Financial Freedom: Rent Out Expensive Use Inexpensive

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

June 2005

Financial freedom is desired by most, if not all, and where achieved, work becomes a choice. Notwithstanding more vigorous definitions, financial freedom exists when a certain desired level of living standards (quality of life) can be (more than) maintained with passive income from passive investment.  

Perceptually, high-income earners can achieve financial freedom faster and / or easier than low-income earners, though this may not always be the case in real life situations. A book your humble author had read years ago profiling USA millionaires suggested that while earning a high income certainly helped toward achieving financial freedom, many millionaires in the study tended not to be the most educated, nor were they engaged in the more glamorous professions earning top dollars. If anything, they led a simple lifestyle = earn a decent (but not necessarily top) income, spend less than what is earned (save more), and invest wisely. This naturally did not get them into newspaper headlines but financial independence instead. 

The following are a few real estate suggestions that may help in achieving financial freedom (or independence as some would like): 

A)     Live in the least tolerable home and / or rent out the better or expensive ones = where personal or family circumstances permit, financial freedom may be achieved sooner IF 1) one opts to live in a home that is ”„least tolerable”¦ (but still being within the tolerated range) despite having sufficient ability to buy and own a much better and expensive home i.e. if one can afford to live in a 3,000 ft2 home but opts to go for one that is half the size instead, and save the rest of the fund for investment, real estate or otherwise; and 2) one opts to use the less expensive property for him / herself and let out the more expensive one(s) which command higher rents thus procuring income for investment.

B)     Acquiring a portfolio of properties is generally preferable to putting all funds into one single property where funds permit = unless one considers the single property to have even better return and risk parameters than a portfolio of properties. A portfolio offers certain advantages. First, the investor-owner does not need to depend on one single tenant. Second, the investor-owner can have some flexibility in terms of changing-adjusting (via property disposition, acquisition, portfolio reduction, or expansion etc) the portfolio to suit his / her latest investment strategy.  With one property, the investor-owner has only 2 choices of either being in the market or out of the market.

C)    Properties spread across different economic zones or geographical regions = where circumstances permit, it would be better to have the portfolio of properties allocated in different economies / markets / sectors / locations etc. First, the risk factor may be somewhat reduced where well-planned and researched, and second, the investor-owner may take advantage of and potentially arbitrage between the different interest rates, currency strengths, and the like that exist across different economies.

The above offers no quick fixes but could be part of a disciplined approach to personal / family financial planning and investment with a view to achieve financial independence within a reasonable timeframe.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.  

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