Everyone aspires to be financially independent. While there are many roads that can get you there, one of the most tried and tested ways is ownership of real estate.
Real estate investment, if done right, is one of the most lucrative ventures anyone can get involved in.
The thing is, though, financial freedom can mean different things to many of us.
What Does Financial Freedom Mean to You?
To some, it is about having a well-paying job that earns them more money than they need to survive each month. With the fat paychecks, they can have enough left to buy a bigger house, fancy cars, or a holiday or two each year.
For others, it is about being able to live without the lingering thought of debt occupying the mind. That brings them peace of mind.
There are others who think of financial freedom as a number. They hope to build a nest egg of $2 million, $3 million—or whatever their freedom figure might be—and live the rest of their lives without the coffers running out.
And then there are those others who think of financial independence as having passive income that they cannot outlive. They let their money work for them without needing to put in hours.
How Much Property Can Guarantee Me Financial Freedom?
Your take on financial freedom will, to a large extent, hold sway over the number of houses you need to buy in a given year.
Calculating your freedom number is the first step in determining how many houses you should buy annually.
If your goal is to afford your dream lifestyle, work out how much that would cost you. If you’re looking to replace your current income, your freedom number (the number that will guarantee you financial independence) is your pre-taxed income.
That in mind, next you need to calculate how many properties you will need to achieve this figure.
This calculation will be largely dependent on your specific investment strategy.
Creating a Real Estate Investment Strategy
One of the most interesting things about real estate investment is that there are a million-and-one strategies you can use to gain financial independence.
This can be through short-term investment strategies like fix and flips or long-term investment strategies like traditional rentals or buy and hold.
Looking at it from a broader perspective, however, there are five strategies you should be thinking about when considering the number of properties to invest in.
1. Achieving Cash Flow Through Properties
This means generating passive income through rental properties. To determine the number of properties you need if you are investing for cash flow, you simply look at your freedom number in relation to what each property can bring in.
For example, if you are looking at $60,000 in a given year in profits, that means your rentals need to bring in $5,000 each month after all expenses have been deducted. Assuming one property earns you $500 per month after expenses, this comes to a goal of 10 properties.
2. Buying the Property Outright
This is similar to the first strategy only that in this case, there is no mortgage or interest to contend with which means very little expenses.
It is a strategy you can use to successfully build up a large portfolio by purchasing properties, allowing them to appreciate in value, following which you sell off a few to pay off the debt on the remaining ones. During that time, you can rent out the property, renovate, or update.
3. Live Off Sales Profits
This also involves purchasing houses, although your focus is not on how much revenue they bring in at the moment—the cash flow can either be positive, neutral, or negatively geared. It doesn’t really matter.
Rather, the essence is to purchase the houses and let them grow in value so when the time comes for you to retire, you can sell them for profit and live off that.
Again, in this case, your freedom number is what will determine how much property you should purchase.
4. Live Off Equity
This is similar to the previous point but the difference is that instead of selling your houses to access the funds, you simply borrow an equity loan against the equity you already have.
You rent out the houses, and the more properties you amass, the more rent that will be trickling in—and consequently, the bigger your equity will grow. If you can borrow against this equity, it is possible to live off it.
5. Owner Financing
This involves charging your house buyers an interest rate over the course of the payment period.
Owner financing usually has a shorter payment period than a traditional mortgage, albeit with higher interests. So, in addition to selling off your properties you also get to enjoy the substantial sums accrued from the interest you have agreed with the buyer.
In closing, you can opt for either one or a combination of two or more strategies. But at the heart of your investment plan, your freedom number should be the guiding principle on how many properties are sufficient for you to invest in on any given year.
Because financial freedom means different things to all of us.