When Alejandro Ayestarán was thinking of investing remotely in real estate, he was thinking really remote.
Like about 6,500 miles remote.
Ayestarán lives in San Francisco and he is from Argentina, so he was contemplating buying property there and having family members manage it for him.
Then he joined Mynd as the chief business officer two years ago, and he started looking closer to home. But not too close: Think Texas and North Carolina.
The Bay Area, where he has a home with his wife and two children, “is not necessarily a great investor market going forward” but Mynd, an Oakland-based property investment and management startup, operates in more than 25 markets around the country.
Ayestarán quickly learned that his new company offered him an opportunity to diversify into an asset class that he “did not need to be convinced about.”
- Learning about the price point — $200,000-350,000— to buy “Class A” rental properties around the country was an “aha moment.”
- Financing a purchase creates move leverage for investors. Most property purchases in Latin America are made with cash.
- “Investing in bricks,” as the saying goes in Latin America, is a great way to build wealth over time. “The economics are compelling,” said Ayestarán.
The economic case for investing remotely
Mynd CEO Doug Brien, who owns rental properties in various parts of the country — including near where he lives in the Bay Area — often laments how provincial most investors are when it comes to buying property. Living within driving distance of a rental property, he says, can be counterproductive.
In the post-pandemic housing market — where homes are sold through 3D floor plans and remote video walkthroughs — more and more Americans are getting comfortable with buying a home remotely. Redfin reported that some 63 percent of offers on homes in 2020 were made by buyers who had yet to visit the property.
Will buying investment properties remotely become as straightforward as a stock purchase?
Thomas Stepp, head of investor offerings at Mynd, says it’s all about maximizing the return on investment.
“Why invest locally if the data points to other places and you now have the ability to invest in the best markets?” Stepp said. “You want to invest in the market where things are going, not where things have been.”
Most of the gains in the housing market have come in the Sunbelt, as industries in the Northeast and the Rust Belt have faded and tax policies in those regions have become more onerous.
He recommends looking at three market drivers when deciding where to invest in property:
1. Population growth
2. Job growth
3. Cost structures (home prices, taxes, insurance, etc.).
Accessing quality data and understanding the risks of investing remotely, the decision on where to buy becomes clearer.
“If your money can work harder for you elsewhere, why not?” Stepp asked.
Diversifying is key to portfolio management
Ayestarán said he and his wife needed to diversify some of their assets outside of technology. “We both work in tech, we are invested in tech — we are tripled down in tech.”
He bought properties in North Carolina and Texas, with financing through Mynd, betting on the upside of those two markets, while diversifying both his portfolio and his geographic footprint.
“Diversification is an advantage of owning real estate,” he says, since the market does not correlate directly with stocks. He prefers to keep about 30-40 percent of his portfolio in long-term indexes, and split the rest between real estate, startups and other nascent opportunities.
And real estate provides some stability during a period of market volatility, like the first half of 2022, while acting as a hedge against inflation.
Owning property outright, as opposed to a REIT or other investment vehicle, offers better tax advantages. Ayestarán said direct ownership also enables the greatest flexibility: a home can be converted to a short-term rental; the property can be gifted; or it can be modified to cater to changing rental demand patterns.
“And if you need to, you can exit and get that liquidity,” he added.
Overcoming the remote investing hurdle
Slightly less than half of the nearly 5,000 owners on Mynd’s technology platform are remote investors.
For some, that was a steep hill to climb.
“I was the last person in America to buy real estate I have not seen,” said David Greenberger, founder and CEO of Plenti Financial. “I am an attorney and a New Yorker and I don’t trust anybody.”
Greenberger was first persuaded to buy sight unseen about a decade ago by a client based in California who wanted him to invest in property in Memphis. Greenberger was leaving his home in California to check on the property when his flight was canceled.
Then it dawned on him: “Who has to schlep?”
He was also growing tired of the gyrations in the stock market and saw how others were doing well in real estate. He spoke to other investors in the Memphis deal and decided to go ahead.
Since his initial foray, Greenberger has branched out, most recently executing a 1031 Exchange after selling a property in Phoenix to purchase rentals in North Carolina and Texas through Mynd.
A 1031 Exchange, also known as a “like-kind exchange,” is named after a section of the U.S. Internal Revenue Code. It allows an investor to avoid paying capital gains taxes on the sale of an investment property, as long the proceeds are reinvested within certain time limits in a property or properties of equal or greater value.
“You can sell one home in San Diego and get 6 in Memphis,” Greenberger said.
He prefers less-regulated markets where taxes and insurance are affordable, and looks at cities where there is a strong tenant pool. Memphis, for instance, is home to FedEx and has the busiest cargo airport in the world.
And he pays attention to where clients of his 1031 Exchange business are buying and selling.
“Follow the exchange traffic and you get an idea of what people on the ground are thinking,” he added.
Geographical diversity can mitigate risk
Stepp said he and his team offer real estate investors a broad perspective.
“We go through the same thought processes as an investment advisor,” he said, “including risk tolerance, investment goals, and the highest returns.”
Looking across the country — at the many markets where Mynd can facilitate the search, financing, purchase, insurance and ultimately the sale of a property — patterns start to emerge.
“The banking industry in Charlotte will do better over time,” he said. “Raleigh looks a lot like Austin, which looked a lot like Boulder, Colorado.”
Buying in different regions reduced risk as well.
“Each market does something different,” Stepp said. “Las Vegas and Phoenix benefit from Californians moving there, much like Florida benefits from New York money.”
Job growth in real estate markets can correlate to investment sectors, according to Stepp, so a remote buyer can diversify a portfolio of homes as if it were a stock portfolio:
Technology: Austin and Raleigh have strong and growing tech sectors.
Financial industry: Charlotte is the country’s second-largest financial center; Bank of America and Wells Fargo are among the city’s top employers.
Military presence: Jacksonville and San Antonio have large bases, which create a stable and steady demand.
Health care: Nashville is a longtime magnet for healthcare companies (and aspiring country music stars).
Logistics: Memphis is centrally located and, as home to Fedex, has the busiest cargo airport in the world.
Employment growth: Houston, Atlanta and Phoenix have friendly corporate environments and affordable home prices.
Tourism and entertainment: Las Vegas and Orlando draw visitors from around the country, and the world.
Low price, steady returns: Indianapolis has pharmaceuticals and life sciences companies. The median listing price in April 2022 was $229,000.
The final tally on remote investing
With the technology platform Mynd offers, the idea of investors limiting their choices to properties they can drive to is anachronistic in 2022.
As CEO Doug Brien likes to say, “You don’t need to go to Atlanta to buy Coca Cola stock.”
Stepp said that once investors see all the benefits of SFR real estate — the tax breaks, higher rents, increases in equity — “then they are hooked.”
The problem is that many are unaware of how to take advantage of the opportunity.
“How many people want to do this but don’t know how to do it?” Stepp asked. “Those people need to talk to us.”
This article originally appeared on Mynd.co and was syndicated by MediaFeed.org
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Can real estate help you retire early?
While people have been retiring early since there was work to shirk, the “FIRE movement” went mainstream in the early 2010s, popularized by Mr. Money Mustache and a few other bloggers.
But does financial independence necessarily mean retiring early? How do you achieve financial freedom? And what hidden pros and cons of FIRE are you probably overlooking?
Here’s your 30,000-foot view of financial independence and early retirement, plus a formula to achieve it.
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FIRE is an acronym for financial independence/retire early, or alternately financial independence/early retirement.
But those actually represent two distinct concepts. Early retirement refers to quitting your career job, never to return to the workforce. Or at least not to a high-stress, high-income career.
Increasingly, some retirees blur the line and continue working a fun job either full- or part-time. But more on that later.
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Financial independence, sometimes called financial freedom, means being able to cover your living expenses with passive income from investments. In other words, your day job becomes optional, and you no longer need to trade time for money.
For example, say you live on $4,000 per month.
You buy a rental property that generates you $500/month in rental cash flow. You like seeing that extra $500/month come in, so you buy another property, and then another. When you have $4,000 of rental cash flow coming in each month, you can live on the rents alone. You could quit your job in a blaze of glory if you liked.
Note that the term “financial independence” has two different meanings, depending on the context. Aside from the financial freedom definition, it sometimes also means the ability to pay your own bills as an independent adult. Thus, a stoner 24-year-old who spends his days playing video games in his parents’ basement and barely working is not financially independent in either sense.
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You get the gist: with enough passive income, you can pay your bills and stop working if you want.
But what should you invest in to reach financial independence and retire early? How much of a nest egg do you need?
Honestly, these are the easy parts of financial independence and early retirement. Easy enough that I can explain them in a few paragraphs.
The hard part is maintaining low living expenses and a high savings rate, month in and month out.
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As outlined above, you can invest in rental properties to generate passive income. And in doing so, you can bend, if not break entirely, the 4% Rule (more on that momentarily).
But as much as we love rental income around here at SparkRental, it’s far from the only type of passive income. You can earn passive streams of income from stock dividends, bonds, real estate crowdfunding investments, and countless other sources.
Rather than trying to pile all your money into one asset class, and earning all your passive income in one way, aim to create many passive streams of income.
For example, I earn money from rents, but also from stock dividends, real estate crowdfunding investments, private notes I’ve lent, and from businesses I own. No one source of my income would blow your mind, but they add up.
If you’re new to investing, I recommend starting with stock investing through a robo-advisor like Acorns or SoFi Invest. It requires no skill on your part, you can automate it, and you can start building an investment portfolio with $10.
When you’re ready for the next step of diversification, add a real estate crowdfunding platform like Fundrise or Groundfloor. It’s equally easy and passive, no expertise or work required.
Only consider buying your first rental property when you’re ready to pick up a new set of skills, and to devote lots of hours to it outside of your day job.
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As outlined above, financial independence requires covering your living expenses with passive income. It doesn’t require an exact net worth.
Still, traditional financial planners tell you to save up 25 times your annual spending (not your annual income!). That’s because financial planners consider 4% a safe withdrawal rate: if you pull 4% out of your retirement portfolio in the year you retire, then adjust that upward each year for inflation, your net egg should last you at least 30 years. Financial advisors refer to this as the 4% Rule.
But if you retire at 40, you need your nest egg to last you 40-60 years, not 30. In that case, a 3.5% withdrawal rate should let your nest egg keep growing forever (see this explanation from CFP Michael Kitces for the math). Rather than multiplying your annual expenses by 25, multiply it by 28.6 to reach your target nest egg for early retirement.
Note that withdrawal rates only apply to your stocks and bonds, not your real estate investments. Your real estate generates ongoing income, with no need to sell off assets.
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Most people who reach financial independence don’t actually stop working. Oh, they may quit their high-octane career job. But there are only so many days in a row you can sip margaritas on a beach before you get bored and fat.
Rather, most people simply switch to a new career that fulfills them. It may not pay well, but that doesn’t matter when you reach financial freedom. Some people start blogs or online businesses, such as travel blogs documenting their adventures. Others work for nonprofits, changing the world for the better. Some focus on writing novels, or painting, or other artistic endeavors.
But because you won’t actually stop working, you probably won’t stop earning money. You’ll just earn less than you do today — which means you don’t need to cover all of your living expenses with passive income. You just need enough to bridge the gap between what you spend and how much your dream job pays.
For example, imagine you spend $70,000 per year while working a soul-sucking job. You dream of becoming a travel writer, but that only pays $55,000. You don’t need $70,000 in passive income to quit your 9-5 job — you just need $15,000 per year, to supplement the income from your dream job.
You may not technically be financially independent, but who cares? You still get to live the same post-FIRE lifestyle without having to meet the full definition of financial freedom.
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To reach financial independence and early retirement fast, cut your living expenses as low as you can. Not only does that boost your savings rate, allowing you to funnel more money into investments, it also lowers your target passive income and nest egg. Remember, for every dollar you spend in retirement, you need $25 invested (or $28.60 if you plan to retire young)!
For maximum savings in a single move, try house hacking to score free housing.
Automate your savings with a robo-advisor, or by setting up automatic recurring transfers.
When you’re ready to expand into rental properties, read up on down payment hacks to buy a rental property with no money down. But beware of using too much leverage in real estate investing, it can leave you with negative cash flow.
You’ll be surprised how quickly your investments take on a life of their own and start generating passive income. Avoid lifestyle creep as your income rises, and keep funneling your returns and passive income back into new investments.
Honestly that’s where the challenge of financial independence and early retirement lies: not in the math or investment strategies, but in the discipline of keeping your living expenses low and your savings rate high.
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The FIRE lifestyle of low living expenses and high savings comes with some surprising perks.
To begin with, recessions are less scary. As you earn more passive income, you rely less on your 9-5 job to cover your bills. If your job disappears to a recession, you can cover many of your bills with rental income, dividends, and other passive income sources.
That same lower dependence on your day job puts you in a better position to negotiate a higher salary or benefits. You can push hard because you’re less daunted by the idea of aggravating your boss. Your world wouldn’t end if you lost your job.
Those negotiated benefits could include working remotely, allowing you to move somewhere with lower cost of living. I live in Brazil for example, allowing me to live a luxurious lifestyle on relatively few US dollars each month.
You may not need life insurance or long-term disability insurance. Low living expenses and a high savings rate means your family could probably survive on one income, if one partner shuffled off this mortal coil.
While many young adults complain that student loans prevent them from investing, living a frugal lifestyle while paying them off makes it easy to keep that “extreme savings” going. You can just start funneling that money into passive income streams and retirement savings rather than student debt.
Read up on other hidden benefits of the FIRE lifestyle here.
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Haters gonna hate — and the FIRE movement has plenty of haters.
Some say it involves too much sacrifice, that people pursuing FIRE save for the future at the expense of the present. As someone who saves 65% of his household income and spends months out of the year vacationing abroad, I can tell you firsthand that’s a bogus criticism.
The woke crowd might retort:
“Yeah but you’re a 40-year-old white male who owns an online business, you probably earn a boatload of money.”
I can assure you I do not. It took years for SparkRental to turn a profit, and even today we reinvest most of our profits back into the business. You know, doing evil things like hiring people and creating jobs.
To this day, my family lives almost entirely on my wife’s modest teacher salary.
Some whine that only married couples can achieve financial independence and early retirement. Others claim only single people can do it, citing marital disputes over money. They can’t both be right, but they can both be wrong.
Others worry about health insurance without employer coverage. Good thing you have so many health insurance options for early retirees.
Everyone has an excuse why they can’t build passive income and retire early. Most of them just don’t want to cut spending for a more frugal lifestyle — and there’s nothing wrong with that. By all means, live the normal suburban life keeping up with the Joneses. Just don’t tell me it’s impossible for middle-class people to retire at 40, because you’re wrong. Look no further than the Thompsons, who retired at 30.
Read the full list of FIRE movement criticisms, and the counterarguments from people actually living the FIRE lifestyle.
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Love it or hate it, the FIRE movement proves that not everyone has to work the standard 40-year career. Some work for 10-20 years, invest a high percentage of their income, then reach financial independence and early retirement.
I plan to work forever — doing things I love. That includes writing, building lifestyle businesses, and perhaps working in the wine industry.
And the more passive income I earn, the less I worry about how much I earn from active income.
This article originally appeared on Sparkrental.com and was syndicated by MediaFeed.org
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