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How to Use Real Estate Investing to Replace Your Income

In this article, we explore how to achieve financial freedom through real estate investing. Discover the importance of building a strong foundation with the right strategy and learn how to create a life of choice and freedom. Delve into the buy-and-hold strategy, discussing the benefits of compounding growth and how to effectively build an investment portfolio.

Written by
Ravi Sharma
Published on
June 14, 2024
Real state Investing house

Table of contents

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I advocate for Financial Freedom, not just “retiring” because you hate life and think, "I really don't want to do this anymore."

Believe me, when you make all this money, have passive investments, and then think to yourself: I wonder what this would feel like if I were sitting on a beach relaxing somewhere

Trust me. You will get bored. 

That's why you want to create a life of freedom so you can do whatever you like for the rest of your life with choice

The best way to achieve this is to: Invest your money rather than just save it. 

I’m going to show you one of the ways you can do that with real estate. 

If you're interested in what my thoughts are, then keep reading.

Build the Right Foundation With the Right Strategy

Now we're going to jump into my whiteboard in a second, and I really want to showcase the importance of building the right foundation with the right strategy in place.

Many people will often find the right property but have no idea what their strategy should look like. Then there are others who have a solid plan but can never execute it. It's okay to be in either camp or neither of them, that’s why you read articles like this.

Now let’s delve deeper into this.

Your job or business is what I call the “OIL” while your investment portfolio is the “MACHINE.”

That's why you'll often hear me say, "Build the machine! Build the machine! That is what you need."

Build the portfolio

When people have a job with a high salary, their situation could change in just two years. 

Let’s say:

  • Your business collapses;
  • You lose your job; or 
  • Your business gets acquired.

What happens next? You would have no ongoing income. 

This is why it’s always important to use your current earnings or the income you generate—referred to here as the "OIL,” and invest them into something that generates passive income (which I like to see grow).

It is like building out the foundation. 

These are the bricks (yellow rectangles), and we're building this foundation. The bigger your foundation is, the further you will go.

Investment portfolio diagram

Now, some people will stack their bricks just to get the highest point as quickly as possible - those are what we call sprints. There’s nothing wrong with that, you might just want to build over the short term.

But if you have intentions to build something for the next 10-15 years, which is where you'll really see the benefits of compounding growth, you need to build a foundation that is strong.

I often hear people say, "I'm going to get into real estate."

But when they are asked, "How are you going to get into real estate?" 

They usually say, "I'm going to develop something. I'm putting down a million bucks. I'm going to knock it down. I'm going to build duplexes. I'm going to sell them and make a profit."

Okay, that may sound great in theory, but you have no foundation. This means that: If something goes wrong in that situation, what will happen? That affects your day-to-day lifestyle. 

If you're young and starting this, well done!

But when you're young, you also want to enjoy life. You should be able to do that and invest on the side as well.

Buy and Hold Strategy

I advocate for a Buy and Hold strategy. 

I think, "Okay, I can be active here, where I know I can make money," and in my case, I run a business. 

But in many other cases, (like yours), you might be running your own business or have a job that you really enjoy, so you think, "Okay, I can be efficient here, and then I can outsource or handle passive investments myself," such as a real estate portfolio.

As this grows, you not only generate more income but also create more choices and generate more long-term wealth.

Buy and hold strategy investment grows

When you think about how many properties you need to retire, we need to go back to the question: What is retirement?

It's not just about saying, "Hey, I don't want to do anything," because your brain will turn into mush. You'll be 35 or 40, if you do this really well, and you'll think, "All my friends are working, I don't connect with anybody, I'm really lonely," and then you hear about people falling into sadness, depression, and more.

What we want to do is: Achieve choice.

With the extra time we have, let's figure out something productive we can do with it. (That might be giving back or helping others).

I'm not sure what it is for you, but you want to be passionate about it so you can do it for a really long time. 

What you want to achieve is: Having your passive income exceed your active income.

Passive to active income

This machine you create will generate passive income, which then covers all your basic expenses.

Machine generates passive income to cover expenses

 

Now, if you close your eyes and think about how it would feel if all your expenses were taken care of… 

Imagine you wouldn't have to work to put food on the table because you've already built an investment machine…

That sounds pretty good, right? In fact, most of your stress is probably already alleviated. 

Then, on top of that, you think, "How much money do I actually need to live a very comfortable life?" and then just add 20% to it.

If you feel like you could live on $1,000 a week after your mortgage repayments and everything else are taken care of, and you're able to spend $1,000 a week without needing to invest anymore, then you are in a GOOD PLACE.

Why? Simple. Your machine keeps growing anyway. 

Some people might think $1,000 is a lot; for others, it's not enough. Adjust the numbers as you see fit. But just being in that state of mind brings:

  • So much more clarity; and
  • So much more happiness.

Why? Because you have a choice.

It's not the money directly bringing you happiness. 

It's that money brings you choice.

…and choice brings you time. 

With that time, you're able to do things you're passionate about, which will undoubtedly impact your happiness - positively.

CHOICE

So, let's think about this. Your active income, which might be your 9-to-5 job or your business, supports you. Forty years later, you've retired, but you're old.

Active income cycle

Retirement under financial freedom circumstances means something very different. You could retire at 65 but not be financially free.

In fact, I spoke to someone just recently who told me via email, "Ravi, I'm 65. I can retire. I've got enough in my super to last me at my current expenses for the next 12 years."

Great. So, if you live until 77, you're going to have a great life, but what happens after that?

Yes, you can rely on outside factors like the government giving you more money. However, if you've worked for so long, wouldn't you want to have that choice in your own hands?

The only way to really get ahead of this is by: Investing.

You'll see many books talk about this, but the simple concept you need to understand is that: As long as you use your money (which is the oil), to build the machine (which is investments), you will do really well long-term.

You just keep compounding that. If you can acquire more assets, keep building that up. Long-term, time in the market will absolutely compound, giving you all the choices you want.

So let's get into some practical stuff.

If you invest well, that passive income can allow you to retire early.

How passive income works

Let's assume we want to replace a $75,000 salary. Let's replace this!

Replacing the $75,000 salary

Now, if we rent, we're just using our money to pay rent.

But if we own, we have mortgage repayments.

Rent or own?

So, if I say, "I buy my own home. I have no income. I also have no rental payments. I'm paying a mortgage instead of rent.”

Buying home will have no income, and no rent payments

Now, if I were to rentvest (which is what I do), I would rent in an area I really like and then invest where the numbers make sense.

In this case, I would be able to generate rental income.

Rentvest income

Yes, I might be told I'm poor because I rent at the moment, and that renting is apparently dead money.

However, instead of thinking, "Okay, it's dead money, let me blow all the rest of my money for whatever reason so that I can really feel poor," I use the surplus disposable income to invest in more assets and build up my asset portfolio.

This doesn't mean you can only do this by rentvesting. You could still have your own home; it just significantly reduces your borrowing capacity.

If you have a high enough income, you can buy your own home, still have borrowing capacity, and build out the investment portfolio as well. This way, you win both ways.

For example:

You buy a house for $500,000.

The upfront cost is about $100,000 (for all your costs, including stamp duty, etc.).

Let's say the average growth is 5% and the rental growth is about 2%.

A calculation on buying a house for $500,000

Year 1: You're probably going to be slightly negative or neutral cash flow. In this case, a 5% growth means you've made $225,000 on the initial investment of $100,000.

Year 1 calculation of cashflow

So, although you've put in $100,000, you've only made 5% returns–it’s leveraged returns. So DON’T get caught up in the argument that: because something else grew more like the share market, you would have made more.

With $100,000 in the share market (if you're not taking on any leverage), a 5% growth is $5,000. 

In this case, the only way you're buying the property is: if you're taking up 80% or 90% of the loan on the house value

So, the $100,000 controls $500,000 and a 5% growth in 12 months means $25,000, NOT $5,000.

Now, here's where compounding growth gets really interesting. 

Year 5: In year five, you see that the property is now worth $138,000 more, and your cash flow is probably about $3,000 positive per year.

A lot of these numbers can fluctuate depending on where rates are, but I'm also being super conservative when it comes to rental increases. 

Many properties, even in my own portfolio, grew by $80 or $90 in terms of weekly rent in just 12 months. This could absolutely exceed these projections, which is why I wanted to take a more conservative approach.

Year 10: By year 10, your property is probably worth $314,000 more, so the total for that $500,000 property is now $814,000. 

Again, being super conservative with numbers, and now your cash flow is about $7,000 per year. After 10 years, with very conservative numbers and not accounting for rate cuts or significant rental growth, you’ll find yourself in a much stronger financial position.

Year 10 calculation

In this case, if there were no rate changes, you would effectively need 10 properties, giving you $77,000 per year, which would technically replace $70,000 of the $75,000 salary.

If you needed half a house, you'd have 7.5, but they don't sell them like that unless you're buying something like a duplex, but then it would be counted as a house or property.

No rate chances

Alternatively, you could buy five of these, hold for 15 years, 

Then your cash flow is probably about: $65,000 to $75,000 a year,

While your net equity position is about $2 million.

Calculation if buying 5 houses and hold for 15 years

Let's pause here because you might be thinking, "I bought half the amount of properties, I've held them for 5 years longer, and now you're telling me I'll still be in a better position? And I have more equity."

The answer lies in: Playing with compounding growth.

The difference 5 years makes is significant if you build a portfolio fast enough by front loading everything, instead of buying one property every year for 10 years. 

You try to buy 10 properties in the first three years or five in the first three years, whatever that number looks like for you, and allow the maximum amount of time for that property to grow in that market.

So, in this case, by just waiting an extra 5 years, I only really have to buy five properties to be able to get to this position.

I know you might be sitting there thinking, "Five properties, bro? I can't even get one! What are you talking about?" 

It's because I understand that we may just be looking in our own backyards. We may think, "Well, I live in Sydney. I have to put a million bucks down, and my rental yield is so bad that I can't afford to hold five of these." 

Or equally, your borrowing capacity is so low at the moment that you can't look at other alternatives, and this is where I would challenge that mindset.

Instead of just accepting that you can't borrow, ask yourself, "Why can't I borrow?" 

The key to unlocking this is to reverse engineer it. Figure out:

  • What you need as an income to be able to buy the five properties;
  • How you can quickly execute; and 
  • What cash you need to do it.

I know some of this might sound super simple for some. But honestly, for some people, it might just be the clarity they need.

Let's break it down:

  • You need the cash or the equity.
  • You need the borrowing capacity.
  • You need the income that's going to fuel both of them anyway.

So, if income is the key denominator, that's where you need to focus your energy. 

That's why I advocate for people to outsource certain things, and yes, shameless plug, I run a buyers agency that helps you execute on the plan. 

It's about how you can do it, not why you'd want to do it. If you're taking financial freedom seriously, then you might want to say, "I need help because you've shown me this is a great life, Ravi, and I can go and do it. How do I do it?" This is where the service comes in. 

So, if you want to learn more, book a free discovery call with my team at Search Property.

Now, some people will be able to do this in 5 years or less, and believe it or not, for some, it will take 20 years. 

But the reality is, it's still better than 40 years' time.

Still better than 40 years’ time

So, if you're thinking about reducing your expenses or if you're thinking, "Well, Ravi, I can't replace my income, but I could replace my partner's part-time income," that is still a win.

At the end of the day, just because some goals seem so big and unattainable, when you break them down into small parts, those goals don't seem so scary in 5 years or 10 years when you start.

The key is: To start now because the sooner you start, the more you have in that market for a longer period of time.

I hope this has brought some clarity around how to replace your income and the simplest way to do it. 

Sometimes, it can seem really simple, and sometimes, super unattainable. But believe me, I've been in that position where I thought, "I bought one property, how do I even get to 10?" and now I've built out a significant portfolio. 

But it's not just me alone. I've seen many others do it, and I hope you're one of them as well.

Hope you've learned from me in this article!

Catch you guys in the next one.

Thanks!

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