Financial independence – when your passive income exceeds your living expenses, is actually a relatively new concept.

For thousands of years, people worked until they died.

Then as lifespans increased the idea of retirement came about. Under this concept, you worked until you were old and not able to work anymore, then someone else provided for you until you died.

This worked well for decades. People spent their paychecks on things like a nice house and car, knowing their company or the government would provide for them when they were old.

But, that’s simply not the case anymore. Companies cut costs, governments can’t afford unfunded liabilities, and stock market savings can disappear overnight as people approach retirement.

Couple these realities with changing preferences of younger generations – people are starting to value freedom and life experiences over the accumulation of nice things. What you get is a lot of very unsatisfied people.

Is Financial Independence Achievable?

F.I. is not a concept just for the wealthy. It’s a basic concept with two components – passive income and monthly expenses. People with great jobs may be able to create passive income easier, but they usually have very high monthly expenses, which puts financial independence out of reach.

To achieve financial independence, you need to do two things:

  1. Reduce frivolous expenditures and live within an acceptable budget
  2. Create long-term, stable, and predictable passive income.

The basic idea is to reduce your expenses to the minimum and increase your passive income so you can quit work. Once you no longer need to work, you can spend all of your time growing your passive income.

The problem is that most people spend everything they earn. If they get a pay raise, they spend most of it by getting a nicer car or TV. Instead, lock in your lifestyle and take every extra dollar to grow those passive streams of income.

Then, as your passive income grows, you can spend on those expensive and nice things that you want.

How Does Real Estate Fit With Financial Independence?

Real estate is the ideal vessel for financial independence because it fits so perfectly with #2 above. If you are missing any of the 3 requirements for your income, it’s much riskier to leave the workforce and live solely on the passive income

Real Estate is Long-Term

There are a lot of long-term investments that can help you achieve your F.I. goals, but for longevity, nothing can truly compare to real estate.

Stocks can be very long term and many companies may outlive you, but the value of your paper is dependent on the company staying alive and staying profitable. To overcome this, people will rebalance their portfolio and trim out companies that are not performing as well and buy into better companies.

Real estate, on the other hand, will always be there and your ownership of it can never be taken away. There are quite literally families that have had parcels of land handed down for hundreds of years.

In terms of legacy, nothing compares to real estate.

Real Estate Values Are Stable

After adjusting for inflation, real estate values are unbelievable stable – It is very rare that real estate has massive and widespread adjustments to value.

Case-Shiller index

Case-Shiller index of property values adjusted for inflation.

In fact, it’s only happened twice in the last 150 years, and both had major causes. One was caused by the great depression and the other was caused due to widespread and risky loans given to nonqualified borrowers.

On the other hand, the world’s stock markets have had about 15 crashes of 40% or more in the last 60 years alone. Since 1950 there have been 57 crashes of 20% or more in the various indices.

Though any and all investments fluctuate in value carry risk, real estate is far more stable than virtually any other investment type.

Income From Real Estate is Predictable

The core part of using real estate to achieve financial independence is the fact that rental income is so predictable.

Of course, sometimes rents go down and every sub-market will see increases and decreases depending on the market, but overall, rents are very predictable.

average rents

When you buy rental property, your expenses are known, your mortgage won’t change by much, and the rental income is predictable. This is perfect for achieving your goal of financial independence.

Stocks, on the other hand, also produce income in the form of dividends, but this is generally a very small amount compared to what you are trying to gain through appreciation. Since appreciation is a wildcard (even in real estate) the income is not predictable like dividends or rents are.

Plus, the only way to capture the income from appreciation is to sell the asset. In essence, you will own less and less of something that is worth more and more.

Are You Thinking About Adding Rental Property To Your Portfolio?

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