The term "financial freedom" is used a lot in the world of investing. Many people associate this term with the many get rich quick schemes that are present all over the internet. However in reality, financial freedom is something that is typically obtained bit by bit through wise investment choices and conscious management of your finances. But perhaps you
wonder, how do I know when I've reached financial freedom? Today we will walk through how to calculate your financial freedom number.
How much do you need to cover your annual expenses?
The first thing to establish when you are mapping your financial freedom plan is to determine how much you need to live for one year. We make this calculation for the entire year instead of monthly to capture things like taxes, insurance, etc. that are not necessarily paid on a monthly basis. You should also account for reserves for things like unexpected hours repairs or medical bills. Once you have tallied all this up you will have arrived at the amount of net income that you need per year to live on. For the purpose of this discussion let's say it's $100,000.
How much do you need to have invested?
Once you have calculated the net income that you will need each year to live on each year, it's time to then calculate the total amount you need need to have invested. The assumption which must be made is how much cash flow will you receive on average from your multifamily investments. This amount could be debated at length but for the sake of our discussion we will say 7%. This means that if you take the net income you need and divide it but the percentage cash flow that you will receive, you will arrive at the total amount you need to have invested. In this example, that number is $100,000/0.07 or $1.43 million. So in summary, if you could work up to having $1.43 million passively invested in real estate making 7% average cash flow you would have reached a place of financial independence.
How much time will it take to reach this number?
In today's world, we can get almost anything we want instantly. Our culture shies away from anything that doesn't provide instant gratification. Unfortunately, investing in real estate is not a get rich quick scheme although it can be a get rich for sure plan. What we mean by that is that the investor who makes an intentional plan like the one laid out above and sticks to it will find themselves financially free in the future. But the question remains, how far into the future? Well this depends on the amount that you are starting out investing and the amount that you continue to add to that investment stack. For this example, let's say that you start with one $50,000 investment and never add anything else to it. Let's also say that the combined average return of both cash flow and profit upon sale of investments is 15% average annual return. Plus all of this into an excel table and you see a result of 24 years to arrive at $1.43 million. For some this might seem short compared to a 40 years career timeline and to others long. For those on the later end of this spectrum continue to save and invest additional funds is what could greatly accelerate this curve. Regardless, you now have a basic roadmap for obtaining financial freedom through passive real estate investing. If you would like help developing your own customized financial freedom roadmap, please feel free to reach out to us and we would be more than happy to assist.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.