F.I.R.E. Movement – The Best Passive Income Strategy

WHAT IS F.I.R.E.?

Have you heard of the F.I.R.E. Movement? The acronym stands for Financial Independence Retire Early. This is a movement picking up steam with new documentaries popping up every few months. I am amazed to learn this is an actual movement that I’ve been taking part in for the past 10-12 years without knowing it existed!

A well done F.I.R.E. documentary that my wife and I recently watched is called “Playing With FIRE” - released November 2019. The basic concept behind this movement is to earn as much income as possible, then save a high percentage of that income, then invest that saved income into passive investments in order to achieve financial independence as early as possible. This is precisely the model I used to achieve financial independence myself; however, I noticed one major difference…

The majority of F.I.R.E. participants are placing their savings into index funds or dividend paying stocks to produce passive income and the most common formula that people are using is called the 4% Rule, which I will explain below:

THE 4% RULE

If you’ve ever explored retirement planning, you’re likely familiar with the concept of safe withdrawal rates. A classic example is to use the 4% Rule, which suggests that you can withdrawal 4% a year from your investments, assuming your portfolio produced 4% and that you are not withdrawing the initial invested principal. Therefore, in order to find out how much you “need” to invest in order to achieve your desired amount of income, you simply take your desired annual passive income goal (I’ll use $30,000 for an example) and you times that amount by 25. When you do the math, you will know how much of an investment is needed to achieve your passive income goal.

EXAMPLE

$30,000 annual passive income x 25 = $750,000 investment

$750,000 investment x a 4% annualized return = $30,000 a year passive income

This is a useful concept for some; at least it helps you gain an idea of how much you need to invest for “retirement”. The bottom line is that IF you earn and withdraw 4% a year, then you need to save 25 times your annual spending.

AN ALTERNATIVE STRATEGY

Here is what I advise you to consider. Rather than focusing on the stock market (index funds and stocks), why not consider investing into real estate? For some reason, there seem to be very few in the F.I.R.E. community leveraging this amazing asset. This is assuming, of course, you have enough capital for a down payment on a rental house or $25-50k to invest into a passive real estate syndication.

If you are just getting started and only have a few thousand dollars to invest, I would focus first on building up your income and reducing your expenses to a level that allows you to save up $25-50k and study investing while in the process.

WHY REAL ESTATE?

From first-hand experience over the past 10-12 years, I have found real estate to be the best passive income generator there is, especially when you factor in the risks of publicly traded assets (such as stocks and REITS) vs privately held assets (such as real/tangible real estate). There is much less volatility and much more predictability in privately investing vs publicly investing.

WHY PASSIVE INCOME?

F.I.R.E. requires a focus on “passive income” which is contrary to how many think about investing. Passive income can come from rental income “cash flow”, dividends or interest. Rental income is my favorite source of passive income. It comes in every month and usually increases over time as your properties or investment appreciates in value.

While “equity investing” may be the most common understanding (buy low, sell high) it is important to understand that buying an asset for $1,000 and then selling it for $2,000 (AKA equity investing or capital gains investing) usually does not produce passive income, typically has negative tax consequence associated and often requires much of your time in order to achieve the desired result. Think flipping houses or actively trading stocks.

A SOLUTION

There are many real estate investments that offer completely passive income + equity growth potential + tax advantages + lower downside risk + these do not require your time commitment. These types of real estate models are an excellent solution to achieve F.I.R.E.

If you’re interested in the F.I.R.E. movement or you are simply seeking passive income, consider passive real estate as part of your overall strategy. I’d be happy to share my passive investing approach with you any time.

To your success

Travis Watts