Today I show you with our real data how focusing on rental cash flow cut 5 years off our original timeline to moFIRE.
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It’s been roughly two years since my original “15 year plan to financial independence, moFIRE style.” “MoFIRE” refers to morbidly obese financial independence, retire early, and implies the ability to maintain an annual level of spending in retirement > $200k.
In this plan, I outlined an aggressive, 15 year timeline to financial independence. It had three important elements:
- Hold expenditures steady
- Max out retirement accounts
- Invest increasing amounts into our taxable and 529 accounts
With our plans of aggressive saving and index fund investing, we were originally set to be financially independent with $8.75 million of investments by 2032.
Side note: I admit that it’s a blessing that the Dr-ess and I are in a position to not only cover our expenditures and also save money. We worked hard to get here, but we had certainly had advantages along the way.
The transition to real estate
It was about a year after I published this 15 year plan when I had my realization that rental real estate has incredible benefits as an investment vehicle, specifically:
I made an abrupt transition to real estate investing, and the it’s been full steam ahead. But this all begs the question: Is real estate investing actually speeding up our journey to moFIRE?
An error in my calculations
First of all, I want to revisit my “target.” In my original plan to achieve moFIRE, I saw that $254,000 of our annual expenditures were recurring costs that would continue even if we retired immediately (barring a change in lifestyle).
I calculated that a 4% rate of inflation would increase this figure to a whopping $428,043 in 15 years.
Numbers seem big? I admit they are. Read this for more information: The Darwinian Doctor’s 13 Monthly Expenditures (with real numbers)
But when I revisited my calculations recently, I realized that I had made an error. Basically, not everything goes up with inflation.
Here are big expenditures that will likely increase with inflation, below.
And here are costs that won’t go up with inflation.
Fixed debt and voluntary savings should not necessarily increase over time.
When I rechecked my projections with this new information, this fact alone shaved 1 year from our 15 year journey to financial freedom. But as you’ll see below, the transition to rental real estate has had an even greater effect.
The rental real estate empire
In 2020, our portfolio expanded to 10 doors.
In January of 2021, we closed on a 10 unit apartment building, growing our portfolio to 20 units. By late 2021, we hope to be generating over $6000/month in cash flow from these properties.
A faster road to moFIRE via cash flow?
So again we have the question: Am I accelerating my path to financial independence or not?
To answer this question, let’s talk a second about how I view cash flow.
To me, it’s a simple equation: $1 cash flow = $25 of investments
I alluded to this in my previous writing on cash flow, but if the 4% rule requires us to save 25 times our spending to fund expenditures, $1 of cash flow is therefore equivalent to $25 of savings.
Another way of thinking about this is that any cash flow you have at this moment can be used to pay your current expenditures. This directly impacts the amount of investments you have to put away to be considered financially independent.
My original 15 year plan to moFIRE
Below, you can see a graph where I calculated how long it should take us to get to moFIRE. We hit financial independence in 2034.
This plan is built on basic assumptions and aggressive, brute force saving:
- 8% annual compounded return
- 4% rate of inflation
- Hold expenditures steady
- Max out retirement accounts (~$106k/yr)
- Invest increasing amounts into taxable accounts every year (~$72k/yr, increasing by $6k annually)
The new 10 year rental cash flow plan to moFIRE
This is my new graph to financial independence, taking into account my SMART goal of having $100,000 of cash flow from rental properties by 2025.
Now we hit moFIRE in 2028, five years faster than our inflation-adjusted 15 year timeline.
Here are the assumptions underpinning this graph:
- We continue to fully fund our retirement accounts and Roth IRAs (~$106k/yr)
- No further taxable brokerage account contributions
- All extra free cash flow gets diverted to real estate investment (~$70-90k/yr)
- Inflation continues at 4% annually
- No primary or rental home equity included in these numbers
We’re actually on pace to beat this timeline, but that was made possible by two big events in 2020: a taxable brokerage account sale ($200k) and taking a HELOC on our primary residence ($500k). Essentially, we re-purposed cash and equity we already had towards rental real estate.
From 2021 onwards, this graph assumes continued real estate investment from our free cash flow only.
Here are the actual numbers, year by year:
As you can see, as our Rental Cash flow increases, our moFIRE # decreases. This is because the cash flow directly decreases the amount we have to save to be financially independent. As I noted above, each dollar cash flow replaces $25 that I otherwise would have to squirrel away into our savings vehicles.
In this post, I demonstrated how the cash flow from our rental real estate empire is accelerating our path to moFIRE. (morbidly obese financial independence, retire early).
By achieving approximately $10,000 of annual cash flow from real estate in 2020, we decreased our savings target by $250,000. This “moFIRE #” will continue to decrease as we increase our cash flow.
When we hit $100,000 annual cash flow by 2025 and increase that by $10,000 annually, we’ll hit moFIRE in 2028. This is 5 years faster that our inflation corrected 15 year plan to financial independence.
By these calculations, I’m definitely accelerating our path to financial independence. I still have some unanswered questions, like our average cost per cash flow dollar. Hopefully, I’ll have enough data to answer this question in a few months.
I apologize if you found this post boring or too numbers heavy. Every once in a while I like to force myself to crunch all of our numbers to make sure we’re on track. Without the accountability of publishing these blog posts for you, it’s too easy for me to make assumptions about my investing choices that aren’t backed up by reality.
As I mentioned, we’re on a faster cash flow trajectory than my assumptions above. It’ll be exciting to see how our actual progress compares to these numbers in a couple more years.
What do you think? Do you find my projections realistic, or are there some mistakes I’ve made? If so, I want to hear about it!. Please comment below and subscribe to follow along!