Financial independence means achieving a point in life where one does not need to work anymore in order to pay for one's life expenses. It means that one can choose not to work for a living if one one chooses to do so. In other words, financial independence is really everyone's dream.
The one million dollar question (literally) then is "how does one go about achieving financial independence?" The answer to this very important question is actually deceptively simple. You need to build enough passive income to cover your life expenses. Passive income differs from active income since it is income that does not originate from active labor but rather from one's income-generating-assets. Examples of passive income are rent from properties, dividends from stocks or bonds or profit from privately owned businesses.
Hence, it follows from the above that the key to financial independence is the act of acquiring, maintaining and managing income-generating assets. One could argue that the acquiring step is the one that presents the biggest challenge for most people since it demands a considerable investment of initial capital, something many people, especially young people, lack.
However, it is easy overestimate the amount of capital needed to start the journey towards financial independence and simply use that apparently insurmountable difficulty to give up on it altogether. Real estate specifically, and even more so in the United States, is actually extremely accessible to those who want to buy it when you understand all the financing options available to buyers currently. Today a young person or couple living in the United States can easily acquire a property by paying only 3.5% of the total price of the property as a down payment. That means you can acquire a $200.000 property by investing only $7000 initially and finance the rest at considerably low interest rates. This is why, among other reasons, I believe that real estate is the best type of asset young investors can invest in right now, particularly at a time when down payments and interest rates are near a historical low. (even though they are on the rise)
The main reason, however, why I believe real estate investing is the fastest and surest way to financial independence has to do with cashflow, that is, the ability to generate considerably high income in proportion to the capital invested. For example right now in Minneapolis you can expect at least $1000 of monthly revenue if you decide to rent out a $200.000 property. That is equivalent to a 0.5% per month and a 6% yearly return on investment in cashflow alone, without even taking appreciation into account. Most stocks for example will only give you a 2.5% yearly dividend or something similar to that.
The practical applications of real estate's great capacity to generate income are quite incredible in terms of our assumed goal of financial independence. Taking once more into account the conservative estimate of $1000 dollars net rent for a $200.000 property in Minneapolis, that would mean that by owning such a property you would be able to easily generate $1000 per month in passive income, enough to cover the basic expenses of a thrifty person. That also means that if the same person had two properties instead of one, the amount of passive income generated would go up to $2000 dollars per month or $24.000 per year, that is, a full salary (not a great one admittedly but enough for most people to live on).
This is why rental properties are a great way to achieve the coveted goal of financial independence. While other income-generating assets such as stocks, bonds or privately-owned businesses are also great ways to pursue financial freedom, I truly believe real estate is the best way to do it due to its accessibility, stability and enormous potential to generate cashflow without hindering its appreciation potential at the same time.
And yet why is financial independence so important after all? Isn't working hard one's entire life the American way? Isn't hard work a virtue in itself? Many, I'm sure, would argue in such a manner.
I am not, however, saying we shouldn't work hard. If anything, I'm saying the exact opposite. The difference is that I believe that we should work hard for ourselves, and not for heartless, faceless, profit-obsessed corporations. Too many of us end up selling our lives to companies in order to buy big houses and fancy gadgets. This is not what we should be doing, we should be trying to change things. I believe that we should be trying to build a society driven by ideals and passions rather than aimless profit and bottomless greed. In order to change things, however, we need to educate ourselves financially and understand how the game is played.
I'm here to tell you that financial independence should be a priority for you and that it can be achieved even by the most humble of people, at least in the United States. All it takes is hard work, lots of determination and discipline and, of course, some financial knowledge. I believe that investing in all of that is a fair price to pay for your economic freedom and the chance to determine the course of your life. So what are you waiting for to get started?
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