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Understanding Financial Independence and Real Estate


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Let’s quickly look at some ways of defining and actualizing financial independence; financial independence by net worth and financial independence by cash flow.

Financial independence by net worth: Refers to the net worth of all your investable assets (excluding your assets that do not generate income like your primary residence, furniture, cars etc.)  divided by your annual expenses.

Financial Freedom Ratio = investable asset/annual expense

 For me this value should be greater than 40 to be financially free. This then means you can withdraw a fixed 2.5% from your asset annually (by liquidity) and your portfolio will last the rest of your life time. This will work better if you are 40 years and above. Remember that liability from children upkeep and education costs tends to decrease as you grow older, however, liabilities due to need for health-care or long term living assistance care can increase.

Financial independence by passive income: This refers to generating passive income that is more than your living expenses or life style without having to work. Note that some people’s net worth may not be very large but their investments generate a lot more cash flow than they need annually. Their cash inflow may be a combination of real estate rentals, royalties, pension, dividends and interest from investments etc.

If you are determined to become financially independent, then understanding real estate will give you an insight into how to invest wisely. There are different types of real estate and investing in any of them has its merits and demerits. If you want to invest in real estate it will be wise to study them very well before committing your time, effort and resources.

There are two types of properties, personal and real property. Personal property is movable property that is not associated with land. It can be items that can be touched (tangible) , this includes furniture, vehicles, Jewelries, clothes etc. or items that cannot be touched (intangible) like stocks, bonds, mutual funds, savings and checking accounts, insurance policies etc. Real property is fixed and cannot be moved, it is mainly associated with land and includes buildings, crops, mineral rights etc.

However, there are four types of real estate. They include residential, commercial, industrial and land. Residential real estate is built for people to live in such as apartment buildings, single- family buildings etc. Commercial real estate is built for businesses. Examples are shopping and strip malls, office complex, hotels, schools etc. Industrial real estate is built for manufacturing and warehouses. Land as a real estate can be acquired as vacant land, ranches, farm land, etc.

Some of these real estate investments may or may not be as profitable as you think. Knowing some comparison is important so that you can make the investment decision that’s right for you. Real estate investment like land may be too risky because of the exposure to land grabbers except proper documentation is obtained from the government. There is a high tendency that you may not be able to lease it out, thus net passive income from it is zero. Buying a land to keep is good for speculation and future development.

With commercial real estate it is a lot easier to get your rent because commercial tenants may not want to lose their shops where they are known by customers, you enjoy longer lease terms, you may be able to get more value for your investment as compared to residential buildings, there is more assurance of cash flow, there is lower vacancies rate. However the downside of commercial real estate investment as compared to residential real estate is higher risk of damages due to high volume of people coming in and out on a daily basis, higher risk of fire hazard and managing of more tenants and repairs.

Residential real estate perform more consistently in economic downturns because people will always need a place to stay, it has more liquidity rate than commercial property because of the larger pool of buyers. Residential real estate investor can manage their properties at their own time but you will definitely need the help of a professional when investing in commercial or industrial real estate.

Commercial real estate may appear to be more lucrative, beginner investors should know that with higher returns come higher risk.

 Real Estate Investments: The Rental Property Advantage.
 What I Which I Knew Before Investing In Rental Properties.
 Real Estate as a Store of Value.
 Investing in Real Estate Properties: Successful Startup and Growth Strategies.
 Important Considerations Before You Invest a Loan or Personal Savings in Rental Properties.

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  1. UnknownJuly 16, 2019 at 7:56 AM

    I know much more about cash flow now. Thanks. Keep blogging.

    ReplyDelete

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