Define financial independence yourself!

I’ve defined what financial independence means to me – but you should define it yourself.

Steal my ideas, by all means – but don’t feel pressured by them.

“Your strategy isn’t really passive…”

The other day I was wasting time profitably browsing various Financial Independence forums and Reddit and so on. Something caught my eye: a post had been lodged by someone who is already a buy-to-let (presumably, residential) landlord. Their plan was to live off the rental income from their properties, and use the capital growth (i.e. the house price rises) to pay down deposits on more buy-to-lets.

You use the houses to buy the houses..?

This is a strategy that I’ve seen mentioned a few times in general investing blogs, books and YouTube videos. The basic idea is that the house prices rise over time with inflation and/or demand. You, as the owner, then remortgage the property so that you take out a bigger loan against the house than you had anyway. This can be a tidy chunk that you then use as a deposit on the next buy-to-let house.

Obviously, the more properties you own, the less time you have to wait for growth on each property. You can skim off capital growth from all of your houses/ flats/ garages/ whatever, so you generate a big deposit pot quite quickly once you own a couple of properties.

This strategy is often used with interest-only mortgages. That’s because the liability (i.e. what you owe) stays fixed, your income as landlord stays fairly constant, so it’s only the equity in the property that moves with house prices. Debt secured against property is really cheap and rents will cover interest payments by quite a long way. This makes chances of you taking a loss over 30 years pretty small.

Never zero, though – in investing, nothing is guaranteed nor risk free.

There is a variation where you Buy, Refurbish then Refinance a property to take out your investment capital – but that’s something for another time, and it isn’t something I’ve done before. It might be worth a search on Google if you’re interested but be warned: there’s a lot of conmen in property investing.

Disadvantages of this strategy – i.e. why I haven’t done it

There are some obvious disadvantages to buy-to-let investing being your primary strategy for financial independence:

1. You need to start with a big pot of cash for that first deposit. How are you going to raise it, if not by saving? What’s the opportunity cost of saving vs. the possible investment returns?
2. If this is your main investment, you’re not well diversified.
3. What if the banks just say “no” to new mortgage lending when you apply?
4. Property investing requires some knowledge and judgement. What if you choose the worst possible properties, in the worst possible locations, and they become effectively worthless over time?
5. You need to manage tenants, banks, letting agents and maintenance, plus account for them in your tax return. This requires a bit of skill and effort.

That said, this is something I’ve considered doing in the future. Markets rise and fall, but rental yields are likely to be reasonably consistent sources of income for the foreseeable future, and tend to be reviewed regularly to keep up with inflation.

I’m not sold yet, though. At the moment, it would pretty much put my investments largely into one single property. That doesn’t really fit with my investing strategy, but maybe in a couple of years that will change.

Why this person should define their own financial independence

The post received quite a lot of criticism on the forum. “This isn’t passive!” was the general gist.

Fair enough, you can’t exactly sit on a beach sipping Mai Tais 24/7 if you need to occasionally check up on your properties and arrange some minor works. You can definitely do this with a portfolio of ETFs.

However…

…the poster had already shown that they had the skills to make this work and – most importantly – they said they enjoyed doing it. This isn’t a chore to them, it’s almost a hobby.

By my reckoning, if you’re earning your own money from your assets that frees up most of your life and you’re never having to work again, you’re financially free. Worst case? The poster could sell the properties and go back to less hands-on investments. Good on ’em!

The lesson for us all

This kind of gatekeeping isn’t unique. I’ve seen similar refrains along the lines of “it makes no sense to pay off your mortgage”; “index funds are all the diversification you need”; “you can’t call it FIRE if you’re only giving yourself £12k a year to live on, call it lean FIRE!”.

Nonsense.

I genuinely know someone who lives primarily off the income from their stablecoin crypto portfolio. That’s too risky for me, I like a bit more diversification; but you know what? He’s financially independent. Good on him, long may it continue.

If you want to follow the tried and tested route of buying index funds and cost averaging, I say go for it. It’s tried and tested, the risk is reasonably low as long as the market remains buoyant. If you’re short on ideas, it’s a great tactic and shouldn’t steer you far wrong.

However, if you’ve got an ambitious plan that does something a bit weird – that’s cool, too. Own your risks, be happy in the life that you choose and the decisions you make. Perhaps you want to buy the biggest property you can afford and get into house hacking? Maybe you want to live in a caravan for a few years and rent your home out? It’s all good.

Finally: don’t put your weirder plans on the internet for validation. It’s not always a nice place out there.

My own definition of financial independence

I don’t necessarily want to stop working. Well, not really. I really enjoy my little side hustles, they give me a dopamine kick that I don’t get from work. I have no intention of stopping little projects like that when I hit coasting FIRE.

That’s actually part of the reason I’m aiming for coast FIRE. All I want to do is remove the routine, “need to” work, and just take up projects and jobs that I find interesting. There are a lot of other ways I can earn money for luxuries.

I’ll consider myself financially independent when my basic bills are covered and my pension can be left to its own devices in the background, so that I can just do the little weird jobs that don’t pay well.

The question for you…

The real question is: what does financial independence look like to you?

What brought you here, apart from curiosity? If you had freedom and time, what would you do with it?

Once you have that answer, then you can work out how much of a hands-on / hands-off approach you’re going to need. You can define financial independence for yourself.