Real Estate for Real Wealth

The most reliable way to make money is to earn it. However, this is a difficult path to building long-term wealth. There are some careers that predictably allow for it, but they still require sacrifice, dedication, and time. Wealth is different from riches. Wealth permits financial security and freedom of choice. Riches are an excess of wealth typically available only to CEOs, professional athletes, famous actors, successful musicians, and somehow, politicians.

The Bible strongly cautions against pursuing money for its own sake. It also has a great deal to say about generosity and the obligations wealthy men have to their communities. There is nothing inherently wrong with building wealth. As a matter of fact, I strongly encourage it. You can have a strong faith in God while using the abilities he has blessed you with to be fruitful and multiply your productivity. More wealth leads to better opportunities for more people, especially your own family.

I spent the majority of my working life in the military. I never intended to make it a career, but was hit by the stop-loss in 2005 for a yearlong deployment to Iraq. I am now a few months away from retirement and am very glad I decided to stay. There were some tough years, but overall it worked out well. I gained two very lucrative skill sets and there are few retirement packages that compare: 50% of base pay and free medical coverage for you and your spouse starting the day you retire. Children are covered until age 21 or up to age 24 if in college. Not having to factor in the rising cost of healthcare in my financial plan has had a massive wealth building effect.

I also did not have to save for retirement, so spent my 30’s supporting my family and putting any extra income into paying off my personal home. In 2013, we were going to open a business and refinanced the equity out of our home for the 25% necessary to obtain the loan. In the end we decided not to pull the trigger and had the cash on hand to either invest, or put back into the house. Considering the opportunity cost, we decided to invest in several rental properties. It was one of the best decisions we ever made and I regret not doing it much earlier.

In 2014, our first year, we paid cash for three foreclosed properties. We remodeled them and did a rent-to-own on one, rented one, and flipped one. The rent-to-own has reached its term and he is currently obtaining the financing to purchase. Total three-year profit is $57,000. The second one we rented for three years and then sold and purchased two less expensive rental homes, which increased our monthly cash flow by $500. The third one made $22,000 on the flip. Long story short, four years later we own eight single family homes and will have them all paid off next year with an after expense cash flow of $6,000 per month. I am not sharing this to boast, but to excite you to action. If you are interested in more of the particulars, you can email me or ask questions in the comment section.

Now many of you are not going to receive a pension, disability, and free health insurance, and I understand that, but much of what I have to say will still apply. We had the equity on hand to start our real estate investing, but you don’t need $360,000 to get started. Realistically, you can get into your first property and rent it for about $25,000; that includes the 20% down payment and repairs. You can do it for less by purchasing a cheaper home of course, but we buy three bedroom, two bath, one or two car garage starter homes with or without a bonus room. Most banks offer investment loans of 80% for 20 years at 5% APR. There are other creative ways to obtain financing and homes, but I prefer the most reliable and honest course of action.

That process generates approximately $400 per month cash flow per home (it doubles when paid off) and a 19% annual rate of return on your investment. Plus, on average, there is $30K in equity built-in due to buying them as foreclosures. This starts a powerful wealth-building tool I call OPM: Other People’s Money. I don’t know of a faster way to build long-term wealth than having someone buy me a house every eight years. I really appreciate them donating $110,000 to my net worth as well as the perpetual cash machine. We save a lot of money by doing most of the remodeling ourselves. It takes a little know how and there is a mild learning curve.

Everyone should own rental properties as part of their diversified wealth building portfolio. The returns are immediate. No waiting until your 60’s to begin drawing money. The risk is low. If you don’t stretch yourself thin on margin (greed) and the economy tanks, you can lower your rents but still own a tangible asset. The income is passive. No paying social security or Medicare taxes on it. It is a huge tax shelter. You can deduct all expenses, taxes, insurance, interest (if any), and you can depreciate them over 27.5 years. You can leverage them. Once you have one paid off, you can replenish your investing money with a line of credit and move to your next one. And finally, you recoup your initial investment quickly and then someone kindly gives you money each month.

Most millionaires in America own real estate. You must have a source of passive, unearned income in addition to your paycheck. Not only does it increase cash flow, it increases net worth. My initial goal was 10 properties and four times my monthly expenses in passive income by age 50. I will meet that objective in two years right on schedule. I had initially planned to retire completely. Although I will no longer work in medicine after that, I will continue to purchase two more rental properties each year. At twenty, I will pass them to a property management company to oversee. I mentioned in a previous post that at a certain point, more wealth doesn’t increase your happiness. However, excess income has to go somewhere as you can only spend so much, so it is wise to continue to grow it for your children.

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Financial Samurai has excellent advice on IRA, 401k, stock, and bond investing. Those are beyond the scope and intent of this article. Financial freedom is incredibly liberating. I am excited to have nearly bought back ALL my time. Soon, I will never again set an alarm clock, leave the house early for work, and earn money for someone else. I hope you take the advice and get started in real estate. Good luck and share your experience in the comment section.

P.S. I am well aware of the “terrible tenant” excuse for not taking action. We have had to evict one tenant in 4 years because she lost her job. That is an inherent risk in rental properties, but is way overblown and for the most part, very manageable with a good screening program.

 

 

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