Investing in real estate is not a scary as you have been thinking, and with a little bit of understanding and planning it can become a path to wealth.
Over 20+ years ago my father-in-law, a real estate broker, gave me the basic vision for investing in real estate (or as I like to call them now – my 401k’s).
I was working for Pepsi-Cola at the time and my father-in-law asked me what life would be like after working for a large company for 40+ years and at the end of that time period the company declared bankruptcy or my 401k was dissolved or anything else beyond my control. Similar to the stories of many from companies that altered pensions like Enron, Delta, IBM, EMC2, etc., etc., etc. Well, I had never given it a thought until then, and the thought was that it could very well happen to almost anyone at any company. So I asked, “what could I do about it?”
Dad explained the basic concept or vision to me which I will repeat for you here.
Dad asked, “what if you bought 10 rent houses by age 35?”
HA! I lived in California at the time and could not (or so I thought) even buy myself a place to live.
Dad continued with the vision. “Let’s say each house costs $100K and you buy your last one at age 35 because with a 30 year mortgage it will be paid off (by someone else) at age 65 when you want to retire.” “So, what is your net worth at age 65 with 10 rent houses paid for after 30 years at $100k each (assuming NO appreciation)?”
Uh… $1 million!!!! I blurted. Wow! could that be right? Yes, I was correct.
Dad continued to ask questions. “If you had $1M and you put it in the stock market, would you sleep well at night?” “What type of income could you get from that without reducing the principal?” Then he continued to explain, “let’s say you invest in some preferred shares at 4-4.5%, now your semi-secure money is spinning off $40-$45,000 a year of tax disadvantaged income (meaning that after taxes maybe you’ll have $28-$32,000).” “Can you live on that?” “Ummmmm, probably not,” I replied.
Dad continued, “what if you kept your 10 rent house and each one generated $800 a month?” I added up quickly that was $8,000 a month, because you would own 10, and I quickly calculated that meant $96,000 a year!
So, Dad asked, “Which retirement plan sounds better to you? $28-$32,000 a year of tax disadvantaged income or $96,000 of tax advantaged income?” (more on tax advantages in another blog someday).
WOW! I caught the vision and I hope you have too. Granted this is simplified and real estate investing is not truly passive investing, but hopefully you can understand the power of cash flow and why you would want to work it into your retirement plans.