Real Estate FIRE – Passive Income

Updated: Dec 3, 2020

Buying real estate and earning passive income through rent is probably the fastest way to become financially independent. Everybody needs a place to live, so there is always going to be demand. Food, water, and shelter are the most basic human needs. Real estate provides shelter, accessible drinking water, and kitchens where you can store and prepare food. My main man, Grant Cardone, is a behemoth real estate investor worth $400 million. His advice is to only buy real estate with 16+ units. This reduces your risk and also provides many cost advantages. If the roof needs replacing, you cover all 16 units in one swoop, instead of having to fix 16 separate roofs. Also, you can afford a property management company that can collect rent, handle accounting, do repairs, and be on call when things break. This way, the stress of managing a property isn’t your responsibility. My favorite website for looking at investment properties is LoopNet. You can filter exactly what you’re looking for, such as the number of units and the Cap Rate. The Cap Rate is calculated by taking the Net Income of the property (after expenses), and then dividing it by the Purchase Price. You can think of the Cap Rate similarly to a dividend income %. In the below example, you would earn a 10% dividend as passive rental income. Generally, commercial real estate properties require a higher down payment than a normal house, between 25-30%. Also, since the loans are so much bigger, they tend to charge around 5% interest and have a shorter term of 20 years. In this example, you will need a down payment of $300k. After paying taxes, you will come away with $81,825.50 profit per year or $6,818.79 per month. But, you will still have to pay the mortgage payment of ($4,619.69). This drops your total monthly cash flow to about $2,200 per month. If you can survive on $2,200 per month, you have just become financially independent. In addition to your 10% dividend income, the property will appreciate in value over time at around 3% per year. And, any updates you do to the property, such as creating a gated security entrance or updating the kitchens of vacant units will add value to the property. In 20 years, the property will be completely paid off, and your monthly cash flow becomes $6,818.79 per month. That is the equivalent of someone having a gross yearly salary of $115,000. The property will also increase in value to roughly $1.8 million over the course of 20 years with price appreciation. So, with a $300k initial investment, you will earn a paycheck of $2,200 per month for 20 years, which then shoots up to $6,800 per month for as long as you own the property. And, you will have a $1.8 million paid-for piece of real estate. Let’s say you keep your job and invest the $2,200 per month for 20 years and earned an average of 10% per year. This alone could become $1.67 million. In this example, your $300k turns into $3.47 million in 20 years, and creates a passive income stream of $6,800 per month for the rest of your life!

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