I’ll be honest; cashflowing real estate wasn’t a big part of my FIRE plan.
I did actually receive steady cashflow from two long-term tenants in a condo in Florida and one family plus some seasonal renters on a home in northern Michigan. Both were places I had moved away from and held onto, but in hindsight, neither was a great setup in terms of the numbers; I just wasn’t ready to let go.
Most of my 10-year path to FI consisted of a high savings rate, above-average market returns, and dumb luck.
Dr. Kenji Asakura of Semi-Retired MD has found a better way for those willing to put in a little more time and effort. He and his wife, Dr. Letizia Alto have a mission of teaching others to do what they’ve done — replace their clinical incomes with semi-passive income.
Read to learn more about their Zero to Financial Freedom Through Cashflowing Rentals course opening up very soon! The following was written by Dr. Asakura.
5 Ways to Incorporate Cashflowing Real Estate Into Your FIRE Plan
You’ve started your FIRE journey. You’re diligently building your next egg with aggressive saving and investing in tax-advantaged retirement accounts as well as taxable brokerage accounts.
You’ve also probably read that adding cashflow might speed up your journey to FIRE, but you’re not sure that it’s right for you.
In this article, I’m going to cover 1) the importance of adding cashflow to your FIRE plan, 2) the unique tax benefits of real estate cashflow, and 3) five options for investing in cashflowing real estate.
Why “Cashflow is King”
Why would you want to add cashflow to your FIRE plan?
Cash is the only thing that pays the bills.
A high rate of return is irrelevant if your money is tied up in a retirement account. You can’t spend a 30% annual return on medical bills or rent.
What if you were furloughed during COVID? Would the money in your retirement account put food on the table?
What about the funds in your taxable brokerage account? Sure you could have sold shares in your brokerage account to free up cash, but what if you needed the money right when the stock market dropped by one-third?
The beauty of monthly cashflow, compared to money tied up in the market, is that you have the ability to use the cash if you need it and reinvest it when you don’t.
For example, the cashflow from our real estate allowed us to take a year off to travel, something we wanted to do while we were young, healthy, and could share the experience with our young children. It allowed us to show our children the world and to start building their love of travel, learning about new cultures, trying new things and exploring.
We couldn’t have done that without greatly affecting our financial future by just pulling money out of our retirement accounts.
The Tax Benefits of Real Estate Cashflow
One of the main benefits of cashflow from real estate is that it is often tax-free.
Tax-free cashflow means that you are more tax efficient. For example, if you earn $150,000 annually from tax-free cashflow and $150,000 from your clinical job rather all of it from your job, you have just cut your effective tax rate in half.
Even better, if you can achieve a status called Real Estate Professional (REPS), you can not only earn tax-free cashflow, you can simultaneously shelter clinical income and lower your taxes or even pay zero taxes on your clinical income like we have been doing for the last five (soon to be six) years.
Five Options for Investing in Cashflowing Real Estate
So what are some options for investing in cashflowing real estate? Below I list five options. This list isn’t exhaustive. It’s meant to give you a list of the more common options. Some are better than others in terms of return, but there are trade-offs.
Syndications and real estate funds
Investing in syndications or funds means you give your money to someone else (e.g., general partners for syndications and fund managers, respectively) to manage.
In syndications, the general partner has a particular piece of real estate they’d like to purchase, so they solicit funds from people who have money to invest. Funds raise money and then invest in a number of different properties.
The attractiveness of investing in syndications or funds is that you can receive regular payouts at a decent rate and it’s largely passive. The effort is mainly vetting the general partners or fund managers.
The main downside of this approach is the low return relative to the other investment options below. Keep in mind that the general partners or fund managers earn significantly more on your money than you do.
For example, some estimate that general partners in a syndication earn 7 to 10 times what a passive investor earns.
This option involves buying homes and renting them out. The homes can range from single family to large apartment complexes consisting of hundreds of units.
The benefit of this investment option is that you keep all of the cashflow and the tax benefits. You also retain control. You decide whether to hold onto an investment or sell.
If the property has appreciated, you keep all of the upside. If you know what you’re doing, your return can easily exceed 25% and in some cases you can have an infinite return by doing something called forced appreciation and pulling your invested capital out of the deal.
This option also comes with the possibility of tax-free cashflow and sheltering your clinical income with REPS.
Leti and I now own over 80 residential units and this generates hundreds of thousands of dollars of cashflow annually and simultaneously creates a tax shelter that we use to pay zero income taxes.
The downside of residential rentals that you need to learn how to buy and manage rentals. This process takes time and most stumble through their first few investments, learning from their mistakes as they go. But if you persevere and keep getting better, the rewards can be significant.
Investing in commercial rentals is similar to residential rentals in many ways. The cashflow can be tax-free. The properties appreciate in value if you increase the income of the property. You have many of the same tax advantages.
The main difference is the property. Instead of housing, you’re buying office or retail space, storage units or warehouses.
One additional benefit of commercial real estate investing is that your tenant typically covers many of your operating expenses. This is called a triple net (NNN) lease). If you can get a NNN lease, you can drive down your operating costs significantly and increase your cashflow as a result.
We have a commercial tenant on a NNN lease in one of our properties and the NNN lease covers 66% of our operating costs.
Housing for Specific Tenant Populations
There are a number of government or community sponsored programs to provide housing for specific tenant populations.
For example, we provide housing for people with intellectual disabilities in a State-funded program called Supported Living.
The benefit of Supported Living from a financial perspective is that the rents are competitive and your costs are very low. This means your cashflow can be extremely good. For example, we purchased a $160,000 duplex that brings in about $20,000 per year of cashflow. Because we borrowed $120,000 from the bank, our total investment was only about $46,000 after some closing costs and repairs. So our return on investment is running at about 40% per year.
In addition to supported living, there are a lot of other programs out there. For example, there is housing for patients in need of respite housing. There are programs for developmentally delayed individuals.
About the only downside of these programs is that they are sometimes hard to find and it may be fairly competitive.
Short term rentals
One last option are short term rentals.
This is a great way to generate significant cashflow and get great tax benefits.
While most people are well aware of the cashflow potential of short-term rentals, most people are unfamiliar with the tax benefits.
For example, did you know that you can buy a short-term rental this year and use it to generate significant losses that can then be used to not only earn tax-free cashflow but at the same time shelter clinical income?
We bought a short-term rental this year and by self-managing the first year and doing something called a cost-segregation study, this property alone will shelter about $200,000 worth of our W2 income. After the first year, we’ll get a property manager and project that this property will cashflow annually about $45,000.
Selection of the property and location is obviously very important. It’s also very important to maintain great reviews. Getting either of these wrong could mean that your projections are off and instead of cashflowing, you could be at break even or worse, lose money each year.
For those interested in adding cashflow from real estate to their FIRE plan, the immediate next step is to start educating yourself about investing in real estate.
The most important aspect of learning is to gain the confidence that you too can successfully create a significant income stream from real estate and accelerate your journey to FIRE.
[PoF: As luck would have it (OK… the timing of this post is actually quite intentional), our guest author, Dr. Kenji Asakura, along with his wife Dr. Letizia Alto offer a comprehensive plan to help you get started and succeed with real estate, specifically cashflowing rentals.
They have refined Zero to Freedom Through Cashflowing Rentals as many hundreds of students have completed the course and hopped on the fast track to financial independence by acquiring properties and finding great tenants, and it will begin again in January.
A key feature of the program is the support from Drs. Kenji and Leti and the community that has grown around the course and its current and past students. I could tell you more about all of that, but you’ll learn a lot more from the source. Kenji & Leti will be launching this winter’s course in a few days, and they’re sharing some free info and broadcasting a live Q&A for anyone who joins the waitlist.
Sign up and you’ll be under no obligation. In fact, even if you choose to enroll in the course, you’ll have a few weeks to decide if you want to continue or opt for the no-questions asked money-back guarantee.
Any link to the course on this page is indeed a referral link — this site will be compensated if you enroll, and you’ll be supporting our charitable mission. Cheers!]
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6 thoughts on “5 Ways to Incorporate Cashflowing Real Estate Into Your FIRE Plan”
Just two observations: first, this approach means learning to manage a real estate business; second, managing a real estate business is harder in a nitty gritty sense than these types of courses ever make it sound. Yes, you can go buy a lot of property and manage it effectively to create cash flow. Many have done it. I even own two free and clear rentals. But you can also go bankrupt. I’ve seen that happen too, usually to someone expanding too quickly. This is a valid path, but not a quick or easy one.
We’ve published on the potential difficulties with real estate, as well.
I Owned Six Homes and Lost It All With Real Estate Investing
The Reality of Real Estate Investing: It’s Not as Easy as It Seems
And I appreciate the balance. My comment was just to call that perspective to the fore for readers that might not take the time to search the archives. It is also on my mind since my son just bought his first commercial property and he and I went through all the pros and cons. In the end, a course might help, but a lot of this business is learned by hard knocks.
I hope for your son’s sake that the pros outweighed the cons!
Personally, I prefer the more passive RE investments. I’m as busy as I’d like to be without the hands-on aspects of actively managing properties.
Dr Kenji, how are you able to claim REPS if your wife is also a practitioner? Or did I not read that correctly?
He spends more time on real estate than medicine.