How We Use Real Estate Investment To Travel Full Time

Reading time: 10 minutes

Louise and I generally tend to try and keep things travel related on our blog, because generally speaking, people read travel blogs to get travel information.

But, there now seems to be a growing interest in how travel bloggers can afford to travel full time. For any aspiring professional travel blogger, or anyone that wants to escape the 9-5 rat race, these types of blog posts are a great source of information and inspiration.

However, I’ve noticed that none of them ever seem to diverge from the same few sources of income. Those are generally the following:

  1. Affiliate income
  2. Ad revenue
  3. Freelance remote work
  4. Lightroom presets/online courses
  5. Books and ebooks
  6. Photography/influencer work

While we do use these methods ourselves, and they do make up a large portion of our income, there are a couple of things we do to make passive income that aren’t on this list. I’ve always found it strange that these other methods aren’t generally listed, but I think I’ve narrowed it down to 4 main reasons:

  1. All of the methods above embody the digital nomad dream of creating a travel blog that pays you every month, working remotely and getting paid to travel. Investing in financial products isn’t as sexy or a particularly new revelation.
  2. Most blog posts by travel bloggers talk about ‘how to fund your travels by travel blogging or related products’, rather than ‘how to make enough money to travel full time – by any means.’. To me, those are two very distinct subjects, but the key to both is is creating consistent sources of passive income.
  3. The methods above don’t exclude any readers. The passive income streams above aren’t investments in the ‘traditional’ sense of the word because they require only a modest financial investment (camera gear, websites etc), which only indirectly pay out. Most of the typically referenced ‘blogging sources of passive income’ are built through blood, sweat and tears and require barely any financial investment at all, other that your time and effort.
  4. There’s a weight of responsibility that comes with recommending financial investments, and most of the time, we try to avoid responsibility. Come on, we’re travel bloggers!

So that’s why you might not have seen anything about real estate on a travel blog.

What is passive income?

Ok, so what is this buzzword, ‘passive income’?

Passive income comes in many shapes and forms, but in all cases, it is a source of income where you have to do little to nothing, and the money still comes in every week, month or year; rain or shine.

In most cases these streams of passive income require a massive investment of time, energy or money at the beginning to get them up and running, but once finished, you can just sit back and watch the money roll in! (ideally)

That then frees you up to travel, hike, ski or whatever you’ve been itching to do!

Trying to create passive streams of income

From our point of view, figuring out a way to earn passive income was always our biggest priority. We wanted to find a stress free way to consistently bring money in each month without having to think about it.

Skiing on weekdays to avoid the crowds!

We also wanted to take some of our shakier sources of income (unpredictable contract work), and invest them in a much more stable revenue stream that would pay us, week in, week out.

We did a lot of digging around, and eventually, our lightbulb moment happened when we were introduced to Real Estate investment!

And that’s exactly what we’ll be talking about in this post;

How investing in Real Estate can be an incredible source of passive income and allow you to travel full time

Ok, that’s cool, but Real Estate is too expensive for me

Now, I know you’re probably rolling your eyes right now, thinking, “ya, we’d all love to invest in real estate if we had the money!”, but please, hear me out before you click away.

By the time you finish this blog post, I hope to have you convinced that it can actually take a LOT less money and expertise than you might think to get onto the real estate ladder. I should also have you convinced that real estate is an absolutely incredible avenue for creating passive income.

Bold claims, but we’ll back them up with a few real numbers from our own investments.

This is not a sponsored post

Before we dive in, I want to make it abundantly clear that this is not a sponsored blog post trying to get you to sign up to some sort of sneaky financial product, and there are no affiliate links here.

This is a post about our real experiences in real estate as travel bloggers, with the hope of inspiring a few more of you to take the leap and move towards financial freedom and the ability to travel full time!

Having said that, we will use a disclaimer; nothing in this post constitutes financial or real estate advice. Please consult a real estate professional or financial planner before you make any decisions. Investment in real estate carries some considerable financial risk, so weigh your options carefully before you do anything.

Real Estate Investment as a Revenue Stream

Now when it comes to real estate investment, there are a few prerequisites to get your foot in the door.

  1. Some savings for a down payment
  2. A decent credit score to qualify for a mortgage
  3. A job or proven self employed income (again, for mortgage qualification)
  4. Common sense

And that’s about it!

Real Estate Investment for Passive Income? Flipping vs. long term buy and hold

Long Term Buy and Hold

Ok, when we talk about investing in real estate, we’re not talking about buying and flipping houses. Flipping houses is a risky business. You have a lot of potential for quick gains in property value, but at the same time, you’re also risking short term market fluctuations that could sink you.

When you buy and hold, house prices almost cease to be relevant. They’re only useful in figuring out your Cap rate, which is essentially a measure of your annual rental income as a percentage of the purchase price.

When we talk about real estate investing, particularly with regard to passive income, we’re talking about long term, buy and hold rental properties.

Yes, the idea is to find a property that you can rent out for the next 25 years while someone else (your tenant) pays all your bills every month. This is making use of the famous OPM principle (Other People’s Money).

Ideally, every month you’d also make a little profit on the top as well. But if some years you don’t, then it’s not the end of the world because at least your bills are getting paid and your equity is growing.

How much are you likely to make each month from a rental property?

Well, to be honest, it really depends and varies a great deal depending on the property you’ve bought, and that’s why the research beforehand is such a big deal.

As a first investment, I’d say you should go out looking for a property where the rent will cover all of its own monthly bills at the very least (even in a down market).

via GIPHY

Running the numbers

To find a good rental property, you have to run the numbers. Here are the first qualifying steps I would taken when looking for a property:

  1. Find an approximate rental rate for a property of the same type in the same area. If you’re looking for a condo, look for other properties in the same building. Rentfaster and Kijiji are great places to find these rates.
  2. Find comparable property prices in the area to find out a fair price for the property
  3. Get an estimate of all the monthly fees for the property; condo fees, property taxes, utilities, internet, mortgage payments (based on current mortgage interest rates) etc.

Working out the Capitalization Rate:

The next step, for us, is to work out the property’s capitalization (cap) rate. The cap rate is a crucial qualifier for property investment, and is basically a measure of a property’s income against how much it costs.

A cap rate is essentially a measure of your property’s annual income as a percentage of the total purchase price.

A good rule of thumb in general is to look for properties with a cap rate between 8 and 10% (when looking for rental properties). Remember, you’re buying a rental property for its monthly return and nothing else. You could buy your own, forever home at a much lower cap rate, because income isn’t as important, but when buying a rental property you need a high cap rate to insulate you from rental market downturns.

Properties with cap rates between 8 and 10% are very hard to come by. Believe me. But they do exist! Keep looking until you find something in that range, or very close.

In summary, the lower the cap rate, the less likely your property is to cash flow each month.

The cap rate is calculated by the following formula:

Capitalization Rate = ((monthly rent x 12) / total house price) x 100

via GIPHY

The ideal situation

The ideal situation is that you’re able to cover all your bills each month AND make some money on top, however, even the best properties may have bad years where the rental market rate dips below what you have to pay each month. This is why it’s so important to start with such a big buffer (a high cap rate).

BUT even if you’re only breaking even or taking a small loss, you have to remember, someone else is paying your mortgage every. single. month. This is the cornerstone of the OPM principle.

That means in 25 or 30 years, someone else will have essentially bought you a house!

Even if you can’t spend that money today, you’ll certainly be able to reap the profits from selling it once you own it outright, and you can always pull money out of it once you’ve accumulated enough equity.

Looking to the long term

The other thing to understand about these investments, is that even if there’s a relatively small payout today, your monthly income will increase by several orders of magnitude once the mortgage is paid off. That means, hopefully around the time you retire, your entire mortgage payment today will go straight into your pocket.

A buy and hold strategy really requires you to play the long game, but if you choose the right property you can also benefit each month as well!

An example from our personal investments

I’m going to use our first rental property as an example because it’s important to show that we’re not just making this up as we go along. I’m going to use the real numbers to show how ridiculously good an investment can be if you look hard enough.

I also want to show you the numbers because quite often people write off real estate investment as something for wealthy people. I want to show you just how little we needed for our first property and how easy it can be for you too.

It should also dispel a few myths about how easy it is to make a LOT of passive income quickly, particularly if you’re starting out with a cheap property. We’re playing the long game here people!

After all, the lower the rental income, the less you’re going to make each month. From my perspective though, it’s better to chip away and buy one small investment at a time, rather than putting all your eggs in one enormously expensive basket.

Ok so here goes:

Property purchase details:

  • 1 Bedroom Condo close to downtown Calgary
  • Purchase price: approximately $160,000 CAD
  • Downpayment: 5% with government first time home buyer deal – $8000
  • Mortgage rate: approx 3.6%
  • Payment each month: $690
  • Rental income each month (furnished): $1350
  • Net income after utilities, property tax, condo insurance, internet & tv license, condo fees: $200

Cap rate: approx 10.1%!

(Bear in mind that there were also several thousand dollars worth of legal fees required to actually close on the property)

So as you can see, this tiny, yet cheap condo has been an amazing rental property for us. It doesn’t make us a ton of money each month, but it also cost us a staggeringly low down payment. If you work out the equity we accumulate each month from the mortgage (paid by our tenants), our annual return on our initial investment (ROI) is currently around 50%, and every year that increases as the interest payment decreases.

Reinvesting the passive income?

In addition, if we take some of that monthly cash flow each month and reinvest it into our mortgage each month, we shave huge amounts of time off the mortgage AND reduce the total amount of interest we pay over 25 years.

BUT, my general feeling towards paying down properties faster is that you should do that on your primary residence, because you’re the one paying your interest.

I don’t think it necessarily makes as much sense with rental properties. I prefer to let our tenants cover the extra interest over the years and keep the extra income as passive income. After all, they’re paying all the bills anyway, why give myself a monthly expense? Having said that, you can save hundreds of thousands of dollars in interest by paying down a mortgage quickly.

Another thing I should mention is that although $200 cash flow per month doesn’t sound like a ton of money, once the mortgage is fully paid off, the income will jump to $900 per month. Suddenly that’s not a bad chunk of walking around money anymore. $900 per month of passive income is nothing to turn your nose up at!

Taking out equity and reinvesting

The next stage of the passive income puzzle is reinvesting the equity into another property with a Home Equity Line Of Credit (HILOC). After a few years, you’ll have paid down a fair amount of the property, and should be able to draw equity out of the property and invest it into another property that cash flows. This creates a snowball effect that allows you to gradually grow your passive income and equity exponentially.

A word on timing and interest payments

The worst thing about mortgages is that time matters. In all mortgages, the interest is heavily front loaded. This means that in the first 5 years, the majority of your payments will be going towards interest. This also means that most of your gains in equity are from year 5 onwards.

What does that mean for your investments then? It means that the earlier you can start, the better. The sooner you can pay down those first 5 years of interest, the faster you’ll start making the big bucks (in equity, that is).

Takeaways from long term real estate investments

So, without going into too much detail, I hope I’ve given you some new ideas about potential ways to diversify your income streams and hopefully have inspired you to start looking for deals, no matter what your budget is!

If you’re travel obsessed like us, then the ultimate goal is freedom, not extreme riches. Or in other words, we’re following the FIRE movement (Financial Independence, Retire Early). Passive income is easily the best way to achieve that.

Let’s have one final recap of the things we’ve discussed in this post:

  1. Passive income is an amazing way to pay yourself effortlessly each month
  2. Passive income takes some time, effort and investment to set up but once it’s ready it can make a huge difference to your life
  3. Passive income can give you security for when times are tough (case in point, COVID-19).
  4. Real estate doesn’t have to be crazy expensive to get into. In fact, from our experience, the best rental investments tend to be the cheaper properties because rent doesn’t drop proportionally with house prices. Bear in mind though that cheaper properties come with their own sets of issues/problem tenants.
  5. Real Estate can be a great hands-off investment that gives astonishing returns. All it requires are patience and research.
  6. Using other people’s money, you can grow a sizeable portfolio with fairly limited risk, particularly if you’re not planning to sell the property any time soon and just want to use it as a rental property.
  7. The best time to invest in real estate was 5 years ago, the next best time to invest is right now!
  8. Don’t buy the most expensive house you can afford, consider chipping away at cheaper properties as your income grows! Remember, you’re not living in the house, it doesn’t have to be the most beautiful house you’ve ever seen. Run the numbers and make your decision from there.

As always, I’d love to hear your feedback about this, particularly if you’d be interested in a few more detailed posts on the specifics of real estate investing.

Is a Vacation Home a Good Investment?

Yes and no, but if you’re buying it for its income potential, you should really view it as any other investment property. If you feel like you’re going to want to stay in it for the best 3 weeks of every year, then this really shouldn’t be viewed as an investment property, or you should pay yourself every time you use it.

kupu kupu barong hotel

Why Believe Us?

Louise and I have been landlords for over 5 years and between us have invested in several rental properties. We have a good grasp of the upside of being a landlord, as well as plenty of experience when things go very wrong. As a result, we feel that we have enough expertise to speak candidly and truthfully about the merits of real estate investing!

You might not believe it, but back in the day I also received my Masters in Real Estate from the UK, and worked in Commercial Real Estate early on in my career, so I suppose you could also say I have a pretty good understanding of the finances involved with real estate investing too!

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