5 Fundamentals of FIRE from Real Estate

Familiar with the FIRE movement?

(Crap did I just call it a “movement”? How cheesy and political-sounding. Let’s start over.)

Familiar with the acronym FIRE?

There’s a small-but-growing minority of people – myself included – who don’t want to be dependent on their 9-5 job for income. Their goal is to reach financial independence, to retire early (FIRE).

And we’re not talking about retiring after 25 years instead of 40. We’re talking about retiring within 5-10 years, no matter how old you are.

Sound impossible? It’s not. Just look at Kevin & Ashley Thompson, who retired before turning 30, by investing in rental properties.

But it does take commitment. If it were easy, everyone would be working for five years, yawning, and saying “Okay, that was fun for a bit, now I’m retiring to the beach.”

Here are five fundamentals for reaching FIRE through real estate (although some apply to FIRE in general), in preparation for our upcoming live masterclass on the Real Estate FIRE Escape: What It Takes to Retire in 5 Years with Rentals. (And yes, that’s your invitation to reserve a seat before it fills up!)

 

1. Set a FIRE Date

When do you want to retire by?

Or, to be more accurate, when do you want to reach financial independence by?

There’s a difference: financial independence (FI, in personal finance parlance) means being able to pay your bills solely on your passive income from rentals and other investments. Many people who reach FI choose to keep working, either because they like their jobs, or because they want to keep raising their passive income for a better post-retirement lifestyle.

So, what’s your target FIRE date?

You can tweak it later, but for right now, set a date that you think is possible but a bit of a stretch. From here, we’ll work backward to figure out what it will take to get there. (Use our free FIRE calculator to mess around with your personal numbers for financial independence and retiring early.)

And then it will be up to you whether you’re willing to put in the work.

 

2. Your Speed in Reaching FIRE Depends on Your Savings Rate

If you only save 5% of your income, like the typical American household, expect to work for 40 years before being able to retire.

Like the typical American household.

If you live on half your income and invest the other half (or more!) of it? Your financial story have a much different trajectory.

Make no mistake, retiring within 5-10 years is not “normal” or “ordinary.” Achieving extraordinary results takes extraordinary measures on your part.

It helps if you live for free by house hacking. Which doesn’t even require a multifamily – look no further than our co-founder Deni, who house hacks her suburban single-family home by bringing on a foreign exchange student to live with her!

Think of it as attacking the problem from both directions. You’re investing more money every month, and your minimum FIRE income will be far easier to meet.

In other words, you’ll be able to cover your bills with passive income much faster!

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3. Shift Away from the Diminishing Nest Egg Mentality

If you’ve ever explored retirement planning, you’re familiar with the concept of safe withdrawal rates. The classic example is the 4% Rule, which asserts that if you withdraw no more than 4% of your retirement nest egg each year, your nest egg should last at least 30 years.

Don’t get me wrong, safe withdrawal rates are a useful concept. Among other uses, it helps you plan how much you need to save for retirement if you’re following the classic retirement savings model. If you can withdraw 4% a year, then you need to save 25 times your annual spending, right? (This is known as the 25X Rule, a corollary to the 4% Rule.)

Here’s what I don’t like about this old-school model of retirement planning: the premise is based on a diminishing nest egg. It’s all about gradually selling off your assets, and hoping you die before your nest egg does.

But if you want to retire by 30, 40, 50? You could live another 70 years! This whole “gradually selling off my assets” plan is not a winning strategy.

Instead, FIRE requires what I call “forever income.” Money that doesn’t require selling off assets, chipping away at your nest egg.

Rental income is one example. It comes in every month – and goes up over time – even as your properties appreciate in value.

It’s not the only example of course. Dividend income is another example, as is interest income from private notes, and a dozen other types of passive income.

I want to get richer every year that goes by, even in retirement.

 

4. Leverage Helps You Get There Faster

Leverage is an enormous advantage when using rental properties to reach FIRE.

Sure, you can buy stocks on margin. But typically, you’re only looking at a 50% maximum for margin financing, and the volatility in equity markets makes margin buying a risky proposition.

But you can borrow 80% of the cost to buy rental properties. If you go the house hacking route and use FHA financing or use the new Fannie Mae or Freddie Mac loans to buy rental properties to house hack with, you can finance up to 97% of the purchase price!

Because real estate values and rents are far less volatile than equities, it’s safer for lenders to make these rental property loans, even at 80%, 90%, even 97% of the value of the property.

You can even use creative real estate leverage to recycle the same $30,000 over and over again to keep buying new rental properties. It’s called the BRRRR method, and it stands for buy, renovate, rent, refinance, repeat. Upon finishing the renovations, you refinance to pull your original down payment back out, then you go out and do it all over again. And with each property, you add more passive rental income.

Which is not to say that leverage is without its downsides and risks. You’ll lose money to interest, and to closing costs and other rental property loan fees. That pinches your cash flow, which means tighter margins and more properties needed to generate the same amount of cash flow.

Having to buy 15 properties instead of five, to produce the same amount of cash flow, means three times the work. More work to find the deals, more work to finance them, more work to manage and maintain them.

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Want to compare investment property loans?

What short-term fix-and-flip loan options are available nowadays? How about long-term rental property loans? We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

5. Pay Off a Few of Your Rental Property Loans for Safer, Faster FIRE

Leverage is a great way to build your portfolio quickly in the beginning. And then the time will come for you to turn around and start paying off your rental property loans. One option, before you quit your job, is to pay off a single rental property loan. Your cash flow will skyrocket, without the mortgage payment. Which you can then turn around and put towards paying down another rental property loan. The less debt you have when you retire, the lower your risk. And the greater your cash flow. As time goes by, your rental properties will almost certainly appreciate in value. One option, as you get closer to your target FIRE date, is to sell off whichever of your properties has appreciated the most and has the most equity. You can take that equity to pay off or pay down one of your other rental property loans. You’d be amazed how much equity properties can gather through appreciation and capital improvements, even in a five-year timeframe.  

Mindset Shift: Love the FIREwalker Journey, Not Just the FIRE Destination

I consider myself on a journey. An adventure. Part of my journey is living overseas, where my wife Katie and I get free housing through her employer (she’s a school counselor). I like to think of myself as a “FIREwalker” – someone who’s marching toward FIRE. Part of what I like about that term is that it puts emphasis on the process, not just the destination. Yes, FIRE is a beautiful dream and goal. But it’s one that takes several years to reach at the very least, and no amount of “grit” or “discipline” is going to last you years. You have to shift your mindset away from “What?! You want me to give up half my income?! Think about how awful and deprived my life would be!” Instead, embrace living lean. It’s fun to learn how to cook your own gourmet meals, instead of going out to restaurants all the time! It’s fun to stay at locals’ inexpensive bed and breakfasts, rather than bland corporate hotels! If you don’t embrace the process, if you can’t stop thinking in terms of sacrifice, you’ll never reach the destination. Make it fun, make it a part of your identity, and you’ll not only enjoy early retirement, but you’ll enjoy the next few years it takes to get there as well.  

Are you aiming for FIRE from real estate? What’s your target FIRE date? Share your FIRE plans below!

   

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