The financial independence, retire early or FIRE movement is a lifestyle for many younger investors. People who adhere to the FIRE movement aim to achieve financial independence early instead of waiting until they reach the traditional retirement age. FIRE enthusiasts tend to invest or save from 50% to 75% of the money that they earn. Meanwhile, they practice frugal living and avoid unnecessary purchases or taking on too much debt.
Real estate is a popular investment choice for people who follow the FIRE with real estate movement. This primarily involves purchasing investment properties to collect rent and boost your income. Becoming a successful investor in real estate, combined with the goals of achieving financial independence and retiring early, requires proper planning and research.
Planning to achieve financial independence and retire early
Everyone who implements the tenets of the FIRE movement in their lives do so in their unique contexts. You might have children or might not. You may have a high-job or earn an income that places you in the middle class. Regardless of your context, there are some basic practices that you will need to follow to achieve your goal of retiring early.
Planning early
Following the FIRE movement will require you to begin planning for your retirement as early as possible. Ideally, you should begin as soon as you become an adult. You should try to keep your routine expenses low and avoid debt. You should also plan for ways to boost your income. If you have debt, your plan should include steps for repaying it as quickly as you can to avoid losses from interest.
Prioritize investments and savings
The next strategy that you need to implement is to prioritize your investments and savings. When you are young, you can have an aggressive portfolio. However, you should also make sure that your portfolio is diversified. While this includes saving money in tax-advantaged retirement accounts, it also includes investments in other areas, including real estate.
Advantages of real estate investments to generate passive income
If you want to invest in real estate as a part of your strategy to achieve financial independence and retire early, you will want to leverage your properties to improve your investments every year. Planning to add rental income for wealth building will necessitate knowing how to be a landlord. Real estate investments can offer several advantages for you if you are working to achieve FIRE with real estate.
Fast way for a passive investor to achieve FIRE with real estate
When you invest in real estate, you might achieve fire with real estate financial independence and be able to retire early much earlier than if you simply invest in the stock market or retirement accounts alone. While you will need to have some money upfront to make the down payment, you can use other people’s money to finance the rest. Building a portfolio of properties is a passive investing strategy that can help you to build wealth. While you can use traditional mortgages to purchase properties, you will want to calculate the income that you will earn versus the payments that you will need to make.
Adjusted returns
Rental prices rise with inflation. When you are a landlord, you can increase the rents for your properties once a tenant completes his or her lease. Normally, this happens annually. By contrast, money placed in an investment fund requires you to make adjustments for inflation when you predict your returns.
Reduced volatility as compared to the stock market
Passive investing in real estate exposes you to less risk than investments in the stock market. Once you retire and start taking distributions from your retirement accounts, you will face the risk of a market crash. Since you were not be contributing to your retirement savings any longer, your portfolio could diminish much faster because of your withdrawals. By contrast, rental income is ongoing. As long as your properties are maintained and occupied, they can continue generating income for you as a passive investor long after you retire.
Avoiding the drawbacks of real estate investments
Purchasing rental properties requires you to pay a substantial amount upfront. You will also need to factor in the costs of repairs, maintenance, insurance, and a property manager. You will need to be careful about where you purchase properties so they won’t sit vacant for months. Diversification can help to avoid some of the problems that can occur with investments in real estate. Make sure that your portfolio includes other types of investments in addition to your properties.
Hiring a property manager can help you to remain as a passive investor instead of working a full-time job as a landlord. A good property manager can collect rents, handle repairs and maintenance, and help with evictions when necessary.
How to invest in real estate
Real estate investments do not require you to become a landlord. There are other ways to generate passive income from real estate beyond working as a landlord. You will first need to decide which type of investment is the right one for you.
Renting out property
Working as a landlord is among the most predictable ways to earn income from your real estate investments. You will need to research the investment properties and ensure that they are in good areas to prevent vacancies and other problems. You can then determine how much you will earn from your rental properties and add the income to your FIRE with real estate plan.
Flipping houses
Flipping houses is another option for investors. People who flip houses purchase properties when their prices are low and sell them quickly to make profits. You might focus on purchasing short sales and foreclosures. Flipping houses may require you to be able to do some repairs and improvements, so you will either need to be handy or partner with someone who does that type of work.
Real estate investment trusts
REITs are another option for wealth building. These are equities that are offered by companies that own real properties. Investments in REITs normally offer high dividends but carry some risks. Since REITs are publicly traded, they have similar market risks to stock investments. They are also affected by the real estate market. Diversification is the key to securing the best returns when you invest in REITs.
Choosing the right property
Choosing investment properties can be challenging. To avoid making mistakes, make sure to invest in a property in a growing area. These areas have more housing demand, allowing you to command higher rental prices or higher returns on your investment. Make sure to thoroughly research areas where the properties are located. Make sure that you know the vacancy rate and the demographics before you invest money. Make sure that the property you choose is within your budget, and avoid properties that are in an extensive state of disrepair. You do not want to have to spend thousands of dollars to make a property livable.
Get your finances in order
To benefit the most from your investments in real estate, you will want to get the lowest interest rates possible. This requires you to have a good credit score. Aim to achieve an excellent score of at least 720. You will also need to gather your financial documents together to get a mortgage, including paystubs, tax returns, current mortgage statements, investment, retirement, and bank account statements, and proof of insurance.
You will also need to have sufficient savings to make your initial investment. Include enough money for closing costs and unexpected expenses.
Financing options
There are several ways to secure financing to invest in real estate. Investor capital is a very attractive option, but you will need to network with the right people. You can also apply for a mortgage to purchase a property. However, many banks prefer to approve mortgages for people who want to live in the homes that they purchase instead of investors.
Hard money loans are another option. These types of loans generally have very short terms. The amount of money that you might secure will depend on the determination by the lender of what your property will be worth after you fix it for flipping. Since hard money loans have short terms, they often also have substantial fees and charge high rates of interest, which can diminish your returns.
Cash-out refinance loans are another option. However, tapping into your home equity to purchase an investment property is risky because your home serves as collateral. Cash-out loans have fixed rates of interest, but they can extend the length of your mortgage.
Under the FIRE movement, taking on high-interest debt is viewed as a risk. If you have high costs each month, it will make it more difficult to meet your savings goals. You should make sure to perform the calculations ahead of time to determine whether taking out one of these types of loans is worthwhile.
Building wealth by investing in real estate can work well with a FIRE with real estste plan. If you do your research and plan carefully, investing in real estate can help you to achieve financial independence and retire early. Make sure to avoid common mistakes and choose your investments carefully so that you can enjoy the highest possible returns and a source of steady income.