The FIRE movement is blowing up. A Vox article recently said: “There are currently more than 700,000 members in an active Financial Independence subreddit founded in 2011, and popular blog and podcast network Choose FI has registered more than 1.6 million downloads to date. Another FIRE-related blog, Mr. Money Mustache, reported last year that it had been accessed by more than 30 million unique viewers since 2011.”
What is FIRE?
FIRE stands for “Financial Independence Retire Early.” The first part of FIRE is Financial Independence (FI) or financial freedom, which is defined as having enough passive income to cover all your expenses in life. This gives you power and control to do whatever you want, whenever you want, wherever you want, with whoever you want.
The second part of FIRE is Retiring Early (RE). RE refers to being financially independent early in life (for example, in your 20s, 30s, or 40s). However, FIRE is for anyone who wants to find a way to retire in the next few years, regardless of age. Thus, FIRE stands for the idea of accelerating your path to financial freedom so you can play golf and go to the beach, or use your time to build a business, spend more time with your family, travel, or work on that book you have always wanted to write.
Most people are completely beholden to their paycheck. Stop and think about how drastically your life would change if your paycheck stopped coming. How long before you would lose your car or your house? This keeps most people living in fear and financial anxiety.
We all know plenty of people who have tremendous talents and fantastic ideas for a business or a charity, but they never act on them. Why? Because it takes tremendous courage to “pursue your passion” or start a business when you have close to zero margin for error.
Have you ever wondered what most successful entrepreneurs, celebrities, and athletes have in common? You might think of talent, work ethic, perseverance, or ambition. However, if those were enough, then why are there so many people with those traits that never succeed. If you do some research, you’ll find that most successful people had a financial safety net – access to capital that allowed them to take risks and gave them a large margin for error.
You can’t pursue your passion when you’re worried about paying your bills!
So, what if you had a 100% margin for error? What if you could go pursue that passion project with the confidence of knowing that even if you never make another dime, you’ll be able to enjoy the same quality of life you live today?
That is the power of FIRE and it may explain why the FIRE movement is blowing up.
The Basics of Achieving FIRE
Financial freedom is achieved either by luck (for example, winning the lottery or marrying into a wealthy family), living without expenses (such as living off-grid), or by owning assets. You might not want to rely on luck and I’m sure you want a good quality of life, so the best way to achieve FIRE is by owning assets. “Assets” refers to stocks, bonds, gold, cryptocurrencies, real estate, art, a business, etc.
Note that assets are different from those liabilities that are sometimes thought of as assets (such as your primary house, vehicles, boats, etc). Assets appreciate in value and produce income for you. Liabilities reduce your income. Liabilities may enrich life, but not financially. You want to own many more assets than liabilities. A book called Rich Dad Poor Dad explains in depth the difference between assets and liabilities and the importance of cash flow to achieve FIRE.
The Traditional Path to FIRE
The FIRE community typically pursues the path of owning stocks and bonds. For example, to follow the traditional path to FIRE, you can graduate from college with a high-paying job and save and invest in a low-cost index fund aggressively—somewhere between 50–75% of your income. This may mean first following Dave Ramsey’s advice to pay off your consumer and student debt and then maxing out your 401(K) and other retirement accounts while living very frugally (e.g., on the “beans and rice” diet). You would do this for 10-20 years until your portfolio is large enough to sustain your spending with 4% per year of your portfolio’s value. For example, if you have $1,000,000 invested in your retirement account, you can retire on $40,000 per year without ever running out of money.
A big drawback of the traditional path to FIRE is that saving 50–75% of your income may not be sustainable if you have a family or live in an expensive city. Additionally, the traditional FIRE movement can often focus too much on reducing expenses rather than making more money, which can induce a scarcity mindset rather than an abundance mindset.
Another downside of this strategy is that retiring during a recession is risky because your portfolio might go down 20% or 30% in value, which may mean that you need to live on less than 4% of your portfolio during those first few years to make sure you give enough time to your portfolio to recuperate.
Lastly, most index funds recommended by the FIRE community have an average yield of about 8 to 10% per year. At that rate, if your salary is $100,000 per year and you invest $50,000 each year (and we assume you do not retire during a recession) it will take you 12 years to have $1,000,000 (and be able to retire on $40,000/year), and 17 years to have $2,000,000 (and retire on $80,000/year). So, if living on $50,000/year for 12 years to retire on $40,000/year (or less if the economy isn’t doing great) sounds good, then the traditional path to FIRE might be you.
FIRE with Real Estate
Ever since I was a teenager, I have devoured every book I found on personal finance and entrepreneurship. I have also listened to hundreds if not thousands of hours of podcasts on the subject. I have tried and failed with several investments and businesses. It took me 15 years to figure it out…so take it or leave it.
About five years ago, my wife and I decided to move our family to the most affluent side of town. Not because we were rich, but because I wanted to find out if those sayings such as “your network is your net worth” and “you are the average of the five people you spend the most time with” were true. I wanted to be around financially successful people to see if I could be like them one day.
I grew up in a developing country and I don’t come from money or have any connections. Thus, when we moved here, I was the poorest, dumbest guy in my network. It was uncomfortable being the poorest guy in the room, but it stretched me tremendously. In my network, I quickly found that owning real estate is the preferred method for most self-made millionaires and the preferred investment vehicle for the rich and wealthy to grow and preserve their wealth. This is true for the many millionaires I know regardless of their financial and social background, ethnicity, and upbringing.
It didn’t take me long to figure out from my network that owning the right real estate is the surest, safest, fastest, and most powerful way for “the average Joe” to achieve FIRE. It can be done actively or passively while you have a full-time job.
If you do some research, you’ll notice that many large corporations and organizations (insurance companies, food chains, churches, etc.) make their money and preserve their money through real estate investments. This is not only because of its safe returns, but because real estate is considered by many as the most tax-efficient investment (you can literally pay $0 in taxes, legally), and pays you in three ways (cash flow, appreciation, and tax deductions), which no other investment does.
John D. Rockefeller, the richest man in American history, made money in the oil industry and then invested a large amount in real estate, which some experts believe gave his oil and gas business the stability to survive and then thrive. An interesting example is Arnold Schwarzenegger, who was able to devote time to bodybuilding and acting early in life thanks to his real estate investments.
No wonder why Andrew Carnegie once said that “ninety percent of all millionaires became so through owning real estate.”
If Real Estate is so Great, Then Why Aren’t Most People Doing it?
Many people think that owning real estate means dealing with the three T’s: Tenants, Toilets, and Terminates. Others are misinformed and think all real estate is risky or too hard or too expensive to get into. However, I will show you how owning the right real estate can be the safest, simplest, fastest, and most passive way of achieving FIRE.
What is Considered to be the “Right Real Estate” to Own?
Owning rental properties as a passive or active owner. That is the name of the game. Owning income-producing properties (and particularly apartment complexes) in booming areas is considered by the rich and wealthy to be the safest investment with the best possible returns. This is how the rich get richer. In fact, a big part of the tax code has been written to benefit real estate owners (no wonder why at least 238 federal lawmakers are also landlords.)
Note that income-producing properties refers to properties that produce cash flow while you own them. So this excludes buying properties that do not produce cash flow and hoping that they will appreciate in value. Buying for appreciation is risky and speculative.
Compared to other investment vehicles, owning income-producing properties is at the top of the list. This is because although treasury bonds and CDs are arguably “lower risk,” the returns (1% to 3%) are meager in comparison, and although other non-traditional investments (e.g., venture capital, private equity, crypto, house-flipping, starting a business, etc.) can produce higher returns, are definitely higher risk.
See, if you go to a financial advisor, is like going to a Chinese restaurant. They will give you a menu with only Chinese food (stocks and bonds); they will not offer you all the dishes that exist. You may like Chinese food and there’s nothing wrong with that, but you don’t know what you’re missing until you try it.
How to Own Real Estate to Achieve FIRE?
You can own income-producing properties either actively or passively. Actively means you buy and manage the property yourself (or with a partner or team). Passively means that you buy a property with an experienced active investor (called an operator or syndicator) who manages the property. The most common structure for this type of investment is called a “real estate syndication.”
As a passive owner in a syndication, you are a limited partner, which means that you are not involved with the day-to-day operations (unless you want to), you do not have legal liability or responsibility in the deal, you receive all the tax advantages of owning real estate, you receive cash-flow distributions each month, and you receive your part of the profits when the property is sold. Whether you want to be a passive or active owner will depend on your personal goals and circumstances and on how fast you want to retire. Generally, the rates of return are higher for the active owners. However, as further described below, passive owners of real estate can safely and passively retire in less than 10 years.
You can own residential real estate or commercial real estate. Residential real estate includes single-family homes and any multifamily property that is smaller than a fourplex. Commercial real estate includes multifamily (anything larger than a fourplex), retail, medical, industrial, office, etc.
In simple terms, commercial multifamily refers to a big apartment complex. This is the favorite type of property of many high-net-worth individuals because it tends to be the least risky and most reliable of all.
Apartment complexes in booming areas have many advantages that make them very desirable. They are low risk because it is nearly impossible for vacancy to affect the cash flow. They are highly scalable, allowing you to save on expenses and increase the cash flow. They produce enough income to pay a professional management company so you don’t have to deal with the three T’s: Tenants, Toilets, and Terminates. Also, unlike your home, the value of an apartment complex is not determined only by comparables because they are valued also based on how much income they produce. This means that apartment complexes can likely make you money even during recessions.
Booming areas are those that have seen population growth and job growth above the national average for multiple years. This includes most sunbelt metros (for example, the main cities in TX, AZ, FL, NC, etc.)
Good operators are those who have a track record of meeting investor’s expectations and have an established reputation. Investing with a good operator is the most important aspect because they will know in which markets to invest and how to find the best deals.
Show me the numbers!
Most apartment syndications go full cycle in 2 to 5 years. This means it usually takes 2 to 5 years from the time the apartment complex is bought to the time it is sold. Generally, passive investors receive 8-10% returns per year (called cash-on-cash returns), and double their money in that time period (and some are never sold, producing lifetime cashflow). It’s that simple.
So, if you want to double $100,000 in 5 years, you would simply invest $100,000 in the deal of an experienced sponsor and wait for the mailbox money (about $10,000/year or $833/month) to start coming in. Five years later, when the deal sponsor sales the deal, you will receive your portion of the profit from the sale, which, when added to the cash flow you’ve received over those five years, will be equal to around $100,000. Thus, in five years, if you kept all the cash flow, you should have $200,000 in your pocket (which includes your original $100,000). The beauty of these investments is that they often produce higher returns, the money you make can be tax-free, and you can invest in them with your retirement account such as a self-directed IRA.
How to FIRE in 5 Years
As a passive investor, let’s assume, conservatively, that you can get a 10% cash-on-cash return per year and that you can 2x your money in 5 years (i.e., 20% total average annualized return). If you invest $50,000 in one syndication each year for five years, you will have about $250,000 invested in five syndications on year five. On year five, syndication 1 goes full cycle, putting $100,000 in your pocket. You invest that in another syndication, making you, with the other four remaining syndications, about $30,000/year in cash flow (10% returns per year on $300,000 invested). That’s assuming you did not re-invest the ongoing cash flow in other syndications during those five years. If you did, you can easily see how you can be making more than $40,000/year in five years. Remember how long it would have taken to retire on $40,000/year following the traditional path to FIRE? To refresh your memory, it would have taken 12 years investing $50,000 per year.
Is it Really That Safe?
Some have lost money in syndications. However, every person I know that has lost money was because they invested with a fraudulent sponsor (didn’t do their research, and invested with the first person that came along) or invested in high-risk deals (e.g., new construction, distressed assets, bad markets, etc.). To make sure your investment is extra safe as a passive owner, you want to invest with the best sponsors out there – the ones that have the best track record.
How to Find the Right Sponsor
The right sponsor can help you to FIRE in five years. The right sponsor is also the most important element of investing in apartment syndications. The sponsor is more important than the deal itself. So you’ll want to meet as many sponsors as possible and talk to people that have invested with those sponsors.
Here are the seven key questions to ask a prospctive deal sponsor:
•What is you experience?
•How many of your investors return to invest with you?
•How do you minimize risk?
•Have you ever lost investor’s money and have you met your projections?
•What are your fees?
•How do you have alignment of interests with you passive investors?
•What’s the biggest challenge you’ve faced in syndication?
To learn what the right sponsor should answer to these questions, refer to my post titled “How to Find the Right Deal Sponsor.”
Disclaimer
Real estate syndications are not for everyone. If you don’t want to go out and network with deal sponsors to meet the right sponsors, this is not for you. If you want liquidity, this is not for you (your money is locked in during the holding period, which is typically 2 to 5 years). All investments, real estate or not, come with risk. So, if you can’t handle some volatility or if you are prone to anxiety about your investments, this may not be for you.
Conclusion
From what I’ve seen and experienced, real estate is the surest way for the average Joe to become financially free early in life and build multigenerational wealth. I know this is a lot of information, but I hope it helps somebody. You may have other goals and may not be interested at the moment, but I wish someone would have told me this ten years ago. The most common regret I hear from people who find out about apartment syndication in their 40’s, 50’s, or 60’s is that they wish they would’ve known about this earlier. I often hear people say “how come I didn’t know about this before?” and “I wish I would’ve known this ten years ago.” Don’t let yourself or your loved ones have that regret. I wish you incredible success and fulfillment in your FIRE journey.
-JP
How to FIRE with Real Estate 