What is House F.I.R.E [Financial Independence, Retire Early]?
House F.I.R.E is the early retirement method of having rental income or cash flow from rental houses covering all of your monthly expense bills. If you have total rental cash flow that is equal or greater than all your monthly debts, you have House FIRE'd.
However the beauty of House F.I.R.E is that this method of early retirement means you are free from living on a budget for the rest of your life. Actually, your expense budget (and in many instances your quality of life) increases each year in House F.I.R.E. How so? Well, using this method of financial independence means your income increases each year as rental income goes up and your mortgage debt gets paid down. The more houses you have, and the more leverage you use, the more handsome the rewards in your retirement.
As the creator of the very low-risk and the fastest way to early retirement, and as the author of the book House FIRE, I feel very qualified to speak of the merits of this F.I.R.E method.
So throw all your objections at me, but I'll highlight the most frequent concerns below. But a little about me first. I Lean FIRE'd at 28. I subscribed to Dave Ramsey and Suze Orman "one-size fits all" personal finance advice through my twenties. I lived off 39% of a $60,000 salary in NYC (chronicled in my first book A Million Bucks by 30.) I've been there, I understand it, and it did teach me one way to look at money. But I disagree with many of the main tenets now that I'm in my 40s. Plus, I don't want to stick to the same budget I had in my 20s.
The method of no debt living, non-stop mutual fund and 401k investing, and reducing expenses as much as possible is one way of improving your finances. And it's absolutely better than doing nothing. No harm done by the traditional approaches if you want to improve your finances with baby steps. It's just a very conservative and slow route to getting to retirement. If I would have being doing House FIRE strictly throughout my life it would have increased my overall wealth by twenty-fold while reducing my risk and getting me to Fat FIRE faster.
So let me make it clear, other FIRE methods are not wrong. They are just limiting your overall wealth potential. I've compared the traditional FIRE advice with House F.I.R.E advice in this video here to see one way House FIRE is better:
If you don't have time to watch the video, I'll provide one example on why House FIRE is fastest way to early retirement and financial freedom. Let's take one $150 bill you may have in your life. Maybe it's internet bill, maybe it's a subway pass, maybe it's your HOA fee. It doesn't matter but you have a $150 bill that will follow you the rest of your life. You can't pay it off in full, you can't buy it in bulk, you can't get a discount on it from Costco or Sam's Club.
No worries, the standard FIRE solution then is to save 25 years worth of that expense. That means a $150 a month lifetime bill x 12 months = $1800 a year. Multiply that by 25 and that is $45,000 you have to save up to cover that bill for life before you can retire (and you repeat this for each bill in your life.)
The Trinity Study, or the FIRE movement's Holy Bible, says the retirement math is you put that $45,000 into mutual funds and you withdraw 4% a year of that investment (which is $1,800 annually) and through compounding interest and typical stock market gains, that $1,800 will always be there for you even if you live 100 or more years in retirement, even if during those 100 years you live through the worst stock market crash all all time. You just have to hope that $150 bill never goes up in cost, which, it most likely will. But maybe you cut costs somewhere else to make up for it, which reduces your quality of life in retirement.
The House FIRE way is to save up just $25,000, or 55% of the $45,000 needed to cover this bill. I think most of us agree we can save $25,000 faster than we save $45,000. And then with this $25,000 we buy a leveraged cash-flowing rental that kicks of $150 in profits each month. Now this $150 cash flow pays for this ongoing bill in your life and it took half of the money it takes in traditional FIRE saving plans to get this bill covered.
And yes, it's very easy to find a property that does this. This $25,000 can be used to buy a $100,000 property with 25% down payment that cash flows $150 a month in most parts of the country. Even if not in your city, the math still makes sense to buy in another part of the country and hire a property manager to handle every single thing, so it's just as passive as stocks. And you will still cash flow $150 a month to kill the bill for the rest of your life. There are methods for cross-country investing and I will save it for another blog post in the future.
So on the surface you already see House FIRE is faster since it takes less money to get involved and to cover your bills. And then if you play this out in the future, you can see the house will be eventually paid off. And when the house is paid off, you get to live larger in retirement as your cash flow gets bigger. No more shackles of living on a constrained budget. The faster you get on this path to early retirement the better.
So how is it the least risky FIRE method? Well, rental properties are leveraged assets that generate income. Don't look at it as a house, look at each property as a small business that generates a small windfall. You can buy this small business in $100,000 cash, which is the Dave Ramsey approved way. And this mortgage-free house would probably kick off $750-$800 in cash flow since you don't have a mortgage, but still have to pay property taxes, insurance, and property management fees.
Not bad, but you also have to save up $100,000 instead of $25,000 to get your first rental property. However, if you just went ahead and bought a house after every $25,000 you saved up, well, you'll reach that same $800 in cash flow much faster since the cash flow on the first one covers some bills which helps you save for the next $25,000 faster, and then the third $25,000 is saved up quicker, and then the fourth. I explain this concept in more detail in this video about why a paid off property does not make sense:
The leveraging of your money across 4 properties is also reducing your risk because if you have vacancy in one paid off unit, you make zero dollars. If you have 4 units for the same $100,000 invested and you have vacancy in one of them, you are still profiting each month from rental income from the other 3 filled units. Rarely will you have two more units vacant at the same time because lease start and end dates will naturally be spread out and occur during different parts of the year. Additionally, an investor could even spread out risk into different areas of town and different property types as well.
Let's also look at the risk of stocks. Anyone can log on a myriad of stock sites and buy $100,000 worth of stocks without an advisor. Those stocks do have a chance to go to zero. But to buy a $100,000 worth of real estate you have to have a real estate agent (advisor), an appraiser (neutral third party to confirm value), and a mortgage lender (stodgy conservative investment partner who makes sure your can actually afford the property, even if there is vacancy, and is willing to provide 75% of the cost in exchange for a low interest rate.) Not only that but this the investment in real estate will never go to $0.
A rental property that burns to the ground the day after closing still has value. You do not lose $100,000 if this happens. Remember, you only have $25,000 invested, so that's your maximum loss. But you don't even have $25,000 to lose either. Your stodgy investment partner, or mortgage lender, always requires property insurance and that will probably cover the cost to rebuild the house. You maybe even get a better house out of it. What partner offers stock insurance?
Ok, let's say you still bought the house in cash regardless of my advice and you didn't pay for home insurance because a mortgage company didn't make you do it and you were looking to save money. Well, if the house burns to the ground you don't have a house to sell anymore and you might not have the means to rebuild it, but you still have some charred land that was underneath the house. That land is probably worth 20% of the purchase price of the house, so if this is a $100,000 purchase, you still have $20,000 in valuable land you could sell to a developer. In short, you'll never have the risk of a 100% loss in value in real estate like you do in stocks.
Lastly, like stock values, home values fluctuate as well. But House FIRE is not in the buying and selling homes business, it's in the buy-and-hold rental business. And rental values don't fluctuate as much as home values.
A house worth $100,000 may rent for $1,000 a month. If in five years that house is worth $50,000 after a housing crash, that doesn't mean the rent goes down in half as well to $500 a month. If anything, a housing crash creates more renters and more demand and so that $1,000 in rent is pretty stable. Plus a 12-month lease term on properties typically means there is up a year long lag on any price corrections.
If a pandemic hits, the government provides mortgage relief and mortgage deference programs to homeowners and small resident investors. It does not provide stock relief programs to individual investors if the stock market crashes. I'd argue it should provide neither as it's investing after all, but a housing crisis has a bigger effect on the economy than stock market meltdowns so there seem to be more government handouts in real estate emergency situations. Not a security blanket to count on, but it is worth mentioning.
After this explanation of House F.I.R.E, I usually get a litany of horror stories of primary homeownership tales of how someone lost money on their home or lost their home entirely. Yes, this happens more frequently when a house is purchased based on primary residence living criteria or purchased with variable rate mortgage instead of a stable fixed rate mortgage, or it can happen with a loan approved entirely on your day job income. If you lose your day job, then yes, all finances get tight. If a once desirable neighborhood experiences a downturn, the home prices plummet and it turns into a rental neighborhood. Rental property neighborhoods, however, usually experiences the opposite, it goes up in value over time as it because more attractive to primary residence buyers. Typically primary residence buyers will always pay more for a home and an investment home buyer.
Remember, you buy a house you live in based on personal choices: school system, commute to work, neighborhood amenities like a pool, basketball court, near park or coffee shops. And you also get approved on the purchase based on our day job income. This is different than when you buy a real estate investment property. An investment property is a spreadsheet decision, not a lifestyle decision. Part of the lending process is to see if the property pays for itself and your decision to buy is based on the same criteria. In up and down markets does the rent cover all the expenses? It's a yes/no decision. Not a lifestyle decision on if it makes sense for you and your family to live in the property at this time.
An investment property lending criteria considers the income the property makes for itself, and that is why it's like buying a small business. Real estate investing is actually safer than primary residence buying since it is not directly tied to your day job income, but I'll save that blog post for another day as well.
And once you retire early using House F.I.R.E, you get to find ways to get "free" toys like a new boat, exotic vacations paid for, or even how House FIRE can help buy you a new Tesla as explained in this video:
So there you have it, House FIRE is the fastest path to early retirement and financial independence. House FIRE is the safest path to early retirement and financial independence. And lastly, House FIRE is the most lucrative path to both early retirement and financial independence.
Again, I've practiced and accomplished other FIRE methods and I stand by House FIRE as the best method if you want to achieve early retirement and financial independence quickly, safely, and also not be forced to live on a constrained budget after you leave your 9-5. More info to be found all over this website, so go learn all you can to get started on House FIRE today.