I like to give credit where credit is due — In my own case, early financial freedom at age 31 would not have been possible for me had I not decided to invest in real estate back in 2012. I am absolutely certain of that, which is why I’m fine with making such a declarative statement.
Yes, it’s true that there are many paths to early FI, and through the many blogs online, you’ll find folks who did it via: index funds, dividend stocks, self-employment/business, etc.
But I must say, in my everyday life, at least 90% of the people that I’ve met who retired before age 35, did it through real estate.
What is it about real estate that makes it so darn lucrative?
Well, for starters, it’s the whole concept of leverage. As I’ve written before, leverage is a double-edged sword that cuts sharply in both directions, but for the risk-takers out there, if utilized correctly, it can shortcut your path to financial freedom by at least a decade… possibly more. Leverage is especially potent when used at the bottom of brutal bear markets. As I always like to emphasize, fortunes are made when investors are willing and able to back up the truck during the Depths of Despair.
Now, these wonderful buying opportunities don’t come around everyday, so when they do, you MUST have the conviction to load up aggressively! Otherwise, believe me, someone else will! And I’ll probably be in line myself…
Of course, this is way easier said than done… No one will ever ring the bell for you at rock bottom… which is why it’s important for all financial freedom fighters to ALWAYS pay close attention to market conditions and asset valuations.
Here’s a hint for you — Most homes out there are NOT cheap right now!
But like everything else is this world — Night follows day, summer break eventually ends, and the bear will come out of hibernation again…
When you hear the bear roar, you had better move decisively…
If you blink, you will miss it!
But if you’re fortunate enough to buy when there is blood in the streets, you’ll be able to ride that gravy train all the way back up to better days… And from my own experience, the greater the fall, the more explosive the move back up will be, no doubt!
Here’s an example of what a Santa Clara townhouse is selling for in today’s market, as of March 2016:
Current listing is $899,000.
Sold in 2011 for $610,000.
That’s $289,000 in appreciation… in just 5 years. An impressive 47% return on investment, unleveraged.
Let’s assume a typical, leveraged downpayment of 20%. That comes out to be $122,000. Debt service of $488,000. Neglecting all principal paydown over 5 years, that still produces a staggering return of 236%!
Now do you see the awesome power of leverage?!? Imagine if you owned MORE than 1 of these units!
In my own case, I first purchased Rental Property #2 in 2013 for $290,000. It is now worth $550,000. My initial leveraged downpayment was 20%, or $58,000. Had I not performed a cash out refi in 2015, today’s leveraged return would be 348% (again ignoring all principal paydown).
With leverage, you don’t need to walk every step of your way through the journey of a thousand miles… No! You walk 20% and then take the bullet train the rest of the way. 🙂
A single right move at the right time can change your life FOREVER!!!
Yes, I know that I’m focusing on appreciation here, but that’s only because it’s related to my own personal story…
If you live in more of a cash flow market, well, the gains are different, sort of, but not really… Instead of massive appreciation, what you’ll experience, instead, is massive cash flow… which is all really one and the same thing… The person who realizes the appreciation is going to have to convert those gains to cash flow, at some point if they want to maximize early FI… So, never discriminate! It’s foolish to fall into the trap of declaring yourself either an appreciation investor or cash flow investor.
Don’t be an idiot; take whatever the markets give you!
Appreciation is awesome… Cash flow is equally as awesome.
Anyway, back to cash flow… We’re talking about 20%+ Cash-on-Cash (CoC) returns in a down market. For a typical single family home (SFH), below $100,000, you should be able to score the following:
The cash flow deal highlighted above was a dime-a-dozen (nothing special at all), back in 2010-2013 timeframe. You could have picked something up like this all day long (or even better), in a really good neighborhood… I’m talking about at least Class B or possibly even Class A (although more challenging to find, no doubt). At $15,000/pop, ten of these babies would have set you back $150,000, to secure over $2,600/month, which exceeds my own current monthly cash flow!
Seriously, who needs a 401k, or traditional retirement account when you’ve got that?
Early FI, mission accomplished!
In either scenario, whether you were out hunting for appreciation, or cash flow, these opportunities did in fact exist… and someday, investors will probably get another crack at similar types of deals, if not better ones. Like every other asset class out there, real estate is cyclical.
Further, real estate investing is really easy to do, if you know what you are looking for in advance!
The trick is to not settle for less… It’s a game of patience (which is why so many investors fail), but believe me it’s worth the wait!
I can’t overstate the potency of leveraged real estate at the right time in the cycle… The gains an investor will make will be life-changing. There’s a reason I’m holding onto $500,000 in liquid funds right now… You’re damn right I want to take another swing at it!
Again, leverage is risky business, which is why my philosophy with real estate investing is quite simple — Unless there are an abundance of: REOs, foreclosures, short-sales, etc., I am NOT interested in buying.
Trust me, investors who get too greedy at the top of the market and leverage themselves up to the hilt will get decimated.
And yes, there will be those investors sitting patiently on the sidelines, ready, willing, and able to pick up the pieces when that happens…
The first time around, I got lucky. The next time around, it will be because of skill.
But without a shadow of a doubt, I owe my early retirement to real estate. Without it, none of this would have ever been possible.