It’s time we talk about how many houses, how many buildings, how many properties in particular, would you need in order to achieve that financial independence thanks to your real estate investing. It all comes down to something that we all hate to do, and that’s budgeting, but there are multiple ways to do budgeting.
The way we’re going to do this budgeting is to ask ourselves, “Okay, what are some of the expenses that we cannot definitely live without?” Those are your rent, those are your utilities. By utilities, we are talking about your phone bill, your electricity bill, your internet. Nowadays, the internet has become part of our day-to-day activities, especially around this quarantine. We need the internet to go to work, we need the internet to help our kids connect to their classes, so yes, that has become a necessity and it’s part of your fixed cost.
Then anything that’s related to food or other regular expenses like your property taxes, if you have a car, then your car insurance. You need to account for how much money you will need on a particular month for those expenses, those that you cannot live without.
Then there are the variable expenses. Those things that are not really necessary but they are a nice-to-have. For example, those expenses can be going to the movie theater, maybe taking a trip here and there, maybe going out and eating at restaurants with your friends, or why not, maybe going to a club.
Real Estate Investing: Incremental changes
We’re all human. We all like to have fun, we all like to have human interaction. Today more than ever, you’re actually feeling the need to have that human interaction. Why punish yourself in that sense? Why deprive yourself of something that it’s necessary for you to have a nice mental health?
When it becomes tricky it’s when you spend way too much money basically going out. For example, if out of your total income, you are spending 50% of your income eating out, going to the movie theaters, going to clubs, then probably, you will have a problem. Rather than just trying to cut all of it down to zero, how about we do that change in incremental changes?
As you know, incremental changes are better than ambitious failure, so we start scaling down little by little. This month, we started at 50%, but perhaps next month we’re going to cut those expenses down to 40%, or to 30%, until you get to a point where you feel comfortable. Let’s say that magic number for you is 20%.
Budget for recreational activities
Now you have all of your fixed costs, the must-have costs, like your rent, utilities, and stuff like that. Then you’re going to allocate yourself a certain amount in your budget for you to have fun. Let’s say that number, once you add it all up, turns out to be $3,000. You need $3,000. Now, let’s look at how much you need in terms of income from your Real Estate Portfolio. After paying all of the expenses, you have to have at least $100 as cash flow. For example, in a given month you take the rent, and you pay:
- Your mortgage
- Your insurance
- Your property manager
- The property taxes if necessary,
and then after all of that, you have $100 left. That’s the amount that you’re going to keep in your pocket.
Now, you’re going to pull out the $3,000 and you’re going to ask yourself, “Okay, from $100 to $3,000, how far am I? How soon or how many houses will I need in order to go from $100 to $3,000?” The equivalent of that will be 30 houses because 30 X $100 will give you $3,000.
Keep in mind, that that number is only for the beginning. Why, you might wonder? Because when you’re first buying a property, your mortgage payment is going to be at its highest point because you still owe a lot of money but over time, that debt is going to start reducing, which means,you’re going to have more cash flow. Instead of having $100 left, you’re probably going to have $200.
That way you know that you’re actually getting closer to either quitting your job, or perhaps knowing that you have the ability to do so, but maybe you don’t want to do it, because you like what you’re doing, or perhaps you want to continue expanding.
Real Estate Investing: You are ready to quit your job when…
That will be, in essence, the benchmark for you to realize that you are ready to quit your job and focus on your real estate investing. You will know what you need to live comfortably every month. You will know the size of the portfolio that you will need in order to have the opportunity to be able to quit your job.
That’s basically on the rental side. Of course, there’s more than one way to do Real Estate Investing. Some people like to do Airbnbs, some people like to do house flipping, that’s completely fine. If you choose to do so, always, always keep that monthly budget in mind. Get a sense of how much money would you need on a monthly basis, and try to get an estimate as to how much money you think you can make off of that Airbnb, or off of that flipping project that you have in mind.
When you take the amount of money that you will make out after doing those projects and you parse it out throughout the period of 12 months, is that still going to be enough for you? If not, maybe that’s something that you will need to consider or just simply continue to remain at your job, because at the end of the day, we all have to pay our rent and we all have expenses to meet.
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