So it’s really fun, me writing this article because we’re going to be talking about my favorite topics of all time in this article which is how I retire investing in real estate. That’s right. We got real estate investing, passive income, Financial Independence, and retiring early, all in one place. I know I can’t believe it either, what a time to be writing an article like this one. But anyway, here it is how to retire early by investing in real estate and these are the types of topics I really enjoy writing about the most because all of these are things that I have done myself personally.
None of this is Theory or anything like that, all of this I have done myself first hand and I’ve seen it work for me. It takes about a decade of saving, investing and following these strategies to get to the point where my rental income covers all of my expenses. And at my leisure time, I can pretty much do whatever I want within reason, of course not going off in like buying limbo’s, buying Tesla Model 3 S, No Lambos, but this works for a Tesla Model 3. But anyway,
Let’s go over exactly how you can replicate my strategies so you can retire early by just investing in real estate
And again, that’s the entire point of this article. By the way, I realized the term retired is used very frequently now on the internet, like everyone is retired. And then meanwhile, they’re still working like 80 hours a week, and not being retired. So let’s just make it very clear. I am not retired. I’m not going to call myself retired. I have no plans of laying on a beach and playing golf all day. I’m not even that good at golf.
However, the point of the article is to get to the point where you could retire if you wanted to but now the choice is really up to you. So now let’s start here and this is where it all begins and this point is not real estate related at all, but it’s still massively important if you really want to retire early by investing in real estate and that is just this:
Take the time to add up all of your expenses
Then you’ll come up with an average number that you will need to replace with rental income every single month. I know this point is rather dull and boring but this is something you’ll have to do. Otherwise, it’s really like trying to navigate somewhere without having a map. So anyway, here’s my challenge for you and I dare you to do this because, most just going to read this article and it never actually do it, that definitely the point. So, you know, you’re different than that, you’re actually going to do this, hopefully.
That is just this very easy to track all of your expenses for the next four months, track everything you spend your money on, every single penny. If a penny leaves your account or leaves your pocket, I want you to account for it. You can always use mint.com or personal Capital.com if you want automated software that does it for you or you can just use your own Excel spreadsheet. I don’t care what you use, the point is you absolutely must know how much money you spend every single month, so that way you can figure out how much rental income you need to replace that with now. When doing this I highly recommend you break up your expenses into two categories.
Which are: The first one will be your
- Discretionary spending.
This might be your housing payments, your insurance, groceries, internet, utilities and everything else. That’s non-negotiable.
on the hands should be something that you don’t absolutely need, that you can cut back on if necessary. For instance that might be Vacations or going out shopping or going out to really expensive dinners or wrapping the Tesla video coming soon. So anyway, once you’ve done this congratulation, you’ve done what probably nine out of ten people will never do in their lifetime. So there you go. You’re already ahead of the game. Now your first goal should really just be to earn enough rental income to cover all of your basic necessary spendings.
If you want to break something like this down into even smaller goals, I recommend having a list of all of your necessary expenditures, and that way you can just check those off every time your rental income pays for it. I remember when I made my first nine hundred dollars a month in rental income and I thought to myself, okay now I have my car paid for, my car insurance paid for, my phone bill paid for, and my groceries are paid for, and then I thought to myself well if I have another $900 coming in that would pay for half of my housing payment and then if I have another $400 come after that, I would have all my property taxes paid for.
So anyway, once you figure out exactly how much money you spend every single month that becomes your goal. That is how much rental income you will need every single month to replace your necessary spending. So now, of course, this is where the work comes in and that is actually getting that amount of rental income. So here is what I would do if I were starting over with zero dollars today in my monthly expenses were let’s say $3,500 so that now becomes our goal to get $3,500 a month in net rental income.
Now, here’s the strategy that we’re going to be following to achieve this and there’s a term for this coined by Brandon Turner over a bigger pockets and that’s called the Burrr method, except I put my own little twist on it, It’s kind of like the house hacking burn method of real estate investing. So I’ll explain exactly how this works and exactly what you can do it. Now, the first thing you’ll need to do is save up a down payment between 10 to 20 percent of the properties purchase price. So this means if you’re buying a $100,000 property, you’ll need between ten and twenty thousand dollars saved up or on a two hundred thousand dollar property. You’ll need between 20 and 40 thousand dollars saved up.
This could definitely take a while depending on how much you’re making, how much you’re saving and how expensive properties are in your area. However, I really believe this part is essential, this single investment can absolutely fund your entire retirement with passive income if you’re just willing to listen to these strategies and actually Implement them and stay consistent with them long term. In terms of actually saving this amount of money, you really just need to make this a priority if that means that you need to cut back on vacations or work more hours or pick up a part-time job, just you’ll be able to save a little bit more money do it, It’s so worth it.
I can tell you 100% that delaying any short-term gratification is absolutely worth it when you see the long-term and result. Once you’ve got that down payment saved the next step is to go and buy a two to four unit building that you can move into yourself. Now, here’s why this step is so important when you go and buy a primary residence, meaning you’re going and buying a property that you intend to live in yourself, you qualify for what’s called conventional owner-occupied financing.
This means you’ll qualify for a lower interest rate and also a lower down payment when compared to buying an investment property. Now, the only two requirements when doing this is that you must buy four units or less and you also must live in the property between 12 and 24 months after buying it, after that you can do whatever you want with the property. But meanwhile you’ve locked in your low down payment and your low-interest rate now, the reason I really like this method a lot is that you can get a conventional owner-occupied loan up to four units. So this means if you want to invest in real estate, you can buy all of the units under owner-occupied financing with a lower down payment and a lower interest rate, even though you’re renting out the other units and only living in one of them.
This is a tremendous life hack and a huge advantage to investing in real estate and getting cheap financing and as we all know cheap financing really just means more money back in your pocket. The third step here is that ideally, you should be fixing up the property anytime you’re looking not only increase the value of the property but also increase the cash flow, fixing it up is really just the way to go. For me, I’ll only look at two to four unit properties that need work, because I know that when I’m done fixing it up, it’s going to be worth more than what I paid for it. I personally go for really light rehabs, like redoing floors, redoing landscape, paint, kitchen, and bathrooms. These are all very simple renovations that any contractor should be able to do in less than a month, and all of these Renovations have an extremely high Roi.
Here is how investing in real estate to retire early really works.
So let’s just use this example so I can show you how it works. Let’s just assume you buy a $300,000 property. That’s three units you then put 10% down that would be $30,000 and you finance 270,000 dollars at a 4.3 percent interest rate fixed for 30 years, but then after all of that you take an additional $30,000 from your own money and you go and fix it up and after that the property’s value is now worth three hundred and eighty thousand dollars. This means that you’ve made an extra $50,000 worth of value just by going fixing it up. That is how real estate investing basically Works.
My favorite places to buy, are the ones that just look a little outdated like maybe it was built in the 70s or 80s and it’s a little older, looks a little bit like Grandma’s house. Maybe it needs some new countertops and new paints, maybe should remove the carpet and get some new bathroom tile, easy stuff like this and in most cases, I never try to rearrange floor plans or going add square footage and for someone really just starting out, I don’t recommend that you take on too big of a project, very light cosmetic stuff is very easy, is very simple for a beginner, many contractors can go and do this in a very quick turnaround time and there’s not a lot of risks when you’re going in with just a cosmetic renovation.
So now the next step, what do you do when you’re done fixing it all up, and that is you rent out the other units. This is where the rent of the other units should ideally cover all of the properties expenses, like your mortgage, your property taxes, your insurance, your repairs or vacancy and everything else that goes along with that.
So now let’s just use our previous example, we have a $300,000 property with three units, you put 10% down Finance 270,000 dollars at a 4.3 percent thirty year loan your mortgage payment within be about thirteen hundred and thirty dollars per month will see your property taxes are going to be another $300 a month will say your insurance is going to be a hundred and twenty dollars a month and then we’ll say your repairs maintenance and other miscellaneous expenses would be another 250 dollars a month. So now let’s just round this off and we’ll say that this property is going to be costing you every single month $2,000.
However, because it’s a three-unit building and you’re only living in one of the unit’s you can rent out now the other two to collect rental income to offset that payment. So in this example, let’s say that the other units are going to be renting for $900 a month. So in total between renting the two units, you’re gonna be getting at $1,800 a month in rent.
Now you’re only out of pocket cost is $200 a month for getting to live in and own a Triplex plus the 30,000 dollars is down payment plus the 30,000 you spent fixing it up. So sixty thousand dollars total now. I realize that right now, we’re not any closer to getting to our goal of $3,500 a month in passive rental income because it appears as though we’re now cash flow negative of two hundred dollars a month. Plus, we’re $60,000 in the whole invested in this property. But here is where the fun begins.
Right now, you’re only housing expense is $200 a month and chances are that is cheaper than you going and renting something else equivalent to that yourself or going and buying something without getting the additional rental income. So hopefully by doing this, you’re able to save a little bit more money on your housing expense.
Secondly, even though you’re paying thirteen hundred and thirty dollars per month is a mortgage just by making that mortgage payment you’re paying down the loan balance by on average in the first year about three hundred and seventy-five dollars a month. This means that your ownership in the property increases a little bit more every single month until eventually after 30 years. Your home is paid off and owned in full.
Even though you pay $200 a month out of pocket to live there. You’re getting back 375 dollars a month in value still though that is not cash flow that you can be able to live off of until that is paid off in full but here’s how we’re going to be able to get there.
The next step is that you’re now going to do what’s called a Cash out refinance. This means that a bank will go and give you a brand new loan based on the new higher price of the property after you fixed it up and then you profit the difference in cash. Let’s go back to the original example here $300,000 property, $30,000 down, 270 thousand dollar loan, you fix it up for $30,000, and now it’s worth three hundred and eighty thousand dollars, but now because this property is worth three hundred and eighty thousand dollars and you have a loan on the property of 270,000 dollars.
This means you have a hundred and ten thousand dollars of equity just sitting there. So when you go and do a Cash out refinance a bank might go and look at this property and say okay we see it’s worth $380,000. We will give you a loan of up to 85% of this property’s value. So on $385,000 will give you a loan of three hundred and twenty-three thousand dollars.
So now you go and take out a new loan for three hundred and twenty-three thousand dollars, you take two hundred and seventy thousand dollars of that to pay off the first loan and that gives you $53,000 extra in profit cash for you to pretty much do whatever you want with entirely tax-free, but now since you’ve taken out a new loan at a higher amount your mortgage payment will jump up from thirteen hundred and thirty dollars to now about $1,600 a month. But remember even though you’re paying more per month.
Now you have fifty-three thousand dollars left over for you now to do something else with and reinvest and of course, we all know what that means you can use that $53,000 to go and buy another Triplex for you to do the exact same thing with so now let’s assume you did the exact same thing. You bought the same Triplex, but the same 30,000 down, spent the same 30,000 renovations. It’s worth the same $380,000.
Here is where it gets interesting, because remember you still own the first property, but now since you moved out of there to go and do this again you now have another unit that you can go and rent out for $900 a month. Here’s how the numbers look for an example like this your mortgage payments going to be going up to $1,600 a month, your property taxes will be $300 a month, your insurance will be $120 a month and let’s just bump up the repairs maintenance and expenses to $300 a month.
Let’s just say that roughly this property is going to be costing you two thousand three hundred and twenty dollars per month after doing a Cash out refinance and after moving out of it, but wait for it because now you have three units each paying you $900 a month instead of 2, that means that you’re now making twenty-seven hundred dollars a month. Now you go and subtract the two thousand three hundred and twenty dollars from this and that leaves you with an extra three hundred and eighty dollars per month, in passive income just for buying the place fixing it up doing a Cash out refinance renting it out and then moving on to the next.
That means that you’re only out of pocket cost to make $380 per month, with seven thousand dollars plus the cost of your time to go and fix it up and buy it and rent it out. That’s it. And now you have three hundred and eighty dollars per month in passive income. Now you own a cash flowing rental property and now you’re also paying it off every single month so that in 30 years, you’re going to own it outright and also since you now have an extra three hundred and eighty dollars per month coming in and passive income that makes it that much easier to now go and save up for the next one.
we can now go on and just repeat this exact same process with the next one, and assuming you do it with the next one with similar numbers. You’ll now have seven hundred and sixty dollars coming in every single month in passive income do it with a third place and you’ll now get one thousand one hundred and forty dollars every single month and you just continue doing that time and time and time again until it slowly builds up. You can also now start investing in more expensive properties because you’re making more money you have more money coming in you have more experience and that’s speed this entire process dramatically.
Another really amazing thing with this concept is that if you just take that extra rental income and re-invest it back into buying more real estate, You’ll start seeing these numbers grow incredibly fast, because now, in addition to not only using your own money and your own Equity but you’re also going to be using the rental income as well, just to invest in even more real estate.
This means that if you’ve determined you need $3,500 a month in rental income to go and retire and then travel the world, visiting every single country, you can realistically do this in about seven to ten years just by investing one property, buying it renovating it, moving in renting out the other units, refinancing it, pulling that money into another property, re-investing all of the rental income into buying even more real estate and then pretty soon within a very short time frame or within about a decade you’ll be able to basically retire off your rental income.
The only requirements in your end is that you just save up enough money to use as a payment and a renovation budget, you never spend the extra rental income because you’ll use that to go and reinvest into buying more real estate and you just do this consistently until eventually, you hit the number where your rental income covers all of your expenses.
The concept is all really easy to understand, but the hard part is actually staying disciplined with this long-term and consistently putting in the work and delaying gratification, because investing in real estate could be a very daunting task especially for someone who’s never done it before whose brand new to the business, doing this as a primary residence where you can go and live in one of the units and then rent out the others, makes this process incredibly easier and now the icing on the cake with all of this is that if you do this consistently within about 30 years all of your rental properties are going to be paid off in full, even if you go and spend the extra rental income on whatever you want.
That’s because your mortgage payment consists of both principal and interest so every single month you make a mortgage payment you’re paying down the loan balance a little bit every single month until eventually, it’s It off, and then like I said, once it’s paid off you’re gonna have a ton of extra money to do whatever you want with. For instance, If you have six rental properties, like our last example having all of those paid off with generating you an extra 9600 dollars a month, that’s because once the mortgage payment is paid off, you’re not going to have that $1,600 a month expense on the property. So multiply that by 6 and there you go 9600 dollars a month and also the icing on the icing on the cake, is that your rental income will be going up over time, thanks to inflation and also demand and that just makes this entire amount just even larger in the future.
So as you can see this is really such a great method for retiring early and replacing all of your expenses with rental income, all that it requires is really dedicating a solid decade to doing this and really just the discipline of saving everything you can, putting in the work taking the time to make this happen, and then just repeating the process over and over and over again. This is something that I’ve been doing myself. I live in a duplex right now it pays for all of my expenses, the other properties pretty much pay for everything else I do and that’s it.
And this is really a decade of really really really solid saving and investing and really being invested in real estate and learning these principles and sticking with it long term and this is what I believe anyone else could achieve as well.