Financially Independent, Retire Early

May 24

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There is a process for this.

The easiest and safest way to achieve financial independence is through real estate investments. Millions of people have already done so, and you can too. However, not all properties are created equal. The income from your properties must meet three requirements:

Reliable - Your income continues even in difficult economic times.
Inflation-Compensating - Rental income increases faster than inflation, compensating for rising prices.
Persistent - Your income will last; you and your spouse won't outlive it.

Achieving these requirements depend on the location and the tenant segment.

Location Selection

The location defines all long-term income characteristics. The two most important are:

Rents rise faster than inflation - Each time you go to the store, it costs more and more money to purchase the same set of goods. Unless your rent is increasing faster than the inflation rate, you will not have the additional funds needed to make up the difference.
Persistence - Your rental income must persist longer than you. The duration of your rental income depends on the location's economy.

It would be difficult to evaluate locations based on raw data. However, there are indicators that provide more accurate information and are easier to evaluate. Below are example indicators of a good investment location.

Increasing state and metro population - People moving into an area is a strong indication that good jobs are available and the living environment is desirable.
Metro area population greater than 1M. Small towns may rely too much on a single business or market segment.
Low crime - High crime and long-term metro economic growth are mutually exclusive.
New job creation - All jobs have a limited lifespan. Most companies last around 10 years, S&P 500 companies last an average of 18 years. This means that every job your tenants have today will eventually disappear. Unless new companies move into town, set up operations, and create new jobs that pay similar wages and require similar skills, it won't be long before only low-paying service sector jobs are available. Lower-paying service sector jobs mean tenants won't be able to pay the same rent as before. You will either lower your rent or your property will remain vacant.

Property Selection

Maintaining financial independence requires continuous occupancy of your property by reliable tenants. A reliable tenant is someone who stays for many years, pays rent on time, and takes care of the property. You will have multiple tenants over the years you own the property. To ensure that your property remains occupied by reliable tenants, the property must attract a segment of renters with a high concentration of reliable individuals.

To identify the appropriate segment for your property, conduct interviews with property managers. Once you have identified the desired segment, the next step is to determine what and where they rent today.

Once you understand what and where they are currently renting, you can transform this into a set of housing requirements. Below is an example of housing requirements for a single segment.

Property type: Single-family
Location - North of the river and east of 11th St.
Configuration - Single family, 3 to 4 bedrooms, two car garage, with a lot size between 4,000 ft.² and 6,000 ft.²
Rent range - Between $1,600/Mo and $2,000/Mo.

You can transform the rent range into a property price range by identifying similar rental properties on a site like Zillow. Then, you can determine what similar properties sell for. This gives you a price range.

Once you have a property description, you can give this list to any realtor and they can find conforming properties.

IMPORTANT: Let the segment you want to occupy your properties define the properties you buy. This method eliminates guesswork and works in any location. You won't need to rely on guesswork, opinions, or luck.