How Purchasing Rental Properties Can Help You Reach Financial Independence

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If you are like most Americans you dream about the day when you can retire. Wouldn’t it be nice if you could retire in 5, 10, or even 15 years earlier than expected?  Whether you are working towards supplementing your 9 to 5 income or would like a little something extra to help you reach financial independence sooner than expected, rental properties can take you one step closer toward financial freedom.

If you currently own a rental property or are interested in purchasing one, here’s how your rental properties can help you reach financial independence:

What is financial independence?

Before you begin purchasing rental properties to achieve financial independence, you need to understand what it means. Financial independence gives you the opportunity to make life decisions without worrying about any financial implications. You can live your life the way you want because you have properly planned and prepared.

Reaching financial independence is  great at any age. Whether you’re trying to create financial stability earlier in life or working toward a secure retirement, financial independence can give you peace of mind.   

Financial independence is not something that will happen overnight. It will take an immense amount of work and preparation to achieve true financial freedom. Even after you reach financial independence, you will need to continue to work on your finances to maintain the lifestyle you’ve created.

What is your financial number?

Now that you understand what financial independence is, how do you determine how much you will need in order to be financially free? You will first need to decide how much you need to either maintain your current lifestyle or live a life of luxury.

The best way to accomplish this is to sit down and list all of your expenses and financial responsibilities. Your financial independence number will replace your current income. If you simply want to maintain your lifestyle you will need to replace your pre-taxed income. If you would like to amplify your lifestyle, you will need to add an additional amount.

Let’s say you currently make $60,000 a year, but have determined you will need an extra $12,000 a year to live the life you desire. This means you will need a cash flow of $6,000 a month to reach your desired annual pre-tax income of $72,000.

How many rental properties will you need to reach this number?

Once you have defined the amount of money you will need every month in order to reach financial independence, you can start devising a plan for reaching your goal. You will now need to identify how many rental properties you need in order to reach your financial independence number.

Start by evaluating your first potential rental property to figure out your cash flow. In order to calculate your cash flow, you will need to subtract your total expenses from your total income. Your rental properties may yield different cash flow amounts, but this will give you a starting point for deciding how many properties you should try to acquire.

Total income

Do your research to discover the best rate for your rental property. Let’s say you can rent your property for $150 per night. This means your potential monthly income would be $4,500, assuming you rent your property for 30 days out of the month.

Total expense

Then you need to make a list of all of your expenses, which could include:

  • Repairs and maintenance
  • Cable
  • Mortgage
  • Property management
  • Advertising
  • Vacancy rate
  • Taxes
  • HOA (Homeowner’s Association) fees
  • Electricity and water
  • Garbage
  • Landscaping

Let’s say your expenses equal $4,000 a month. This means that you will earn $500/month in revenue from your rental property ($4,500 total income-$4,000 expenses=$500). If you were to continue to purchase similar rental properties, you would need 12 properties in order to reach your financial independence number.

Your calculations may be more complex and require a more detailed outline. Property managers such as TurnKey can provide revenue projections for your property to ensure you’re maximizing occupancy levels.

Develop a plan to achieve financial independence

Now that you have all of the pieces you need to finish your financial independence puzzle, you need to develop a plan to achieve your goal. You may first want to create a timeline or date for reaching financial freedom. If we use the example above, you will need to purchase 12 properties with a cash flow of $500 per month to reach your financial independence number of $72,000 a year.

Once you have purchased your first rental property, you can use your additional rental income to put toward you next property. By using the amount of money you have saved from your job and your new passive income, you can put together a timeline for when you can feasibility purchase more properties.

Everyone has a different financial situation. Determine the best timeline that will meet your needs.

Execute your plan

Creating a plan to reach financial independence may be idealistic. That’s why it’s important to have your goals and milestones set in place so you have something to shoot for. However, sometimes life happens and things come up. Your financial independence strategy may not always go according to plan.

Here are a few ways you can stay focused and keep your eye on the prize no matter where life takes you.

  1. Build relationships with experts and industry leaders. Find people in the real estate community that can be great mentors or provide practical advice. By spending time building relationships with industry experts, you can be sure to stay on top of the housing market. When selecting a realtor, find one that specializes in vacation rental properties like beach houses or ski homes.
  2. Always be open to rental properties. You never know when you are going to have an opportunity to purchase a new real property. Try to be open to opportunities that come your way. If it doesn’t seem financially possible to purchase a property when it comes up, do some research and see if there are alternative ways to make it happen, like purchasing it with a friend or family member.  
  3. Constantly look for ways to cut expenses and improve property earnings. Continuously look for ways you can improve your property, make it more marketable, or reduce expenses. By increasing profits and decreasing expenses, you can move one step closer to your goal of financial independence.

As you can see, rental properties can help you reach financial independence. Achieving retirement earlier than expected is more realistic than you think. Whether you are working towards supplementing your current income or would like an extra financial boost to help you reach financial independence, rental properties are a great solution for accomplishing your goals.  

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