You may have come across some real estate investment advice telling you to purchase 15 properties in 2 years.
Or listened to a podcast about a 23 year old that started 3 years ago and now has 85 doors.
Sure it’s possible. But these are the outliers. For the average investor, especially those starting out, these objectives are unrealistic at best, and outright dangerous at worst.
Anyone striving for this might find themselves highly overleveraged, burnt out after a few years, and possibly even bankrupt if the market turns slightly.
I’m here to tell you that you can take a more sane approach to investing. One that is achievable by most people and much more realistic.
So how many houses do you need?
Guess what? You can achieve financial freedom in your life with a grand total of….
2 houses.
Yes, you heard right. 2 houses. And one of the two houses is the principal residence you live in. So in addition to your own home, all you need is 1 additional investment property to essentially be free from the rat race.
Granted, both would have to be paid off.
So how did I come up with 2 houses?
Let’s assume that you own 2 houses outright, mortgage free. Your first house puts a roof over the head of you and your family. The second house brings in the income to support your day to day living expenses.
Using today’s dollars, assuming a net operating income of $3500 for a 2 unit house with a converted second suite, the cash flow after expenses on a mortgage free property can realistically be $2500, providing a gross annual income of $30,000.
Although $30,000 a year isn’t a lot, if your principal residence is mortgage free, this can work for many people who are frugal and smart with their money. Again in today’s dollars.
Now, I never said that financial freedom means having enough money to take annual first class vacations to the Maldives or make it rain at the club.
In my opinion, financial freedom simply means the choice to work, or not. You may choose to continue working, but having the choice not to, or to take a break. This is an incredible privilege.
If your definition of financial freedom means more than the bare minimum and enjoying life a bit more, then 2 paid off properties plus full or part time work will allow you to live pretty comfortably.
Alternatively, you can have a total of 3 houses paid off, which will be able to support a more ideal lifestyle. You can have:
1 house to live in
1 house to pay for your day to day living expenses and enjoy simpler pleasures
1 house to do a couple of nice trips a year, help your kids with college, or maybe grab a luxury item here or there.
It helps to first provide your own definition of success. It won’t be the money itself, but what that money can do for you, whether that's to be able to spend more time with your family, or have more material possessions.
Figure out what makes you happy.
Whether you own 2 or 3 or more homes is up to you, as you need to decide what you personally need from a financial standpoint.
But at least now you have an understanding that a baseline of 2 paid off houses will provide you with the security needed knowing that if you aren’t working, you will be okay.
Of course this also depends on real estate prices and the cost of living in your city or town. This probably won’t be easily achieved in the city of Toronto, but in a town where the average home is currently between $500k to $600k, this can work.
So now you might be saying. “Great! I need 2 houses paid off. I don’t own any houses now. How do I do that?”
Glad you asked.
There are a few ways to go about it. Your risk tolerance, ability to borrow money, and timelines will determine how fast you get to the strategy of 2 houses being paid off.
Let’s look at a couple of strategies based on 2 different time frames. Before we do that, our assumptions are the following:
Person has a full time job and savings to allow them to put 20% down payment on a property worth $550k and finance a second suite/main unit renovation costing $150k.
Person is able to borrow funds necessary to purchase 1 property annually, either through conventional or private sources, and potentially access equity from previous property
The mortgage rate on the home is 2.5% on a 30 year amortization
No market appreciation (to be conservative and for simplicity)
In Ontario, a detached, semi-detached or even a townhouse in the price range of $550k will likely not be in the Toronto area, or even in cities like Kitchener, Hamilton, or Barrie.
It may be in cities such as Welland, Brantford, or Peterborough.
The least riskiest method is to simply purchase a property, convert it to a legal two unit home, and then purchase a second property after the first one is complete, and repeat the process. Simply hold on to both of these properties for 30 years, while your tenants pay for your expenses, taxes and mortgage. After 30 years you will be financially free.
However this seems like an awfully long time for some people.
A more reasonable approach would be to purchase 10 properties over 10 years, one property per year. This is very manageable by most people who have full time jobs.
Let’s have a look at how this would work with a quick chart below:.
For simplicity again, we have removed the market appreciation portion of this analysis. Of course that will likely play a big role (especially with inflation running as hot as it is, and the extreme supply constraints in housing).
But for the sake of this thought exercise, we have not taken that into consideration.
Before we continue, remember this is not financial advice. It’s just to give you an idea of what’s possible.
For a house that costs $550k with a renovation of $150k, we can reasonably expect a 5% bump in value after a year through cosmetic improvements and the addition of a suite, giving us $35,000. Cash flow is at $6,000 yearly and mortgage paydown of $9,000 per year, giving us an equity gain of $50,000.
Initial cost of home: $550k
Renovation with second suite: $150k
Forced appreciation after 1 year: $35k
Annual cash flow: $6,000
Annual mortgage paydown: $9,000
First year equity gain: $50,000
After the first year, the subsequent years’ annual equity gains are from mortgage paydowns and cash flow at $15,000.
For your first property, after 10 years, you can expect a total equity gain of $185,000
For your second property purchased in year 2, you can expect an equity gain of $170,000 using the assumed number above after 9 years
And so on. Here’s our rough chart to give you an idea.
If you repeat this process once a year for 10 years (holding all properties), then by the end of the 10 year period you would have gained $1.175m in total real estate equity across 10 properties.
With markets where homes are $550k, this is more than 2 homes.
You can choose to keep them all and keep it going, or sell 8 of the homes and pay off the 2 that you like.
Now again, we removed market appreciation, which isn’t realistic to leave out. We understand that. If the market does happen to continue to appreciate, then it would benefit you even more as there will be plenty of equity gains. The purpose of leaving out market appreciation is to be ultra conservative and also to simplify the message.
With the seemingly unlimited quantitative easing, and inability for the government to raise interest rates in any significant way, I can’t see how our currency won’t be continually debased, driving up the nominal value of assets like real estate.
Additionally we used an example of someone who is able to borrow continually year after year for a mortgage. Some of you may have challenges with that. This could mean that you might choose to take this process longer - maybe double the time from ten years to twenty years.
This can be 1 project every 2 years, with money saved in between and equity extracted through gains from the previous property.
Your numbers will be much more dynamic, and your mileage will vary based on the approach.
There’s no right answer here. It just depends on what your timelines are and your ability to borrow.
The key here is income, whether from a job or an active business (so don’t quit your job if you don’t have something else lined up!).
If you’re able to access funding, and have the capacity to work on more projects, then great, you might be able to achieve the goal in a shorter period of time.
For example, if you can qualify and access funding, and have ability to work on 2 projects a year, then you may even be able to cut your goal time to 5 years.
For me personally, because of my streamlined process, I can typically manage 2 projects every 6 months - in other words 4 projects a year (by the way, a strategy we are currently teaching in our Second Suite Training Program).
Conclusion
So there you have it. A rough plan for getting you to the elusive equity equivalent of 2 paid off properties, which for me, is the definition of financial freedom - a minimalist version of it if you will.
For those of you who have either already achieved this, or well on your way, you can certainly ramp up your equity gains with more projects.
The process outlined above doesn’t even include the possibility of building a third unit garden suite on the property, which is now allowed in many municipalities across Ontario. Or the possibility of a lot severance and building another home.
You can read more about that in our article How To Add 5 Housing Units On Your Property
The garden suite strategy can really supercharge equity gains due to the “free land” component of building on your existing property. If we throw this in the mix, we can expect potentially an even shorter timeframe to get to our financial objective.
We’ll discuss that more later.
For now, I’ll let you sit with the idea that you can take things slow, working on one project every 1 or 2 years with homes containing second suites, and know that you'll be on your way to financial freedom.
