Real Estate Changes the Math of Financial Independence and Early Retirement
Introduction
One of the greatest challenges investors will face is knowing where to begin their retirement planning. Let's just say that real estate changes the math of financial independence and early retirement in ways, unlike any other alternative investment vehicle. Financial advisors have been teaching the 4% rule to plan for retirement for years, and it is time to let it go forever.
You may be thinking that's great, but what is the 4% rule? Let me break down this horrifying idea for you. You'll understand why it is alarming in just a moment when you realize that you're aging faster than you can possibly reach your goal. The 4% rule is a plan best started as a young person, and if you're like me, your youth was not spent planning for your future or maybe not quite enough.
* IMPORTANT NOTE: Before YOU read further, be sure to read this entire article. The most exciting approach is revealed in the last section. For now, I'll lay the foundation where most people begin which will help provide some clarity.
4% Rule
The 4% rule for retirement has to do with how quickly you draw down your savings account. The idea is to avoid running out of money in retirement. It states that you can comfortably withdraw 4% of your savings in the first year of retirement and then make inflation adjustments in subsequent years. By following this plan, you'll have enough to live on for at least 30 years without the risk of losing it all.
Wow! If that isn't a fear-based tactic for financial advisors to lure people into investing in highly risky portfolios, where less than 4% of money managers beat the market, I don't know what is. Dollar-cost averaging is where money managers get us sucked in. Don't get me wrong, it is a clever way to play the market, but it doesn't factor human emotion into the equation.
Dollar-Cost Averaging
This is the approach most financial advisors give to w-2 employees with a limited amount they can invest each month. Over time, as the investor's income grows, so does his / her monthly investment. It becomes habitual.
The basic premise of dollar cost averaging is actually very good. It says that you take a set amount weekly, bi-weekly, or monthly and invest it. With each investment, your purchase price will be different, some higher and some lower. Ultimately, the cost will average out in your portfolio producing good returns around the 8-10% mark over time (many years).
In fact, I've heard many novice investors look at the market the same way institutional investors like Warren Buffet look at it. When the market crashes everything is on sale. It's time to buy.
Institutional investors don't only look at buying at discount. They buy value. That's a big difference to understand. When a stock is losing value, you have to look at the fundamentals of the company and understand why it is losing value. Poor leadership, bad product line, dated technology? Blockbuster Video was the King of video rentals in the 80s and 90s and they disappeared almost overnight when Netflix knocked them out. They didn't adapt which cost them and their investors.
Emotional investors would have seen the value of Blockbuster dropping thinking it was just a market fluke and dollar cost average their way to a bankrupt Blockbuster, who went out of business leaving their investors out in the cold. Their loss was 100%.
Dollar-cost averaging can be a great strategy, BUT it must be met with sound investment decisions.
Why Real Estate Changes the Math
First, let us define real estate clearly. Is it flipping houses? Is it single-family rentals or air b and b's? Is it self-storage? Maybe it is small multifamily four plexes and duplexes? Maybe it's larger apartment communities? Maybe land? Is it commercial real estate?
Real estate is a hard asset versus a paper assets like stocks and bonds. Hard assets are tied to tangible assets that maintain and grow in value over time. Real estate is unique in how it can be managed to grow in value with an owner/operator's inputs directly impacting the value.
Real estate can do several things to change the math for your retirement planning. So first let's look back to the 4% rule.
If you wanted to retire with a $5,000 per month income to replace your current income we'll figure out how much you need to save.
$1500 - $2000 per month social security
$3000 - $3500 from savings monthly = $36,000 - $42,000 per year (we'll assume the higher for the 4% rule)
$42,000 per year / 4% rule = $1,050,000
You will need $1,050,000 in your savings on your first year of retirement
Simple math right? What if you're in your late 40s or 50s and don't see how you can save enough for a $1,050,000 retirement savings? What if $5000 is not enough to live on 15 years from now and inflation pushes my cost of living to $8000 per month? Now what? That million might look sexy on paper, but it won't cut the mustard to give me peaceful rest in my golden years.
Real estate changes the math.
I have a client who started buying fourplexes in 2017. Today, he has 10 buildings. Those 10 buildings generate approximately $16,000 per month after debt service for him & his partner. This portfolio was purchased over 5 years.
Real estate created opportunities for them that they didn't realize when they started. They've been able to invest in other opportunities creating even more income. Better yet, real estate saves them a lot of money on taxes due to the IRS's favorable position on passive and active real estate investing.
The portfolio value if it were to be liquidated today, would be worth approximately $3.1 million after paying off the debt. That was accomplished in less than 5 years!
Another example is a four-plex I bought in 2019. We actually overpaid for it - intentionally... We only owned it for 18 months. During that time, we had a positive cash flow of $800 per month for 14 of the 18 months (due to some repairs & vacancies). We sold it for a 296% gain on our initial investment in 18 months.
Most would not have overpaid. When you understand real estate math, it defies all logic. And yet, it is simple once you get it. That's why more than 90% of millionaires hold a large percentage of real estate in their portfolios. Many millionaires credit their wealth to their real estate holdings.
Now our 296% gain is reinvested into additional real estate.
Are you getting the idea of how real estate can change the math of your retirement planning?
Income Vs. Savings
In the previous sections, we've seen the difference between saving your way to retirement and buying income for retirement.
A person with $50,000 - $100,000 in savings has more than enough to create a massive shift to their retirement lifestyle. If you are younger, you may be able to leave that job you dislike sooner rather than suffer through for the next 30 years.
When you shift your thinking to purchasing income for the long term, it is easy to see how your position can change very quickly. It's easy to see how your lifestyle can dramatically change in a very short period.
If you were to invest in a $350,000 fourplex today, the bank requires a minimum down payment of 25% = $87,500 plus closing costs put you around $100,000. If you don't have that kind of cash lying around, then grab a friend and partner up. Do it together. Eventually, you can do it on your own.
Take your positive $600 or $800 per month and reinvest it in more real estate. If you're already saving money from your W-2 job, put it all together and raise more. It will take a little while to see the momentum build. By the time you have 5 of these in place, you'll have $3000-4000 per month of income being generated by your multi-million dollar portfolio. You can do this in only a few years vs. saving $500 - $1000 a month for 30 years.
Yet Another, Even Easier Approach to Real Estate
Get your real estate DONE FOR YOU. What does that mean?
Imagine working in collaboration with professionals to build a portfolio of over 1000, 2000, and 10,000 apartment units worth hundreds of millions of dollars or even billions.
Out of reach for you? Maybe not like you think.
Apartments are most frequently bought through an investing approach called syndication. There are 2 partnership LLCs in the deal. The first is the general partner and the second is the limited partner.
Each of these partners may have multiple members involved. Let's look at what they each do.
GENERAL PARTNERS: These are the team of individuals who actively work full time (their job) searching for deals, negotiating with brokers/sellers, and taking on the debt liability to put these syndications together. Once the deal is closed, they then manage the asset to their business plan and provide a return on investment for the limited partners and themselves. They usually retain 30-50% of the ownership in the deal in exchange for the work they do to create the opportunity and manage it.
LIMITED PARTNERS: These are the investors in the deal who invest passively and collectively. Consider a $40,000,000 apartment complex being out of reach for most people. When $15,000,000 of investable capital is needed to close the deal, general partners will provide offerings to the limited partners who buy shares in the partnership, usually in $100,000+ blocks. A deal of this size may have 100-150 limited partners who may never know one another.
The limited partners receive monthly or quarterly distributions for income as well as all the tax benefits of owning real estate without all the management hassles. This resembles investing in the stock market as it is a passive investment strategy.
The difference is that real estate is a hard asset vs. a paper asset. Hard assets rarely if ever lose 100% of their value. When done right, they rarely lose value (and be aware that they can lose value like anything else).
NOTE: It is important to note that syndications are NOT the same as a REIT (Real Estate Investment Trust) that sells stock in a company that invests in real estate. REITs are stocks tied to real estate. Syndications are fractional ownership in real estate.
Example. Let's say you have been diligently saving for 15 years and you have a stock portfolio with an average growth of 8% annually. There is no income other than dividends paid out (if any). It grows only based on the investment you have locked in. You've been able to successfully reach $200,000 in savings for retirement through paper asset investing. 8% annually is $16,000 of growth in the paper.
Now let's say, you were to re-allocate those funds to a syndication deal. (It's only scary if you've never done it). The syndication pays a preferred return of 8% annually (DIRECT pay to you cash flow) AND offers a 16% - 20% average annual return over a 5-10 year period. In addition, you will be able to see depreciation on your tax returns that may offset the income leaving you with a reduced tax obligation.
Wait, in addition to these benefits, the syndication group plans to refinance the asset in 3 years to return 80-100% of your initial investment while keeping you "invested" in the deal. You've received your money back in a non-taxable way to reinvest in another deal. While you're moving your money to another deal, it is still working in the initial deal as you still own the position until the asset is sold by the general partnership team. Your money is working for you after you got it back.
It is a great strategy that is changing the way people look at their retirement and future planning. There is so much more we can go into on this, and there are many more benefits. The math of real estate is changing lives and our goal is to provide hope for a better tomorrow for as many hard-working people as we can!
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Yes! I understand syndication and would like to change the math in my retirement planning.
Simply look into some of our offerings at www.groundswellassets.com/invest.
