What does been "financially free" even mean anyway?!

Question

I've started learning REI and I stumbled upon a few threads talking about cash flow vs appreciation.  One post on this thread here REALLY stood out by Minh Le.

"Cash-flow pays the bills. Appreciation makes you rich."

The way I'm understanding it, is this:  Cash flow is a job.  Cash flow is used to pays bills.  And yet, cash flow is the one single thing you need for financial freedom.  How can you be financially free when you're working a job?  Isn't the reason why we choose REI is to get out of our 9-5 job?  If so, why are we all struggling so hard to achieve cash flow, when cash flow itself is a job?  Robert Kiyosaki's board game called “Cash flow” literally makes you play in the rat race till you get enough cash flow(cash flow > expenses) to get on the fast track and become “financially free”.  Is this a lie or a illusion then?  You work at a job and want out of the rat race, so you get cash flow.  But cash flow itself is a job as well.  If so, what the hell does "been financially free" even mean then?  What does been “wealthy” mean then?  What's the difference between having cash flow and having wealth?

Also, I know my grammar is horrible and I don't care.  I'm REALLY having a internal crisis right now!

Account Closed · Answer

Hi Clayton,

In MY market, appreciation leads to rent increase.  Rent increase leads to more cash-flow.  MY market is arguably one of the toughest markets to invest.  History has shown that MY market is willing to pay $100k for every $500/month net positive cash-flow.  So $5k/month cash-flow = $1MM in net worth.  If you can get cash-flow in MY market, you will be handsomely rewarded.

As your cash-flow increases, you can use it to pay your bills while your equity keeps on piling up.  More rent growth = more equity.  Thanks to appreciation and rent growth in the Bay Area, I watch my cash-flow grows to six figures while my net worth increases in millions. Of course, this is only one man's observation and opinion.

With regards to financial freedom, it means you own the most precious commodity in the world.  That is YOUR time.  You get to do whatever the heck you want.  I spend a lot of my time doing charity work and helping others.  A lot of BP members can attest to this.  :>)

With respect to cash-flow = a job.  Not really for MY market.  The tenant profile here is so great that the rent goes straight into your bank account every month.  If there's an issue, call a contractor to take care of it.  If the appliances are down, order them from Lowe's or Sears and have them delivered and installed.  If tenant moves out, pay someone $500 to do the lease up.  What's there to do?  Don't be cheap.  It's a business.  You're paying someone in exchange for  your time.

I manage 14 of my own single units and 4 for relative/sibling for FREE. I don't know if I spend more than 1 hour/week to do anything.  The only time I have to do something is the 1st week of the month.  :0)

I co-own 4 apartment buildings with a friend, and those are being managed by a professional property management company.  No time to screw around with these.  Time is money, and money can buy you all the time in the world until god calls you home.

Cheers.

JD Martin · Answer

Well, if you consider managing your investments a job, then there's probably no such thing. However, if you have set up your business right, it doesn't take anywhere near 40+ hours per week to manage it. I work a "regular" job besides this business, and my business side has been quite profitable even though I am probably only spending 10 hours per week on it, average, and a good part of that time is just looking for the next deal.

Second, building any business takes time. If you believe that you can become "financially independent" at 22 with no money and a few ideas, you're probably sadly mistaken. However, it is absolutely within reach that for someone who started young - say 20-25 years old - they could be "retired" by 40, with a nice healthy chunk of money coming in for the rest of their life. To me, financially independent means I depend on no boss to make my way in this world.

Linval T. · Answer

@Clayton Rokosh - Welcome to the vibrant BP community.

Thanks for igniting such vibrant and hearty responses.

Here are the salient points I gathered from this dialogue regarding financial freedom and wealth:

@Jd Martin -

To me, financially independent means I depend on no boss to make my way in this world.

@Justin Fox -

You have to spend less than you earn to have surplus money to invest.   You have to invest that surplus into assets that gain value over time  (appreciate) and/or produce an income monthly/annually/etc.

I think the term should be "employment freedom", that's what I think of when I hear people say "financial freedom" anyway.

@Justin Ericsson -

Justin ... Well put... I needed cash flow to become wealthy. My net  worth is now big 7 figures starting out with one property growing to  over 1,000 in five years. What I can tell you is this... There is the  hard way and the best way to create wealth. I figured out all the short  cuts to do it faster and anyone that wants to know can do it. It starts  out with what you know and grows to who you know to expand quickly.

@Minh Le -

Thanks to appreciation and rent growth in the Bay Area, I watch my  cash-flow grows to six figures while my net worth increases in millions.

With regards to financial freedom, it means you own the most precious  commodity in the world.  That is YOUR time.  You get to do whatever the  heck you want.  I spend a lot of my time doing charity work and helping  others.  A lot of BP members can attest to this.  :>)

Justin Fox · Answer

You have to have cash flow.  You have to have some sort of cash flow to carry the appreciation long-term.  Everything is a job.  No matter if you pay for a PM or not.  You'll be dealing with something, sometime.  The goal is to just work less.

You have to spend less than you earn to have surplus money to invest.  You have to invest that surplus into assets that gain value over time (appreciate) and/or produce an income monthly/annually/etc.

I think the term should be "employment freedom", that's what I think of when I hear people say "financial freedom" anyway.

You have to have some type of cash flow in the beginning to become wealthy over time and in the end.  You do that by either investing all that cash flow, or bits and pieces and leverage debt (borrowing debt cheap and charging more for it).

Cash flow is a return on your investment.  Wealth is the total value of the assets you invested in (minus your liabilities).

Justin

Justin Ericsson · Answer

Justin ... Well put... I needed cash flow to become wealthy. My net worth is now big 7 figures starting out with one property growing to over 1,000 in five years. What I can tell you is this... There is the hard way and the best way to create wealth. I figured out all the short cuts to do it faster and anyone that wants to know can do it. It starts out with what you know and grows to who you know to expand quickly. I just offered a new buyer unqualified an opportunity to invest into his business to make him qualified to buy a property from me. That's who you know he got really lucky that I like his business. The who you know in my start was hundreds of phone calls to expand on what I knew and I know a lot of people now!!! This is my shortcut to wealth. You will be suprised at how many people will invest with you if you put in the effort to know your trade. My trade is real estate investments.

Account Closed · Answer

Clayton,

I just want to share with you how powerful cash-flow is in MY market.

Say you buy a small apartment building in my market for $1MM.  Assume you put $250k down, $20k in closing costs, $50k in reserve and $80k in rehab cost.  Your total investment is $400k with 0% CCR at purchase.  Ouch!

Using debt pass through to increase rent, which is way below market, you're able to generate 5% CCR after 6 months.  That's $20k cash-flow/year on your $400k investment.  Nothing to brag about.  However, you should be able to increase rent on an annual basis so your CCR would likely be 7% in year 2, 9% in year 3, and to be conservative say......  10% say........in year 5.

At 10% CCR, that's 40k/year cash-flow.  Nothing to ride home about.  However, MY market is willing to pay $1.8MM for that same building in year 5.  Now you have 2 options.  1) Do a cash-out refinance at75% LTV and walk away with $675k tax-free, or 2)  sell and walk away with over $1MM.

Now you can see why I say cash-flow pays the bills and appreciation makes you rich.  Low cap rate market has a high probability of giving you a higher ROI.  Higher cap rate, no doubt, will give you a higher CCR.  Just don't confuse cash-flow with profit.  You have to look at the IRR to get a complete picture.  Your approach will depend on your end goal.

Best of luck with your real estate endeavors.

Orlando Roche · Answer

Hi Clayton, I know how frustrating that must sound, but everything requires some work. I mean you may have someone bring you food and you don't have to farm it but the mere fact that you have to cook it and eat is work. The idea behind financial freedom is to be able to get up when you choose to and be able to control your time, and to me time is everything because it does not stop. So being able to control where I spend  my time is priceless to me! Now how much financial freedom you need? really depends on you, if you live below your means and don't keep up with the jones it may not take much. Hope this help.

What does been "financially free" even mean anyway?!

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