Financial freedom is a desire most, if not all, of us want to achieve. Yet very few of us do. Fully 95 percent of Americans do not achieve financial independence by age 65 but end up dependent on the government, or charity of their families or keep working until they die. It doesn’t need to be this way. Let me begin by defining financial freedom. Financial freedom is achieved when your monthly sources of passive income consistently exceed your monthly personal expenses. When that day happens you no longer need to work for a living. Congratulations! You’ve stepped off the hamster wheel.
Financial Freedom comes from Passive not Active Income
But notice I said passive income. What is passive income? Passive income is income resulting from cash flow received on a regular basis requiring minimal to no effort by the recipient to maintain it. There are many sources of passive income. The source of passive I believe hands down has the best opportunity for creating wealth and growing passive income is commercial real estate investing. Active income, on the other hand, comes from performing a service. Your day job is a perfect example of active income. In order to receive a paycheck, you must perform a service. So what you do for a living is a form of active, not passive income.
Shown below are my nine steps to achieving financial freedom resulting from generating passive income from your rental properties:
#1 Set clear, written goals.
Yes, I’m starting with the basics. I can just imagine how many of you reading this are rolling your eyes and shaking your heads at this idea. I’ve never understood why most people are so unwilling to take this first step. It baffles me. As if setting goals is beneath your dignity. All I know is that it works. Supposedly there was a study of the Yale University MBA Class of 1953. The three percent who had clear, written goals when they graduated were earning ten times as much as the other 97% of the graduates thirty years later. I’m not sure if this is urban legend or not but intuitively it makes sense to me.
#2 Invest in yourself.
Be a life-long learner by taking classes, attending seminars, and reading books. Become an expert in your profession. Get the professional designations that set you apart from your peers. Not only will you make more money at your day job, more importantly you will realize that those big, hairy, audacious goals you have set for yourself are achievable. Sadly, many adults rarely read another book after graduating from their formal education.
#3 Spend less than you make.
George Clason’s classic book, Richest Man in Babylon, written in 1926, is a must read for anyone who wants to achieve financial independence. In the chapter titled, Seven Cures for a Lean Purse, the second cure is Control Thy Expenditures. “Now I will tell thee an unusual truth about men and sons of men” he states. “That each of us calls our ‘necessary expenses’ will always grow to equal our income unless we protest to the contrary.” He goes on to say that the second cure for a lean purse is to spend “no more than nine-tenths of thy earnings.”
#4 Convert the savings generated from active income, i.e., your day job into passive income.
This is where most plans for achieving financial freedom fail. People will set goals, invest in themselves and maybe even save 10 percent of what they make. But the hardest step of the nine, without any doubt, is to take their savings and invest in something that will generate passive income. First resist the urge to spend your savings on a new auto or a larger home or some other “worthy purchase.” Secondly resist the urge to put your accumulated savings into investments like stocks or bonds that generate little or no passive income. Commit to putting your savings into a rental property that has the opportunity over time to increase in value and more importantly to generate passive income.
#5 Be prepared to take the leap into the unknown.
Buying your first rental property is scary. I get it. It’s a great leap into the unknown. But I’ve written a whole book on how to overcome this fear of getting started: Mastering the Art of Commercial Real Estate Investing: How to Build Wealth and Grow Passive Income from Your Rental Properties. It is near impossible to summarize a 220-page book into a few sentences. But as a new CRE investor I would focus on three things:
- Choose carefully a team of real estate advisors.
First assess your own areas of weakness. What gaps in your real estate knowledge do you need help in? Then find the person who can fill that gap. Possible real estate professionals to add to your team could include a real estate broker, a commercial mortgage broker, a real estate attorney, a general contractor, a property manager, a tax consultant to name just a few.
- Create a method for analyzing potential CRE purchases.
Surprisingly, my most successful real estate clients use very simple approaches for valuing potential CRE purchases. Buying rental properties is not rocket science. It’s mostly common sense so avoid the tendency of making it more difficult than it has to be.
- Choose a property type and submarket as your primary focus.
The fastest way to become a savvy real estate investor is to focus on one property type. Get to know the idiosyncrasies of that type of rental property. Then find a submarket in an area close to where you live and get to know everything about it. How is the market trending? What is the vacancy rate? How much have rents increased in the last year? Become the expert for that submarket.
#6 Roll the dice, a.k.a. taking action.
If you have done those things to get prepared for purchasing your first rental property identified in Step #5 above, then act. Fight the tendency to wait for the perfect time to launch because there is no perfect time. Fear of failure will keep you from pulling the trigger. As the Nike commercial says, “Just do it!”
#7 Have an investment mindset that “You either win or you learn.”
As I mentioned in a recent blog post, “Six hurdles newbie CRE investors must overcome to be successful,” all of us who invest in rental properties need to adopt a mindset of “You either win or you learn.” In everything we do, we either win (we make the right decision) or we learn an important lesson so next time we have a better outcome. Winston Churchill said it best when he said, “Success is not final, failure is not fatal: it is the courage to continue that counts.” And that is particularly true in CRE investing. Sometimes your CRE investment is a home run, and sometimes you learn what not to do so next time has a better probability of success.
#8 Dissociate from negative people.
Some people are toxic to be around. They will tell you all the reasons why your approach to achieving financial freedom will not work. You need to completely break away from the Negative Nellys that masquerade as friends, family and professional associates. You need to guard yourself from people who can potentially have a negative impact on your thinking.
#9 Surround yourself with successful people.
“After 25 years of research, the choice of a reference group is more important in determining success or failure than any other single factor” says Dr. David McClelland of Harvard University. For improving your chances of success, associate with other successful real estate investors.
Those are my thoughts. I welcome yours. What would you add to the dialogue?
Do you have a need for financing? Contact me at [email protected] to set a time for us to talk.
Sources: The Myths & Realities of Achieving Financial Independence by John Cummuta, www.nightingale.com; 31 Passive Income Ideas to Get You Off The Hamster Wheel, by Candice Elliott, www.listenmoneymatters.com; Passive Income, Wikipedia.org; Insane Productivity by Darren Hardy