Real Estate For the WIN!

The Wall Street Journal recently ran an article stating that a staggering 95% of Americans will face financial difficulties at retirement. 95% means that only 5% of the US population will retire with dignity and into a lifestyle that they can enjoy with financial freedom. How do you become a part of the exclusive 5%? It doesn't take an economics degree to know that it's not going to happen by saving change in a jar, or sticking money in the bank (nowadays, those 2 are pretty much the same thing except the jar isn't quite as annoying). The reality is that more people have become financially independent through real estate than by any other means. Real estate is without a doubt the most powerful way to build wealth.

Let's consider the options when it comes to building wealth. We can immediately dismiss any jobs or careers. It does not matter what job title you have or what career choice you make, nobody has EVER built true wealth through a job. A job is simply trading hours for dollars and the moment you stop giving your hours, you stop getting the dollars. The job is merely an asset that provides the initial capital to build the wealth.

The next option is the "safe route", things like savings accounts, CD's, bonds and money market accounts. Historically these options barely outpace inflation if they outpace at all. The end result is the equivalent of parking your money somewhere. There is absolutely a place for these engines in your portfolio, but building wealth is not what they are for. I am a fan of Dave Ramsey's analogy of these types of accounts as insurance. You need them and they have a function, but that function is to act as insurance during stormy times so you don't bottom out. They never have and never will build REAL wealth. I defy anyone to show me one millionaire who ever built their wealth from a money market account.

The stock market is always fun... and harrowing, stressful, confusing, etc. The truth is you have no control over the companies you invest in and when losses come, they come big and hard. There are virtually no tax advantages to owning stock either. I'm not saying you should never own any stock, I am merely saying that playing the stock market with your retirement fund is the epitome of risky and has a better than not chance of leaving you broke and sour in your golden years.

Historically, real estate provides reliable, consistent and stronger returns than any other investment. Using the median price for a single family home; a home bought in 1950 for $7,400 would value at $217,000 in 2007. Obviously there will always be fluctuations and dips here and there, but in the end real estate will show a steady appreciation in the long run.

If you ask 100 random people over the age of 50 what was the best investment they ever made, I would almost guarantee that the vast majority of them would say their home. I'll also be willing to bet that if they could do it all over they would try and buy a few more.

Here's a thought experiment. If you were to purchase a $125,000 home today with an investment of $15,000 and rent it out simply to break even on the mortgage, tax and insurance payment; at a conservative 4% appreciation on a 30 year note that home would be worth $405,000. That's a $280,000 profit on a $15,000 investment, not too shabby. Retirement wouldn't be too bad with that little $15,000 investment.

The concept of leverage allows you to take advantage of owning something worth of 15 times your initial investment and still be able to capitalize on 100% of the appreciation of that asset.

I can hear you now saying, "that's awesome... but 30 years is too long to wait to retire". Well, there are lots of solutions to that in real estate. Let' go with the simplest option which involves paying your loan off early by paying a little extra each month (again something you can build into the monthly rent while you are renting out your property).

Let's break down our $125,000 home from the example above and see what happens when we pay just a little more each year on the loan. Note that this is the extra payment per year.

    If you were to make an additional $1,000 payment per year that same loan would be paid off in 22.5 years!
    An extra $2,500 per year pays it off in just 17 years.
    And finally, an extra $5,000 per year (scenario #1) pays it off in only 12.3 years.

Loan scenario 2 is barely over $100 a month in extra payment.

Of course there is nothing stopping you from repeating this scenario over and over until you quickly find yourself with the title of "real estate guru" and all of your friends wonder how you did it. It all started with 1 choice to invest in 1 property and then...

Mikel K Smith