Plenty of articles and success stories have been written about normal working people achieving financial independence but often these stories are considered the exception rather than the rule. Many Americans consider that the few who succeeded did so because they had special skills, they were lucky, or the market conditions were favorable at the time.
Speaking from my own experience as well as others who successfully traversed the gap between fulltime employment and financial independence, I determined that the key attributes needed to reach financial freedom are:
- Understand your investment space which includes the ability to separate a good opportunity from a bad one
- Find the right market for your investments
- Be confident and take action
- Be resilient and adaptable
Understand Your Investment Space
In essence, financial freedom can be reached when you place your money in investments that generate passive income. What is passive income? Passive income is revenue that comes into your bank account with little to no work on your part. An example of such an investment would be government bonds that pay you every month. The payment on the bond would be considered passive income because it was deposited in your bank account without you having to work for it.
There are many types of investments that will generate passive income but it is critical that you choose an investment space that you fully understand. That way you can tweak your strategy to optimize your returns and more importantly differentiate between a good opportunity and a bad one. This is why I recommend that new investors choose a simple investment space such as single family rentals. It is probably the easiest to understand because it is tangible. You own a house, you rent it out. The tenant pays you rent, you have some expenses and you have a profit at the end. Calculating the return on a single-family rental only requires addition, subtraction and division. It is that simple. All you have to do now is find the right environment where your strategy is viable.
Find The Right Market
Once you know what the ideal investment opportunity looks like you need to identify the right market where you can find opportunities that meet your criteria. Many real estate investment books suggest that you find your rental properties within 30 minutes of your home. If you live in Manhattan, San Francisco Bay Area, or another high demand market, it might be impossible to find properties that have positive cash flow and a great return within 30 minutes of your home.
I spoke with Michael Zuber, author of the book “One Rental At a Time”. Michael lives in the San Francisco Bay Area and, in 2002, after one year actively searching for a rental property that meets his criteria, he and his wife decided to ignore the arbitrary 30 minutes rule and expanded their search. Michael told me that they put a map of California on their kitchen table and drew expanding circles around their home until they found a city with at least half a million in population. They selected Fresno after making sure that they could find rental properties that met their investment criteria on cash flow and return.
I also searched for rental properties in the San Francisco Bay Area in 2000 and 2014 but I couldn’t find anything that was cash flowing with a good return (see previous story). I briefly considered cities like Fresno but unlike Michael I didn’t want to drive 3 hours to invest.
Be Confident And Take Action
Learning about real estate investing through books and videos will give you some valuable insights. Some of these books will give you actionable steps on real estate investing. Simply role-playing what it would be like to invest in real estate is missing the point. It is similar to watching a car restoration video. It looks fun and easy but it is actually hard work over a long period of time. Same goes with real estate investing.
Whatever you do, focus on learning the skills, getting inspired, and building the confidence to complete your first transaction. I see so many people with a great opportunity in front of them and they get paralyzed. If you understand your investment space and you can recognize a good deal from a bad one then why not put an offer on the house at least.
New investors fail to take action due to two main factors. The first one is fear followed by the belief that there is a better deal out there waiting for them.
Fear is meant to protect us from harm but fear is also a feeling overly sensitive to the unknown. In fact fear would make us avoid almost any unknown even if we logically know that there is something better waiting on the other side. Imagine going on a roller coaster. It is scary but we manage to push past our fears because we know that we will have fun at the end. It is the same with your first real estate investment. We need to go beyond our fears and going from 0 to 1 rental property requires the most significant mind shift.
Even Michael Zuber, who now owns a portfolio of over 200 rental units, hesitated with his first single family rental in Fresno. The house was in good shape, in a decent neighborhood, the numbers looked good. Everything checked out. Driving back after viewing the rental, his wife asked Michael if they should put an offer on the house. Michael thought they should look at more houses and see if they could find a better deal. His wife convinced him to put an offer and this was their first rental property. Michael recommends that investors don’t pass on a good deal hoping to find a better deal around the corner. A good deal is still good. Don’t wait for a great deal that may never come.
It doesn’t matter how many books you read, how many videos you watched, how many webinars you attended; if you don’t take action nothing will change.
Be Adaptable And Resilient
Even though real estate investing is relatively simple there are still market fluctuations and corrections that may occur. The key is to observe the market and adapt to changes in conditions if needed.
Let’s think back to the 2008 financial crisis. Michael Zuber wrote in his book how he had a rental portfolio of eight houses just before the crisis. As he was trying to add his 9th house to his portfolio he realized that the market appeared to be overpriced. A house he had bought in 2002 for 107,000 was now worth $264,000 while the rent remained the same. The returns were below his target so he needed to adapt his strategy. He noticed that the smaller multi family rentals were still very affordable so he decided to convert his portfolio of 8 single family rentals into a portfolio of 80 multi family units.
After the financial collapse, the market had changed again. This time the single family rentals were 25% less than they were in 2002. The house they had bought for $107,000 in 2002 was now worth $75,000. This represented a tremendous acquisition opportunity. The banks were not keen on lending after the crisis. Michael and his wife had to adapt again and secured a private source of financing and started their plan to acquire more single family rentals.
At the top of the market, Michael and his wife adapted their strategy to the new market conditions and stayed focused on their goal. They had to adapt a couple of years after the financial crisis. In hindsight, Michael’s decisions may seem obvious but when you are in the middle of the crisis it is not obvious at all.
Market conditions will change but how you react to these changes will either strengthen or weaken your position. Real estate is a long term play. Stay adaptable, resilient, and thinking long term are very critical attributes of a successful investor. Focus on your long term goals.
Don’t Give Up On Your Financial Freedom
I hope that this article has given you hope and has inspired you to reach for financial freedom, even early retirement. It is possible. Find the right investment space. Learn how to find a good deal. This is a long term strategy so you have to be resilient and adapt to unforeseen circumstances. Above all, take action.
I would like to thank Michael Zuber for sharing his knowledge and his story. You may reach Michael on instagram at onerentalatatime or on his website at www.onerentalatatime.com