires you to factor in more than just your expenses. You need to consider the type of properties you want to invest in, from single-family houses to multi-unit apartments. You also have to factor in the total cost of targeted property and market location, your debt-to-income ratio, plus so much more.
2. Mind Your Financial Source
It is common for investors to get other financial sources that will finance their first real estate deals. You can get funds from a private lender, or you can apply for an FHA loan. However, the best approach is to make adjustments to your spending habits so that you can save up for the cash you need.
Take, for example, Joe and Ali Olson. The couple managed to retire at 29 after committing to saving 80% of their income. The two got married in 2008 when they were in College. They maintained a cheap lifestyle while in College and used their savings to buy rental properties. Presently, the couple has 19 rentals and spend most of their early retirement volunteering and picking up hobbies. They have a blog where they share their experience.
3. Track The Numbers
Keeping track of your investments is essential as it will help you have a clear picture of how much income you’re generating. It would be best if you set a goal for the amount you want to gain. Also, include the money required to keep the properties in good condition and for upgrades. You should factor in emergencies as well as something that may happen to your property.
Fortunately, some mobile apps and trackers can help you in this endeavor. When you keep track of your rental property numbers, you will be able to:-
See the value of your investments
Plan for the next steps in case your investments aren’t bringing in as much as you expected.
Have a clear picture of the ins and outs of your assets.
4. Map Out A Timeline
When do you want to retire? When you’re 30? Or now? If you feel that you are ready to retire now, then maybe you should take some days off from work. Maybe a break is all you need or a better job. The truth is some people have managed to build their real estate portfolio without walking out of their jobs. So feel free to commit several hours of your time to real estate while at the same time continuing to work. On that note, when you can retire depends on your current age and how long you plan to stay in employment.
5. Choose The Right Tenants
You must target reliable tenants so that you won’t incur the costs of the upgrade. Tenants can make or break your investment. As such, take your time to ensure you pick the best ones. On the application form, you will learn about your tenant’s employment history and prior address. If they have a pattern of moving often, then that pattern is likely to persist, and you will have a vacant rental in your hands.
Similarly, pay attention to occupancy levels as an overcrowded apartment increases the risk of wear and tear. Trust your gut when vetting your tenants, as your gut feeling is likely to be right.
Consider charging a fair rent so that you’ll attract stable tenants. If you find a troublesome tenant, take the legal steps to remove them.
5. Select The Right Strategy
The goal here is to choose a real estate investing strategy that will help you transition from your current financial stage to the next stage (financial stability). In Carlson’s book, ‘Retire Early with Real Estate,’ the author gives case studies of different real estate investors and how they approached investing in real estate depending on their retirement plans and financial goals. Each case study informs you of how different real estate investors created a plan that fits who they are as investors and what they want out of life.
Get started with one real estate strategy. This could be house hacking (living in a house that also provides income), fix-and-flip, or BRRRR investing (Buy, Rehab, Rent, Refinance, Repeat). There are great investment strategies out there that you can choose depending on your level of wealth. It would help if you took the time to understand the pros and cons behind each strategy. For instance, the fix-and-flip is a good investment strategy for a beginner, you might not be able to retire early by leveraging this strategy alone. You’ll have to add another strategy, such as reinvest your income from the property into a property that provides a high cashflow.
The strategy you opt for depends on how soon you want to retire and how much you are able to invest. Still, there is a lot to learn about real estate investing, and although there are a ton of books out there on the same, your first book should be Chad Carlson’s. Carlson breaks down the topic in a clear way and provides helpful information that is suitable for anyone, whether you are a beginner or have already started investing in real estate.
Retiring early with real estate is possible and can become a reality with commitment and the right strategy. We recommend that you begin your first-steps as soon as possible by evaluating your finances and aiming to save up for your investment needs. They will definitely pay off. Imagine a life where work will be optional for you and you’ll get to pursue other ventures without worrying about money and being financially secure.