If you have done any research into real estate investing, you’ve probably run across the notion of the Freedom Number. The idea is that there is a certain amount of money that the investor needs to bring in per year to live comfortably. That person first calculates what they need to live off of then whatever else they need to be comfortable. They then work backward to determine how much money they need to bring in each month in real estate to be able to quit their job and become ‘free’.
If they calculate they need $120,000 each year, then they need only $10,000 a month in personal cash flow. They might also calculate that they can get $400 cash flow off every rental unit they own. They only need 25 units to be free! It seems very obtainable.
I love the idea of it. It gives people a goal on which to focus. It brings people a common language: “How close are you to your freedom number?” “I’m 40% of the way there! I just need 15 more units!”
What stinks about the freedom number is that the focus they get is on that number and nothing else. It’s terrible for all these reasons:
- It assumes that the investor hates working his current job.
- It assumes that each unit is the same and produces the same cash flow.
- It assumes that the value of $120,000 will be the same in the future.
- It assumes that the income is all it will take to be happy.
- It fails to set a time for the goal.
- It pushes you to make decisions that maximize cash flow, such as deferring maintenance.
- Worst, it puts all the pressure on cash flow, when the investor should really be focusing on equity build.
Most People Don’t Hate Their Job
You are a high-performer. You’ve spent years of your life preparing to do what you do. You put in the time and effort and you’re probably not willing to throw that away at this point in your life. More likely, you want to build a future that allows you to remove yourself from your current job, but not right now. By focusing on cash flow, as the freedom number forces you, you’ll pay higher amounts in taxes than other investors, yet have the same equity as them when you do decide to retire.
What About Freedom Units?
You’re talking about a certain number of units you want to have in order to retire. This goal suffers from a similar problem. It’s easy to make bad decisions. If you want 15 more units, why not game your own system by purchasing those run down studio apartments that are cheaper? It is a way to achieve your goal, but because you set a bad goal, you don’t get where you really want: the ability to retire.
Set a Time-Based Goal
Forget the freedom number. Set yourself a freedom time. Do what I did: I set a goal to be able to quit my ER gig once I turn age 50. A certain amount of yearly income helps, but all I really need is to just pay my bills. All of my loans will be paid off by then and I won’t need much money at all. The difference between me and a freedom number follower will be that I will have a large amount of equity in my properties. At 50 I will refinance or sell the lower performers and have the cash flow everyone craves. Keep the freedom number if you must, but be sure to add a date. I know you’ll make it.