Starting Now is Good, But Starting Young is Great: How Time Affects Investing
Time—the constant, universal element that holds more power than any other factor in investing. The most underrated, under-discussed asset ever is our time. As investors, we often declare the mantra, “Cash is king.” If cash is of royalty, I would argue time is of godliness.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
We all have a finite amount of time to be alive. Unfortunately, many of us trade so much of that time for cash. We know this isn’t right, we know it doesn’t feel good, and yet so many continue to trade time for money. There is a better way—a way to combine the power of time and money to take control of your most precious asset.
In this article, I will outline the power time has on our investments, specifically real estate, and why people of all ages should be using whatever amount of time they have. I’ll also show the younger generation that because of the time they have, they are the wealthiest generation—they just don’t know it. I believe wealth is measured in time, not money. However, our time can be preserved with money, and our money can grow easier with more time. Let me explain.
Exponential Growth: The Story of Bailey
The reason time is the most valuable asset is due to the extraordinary power of exponential growth. Some may refer to it as compounding interest. No matter what you call it, the largest factor in an exponential equation is time. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pays it.” And Albert Bartlett emphasizes the importance of exponential growth with his quote, “The greatest shortcoming of the human race is our inability to understand the exponential function.”
The power of exponential growth can work for you rather than you trading hour after hour to earn money to live the lifestyle you want. As exponential growth continues to work, the growth becomes more rapid and your path to financial freedom accelerates. This is why starting on this path now rather than later is so important and why starting young can be so powerful.
Let’s put these concepts into an example to help wrap our heads around it better. There are a lot of numbers and moving parts in the example. Stick with me on it, and we’ll break it down after.
Meet Bailey. Bailey is your everyday woman. She graduated from a normal college at the age of 23 and got a 9-5 job with a starting salary of $45k a year. After 2 years of working at her 9-5 and saving what she budgeted, Bailey is able to put away $20k worth of savings. She is now 25 years old and decides to start thinking about investing her money. Deciding to put that money to use in a real estate investment, Bailey buys a $100k investment house by getting a 20-year mortgage and putting a $20k down payment on a single family that cash flows $3k a year. Not bad—a cash on cash return of 15%.
But Bailey is smart. She decides to begin saving the cash flow in addition to her annual savings of $10k a year from her job. Just about a year and a half after Bailey buys her first house, she has another $20k saved up, thanks to her $15k in job savings and her $4.5k in cash flow from her rental. She decides to buy another house exactly the same as the first one. Now Bailey is cash flowing $6k a year from her rentals and continues to save $10k a year from her job.
After 15 months, she has enough money saved and buys another single family house. Now cash flowing $9k a year from her rentals and saving $10k from her job, she is able to buy another house just about 12 months later. This same pattern continues, and by the time Bailey is 35 years old, she owns 14 rental properties that produce a monthly cash flow of $3,500. Some of her properties have gone up in value through appreciation, making her total portfolio worth $1.5 million. She has been paying down her 20-year mortgages this whole time, and because of that, at age 35, her portfolio has $535k in equity.
Bailey now sees the power of exponential growth and the power it has in real estate. She decides to do a cash-out refinance on the equity in her portfolio. The bank allows a 75% loan to value, so she is able to pull $160k out after paying off the existing debt. She then takes the $160k and uses it to put a down payment on a $800k apartment complex. This complex produces the same 15% cash on cash return and therefore produces an additional $24k cash flow annually, or $2k a month, for Bailey.
In this example, Bailey initially invested $20k and an additional $10k a year from her job for 10 years. All the other money came from the cash flow the properties produced. Because of that, Bailey now cash flows $5,500 a month and owns $2.2 million in real estate. Bailey decides to enjoy her mid-30s and quits her day job. She is content with the property she has and doesn’t want to buy more. She lives on the $5,500 a month and pays zero income taxes due to depreciation.
After 20 years of owning all her properties, Bailey is 55 years old, her portfolio is 100% paid off, and it has appreciated to being worth $3 million. Although her portfolio has treated her well, she is ready for something easier. She sells the portfolio for $3 million in a 1031 exchange and buys a $12 million A-class commercial building that CVS rents under an NNN lease, where her involvement is hardly required. That property produces a 5% cash-on-cash return, which is a nice check of $12,500 a month that Bailey gets to live off for the rest of her life while trading hardly any of her own time.
Bailey dies at the age of 85, leaving her heirs with a free and clear commercial property now worth $15 million. Her family will have the wonderful luxury of financial freedom because of the initial $20k investment bailey made when she was 25 years old.
This example has a lot of moving parts, so let’s break down some of the many benefits and actions Bailey was able to achieve by starting young and using the most valuable asset of time to her advantage.
Less responsibility in life allows the ability to save.
One benefit of beginning to invest young is the lack of responsibility. Think about it—when we are young, we often don’t have kids who depend on us, parents who are getting older and need our help, and all the other expenses and time commitments that come with the next chapters of life. All those things can be great experiences if you have time and money to deal with them, but they can be extremely overwhelming if you don’t.
In our example, Bailey was 25 years old, working a 9-5 job, making an average salary. Because she didn’t have the other responsibilities that often come with the next chapters of life, she was able to save the $10k a month and live off of $35k a year. This may not have been possible if she had started to save at 45 years old.
5 Lessons We Can Learn From This Story
Reinvesting cash flow utilizes compounding interest.
Bailey utilized the power of exponential growth to the fullest by taking the cash flow from her rentals and reinvesting them into more rentals that in turn produced even more cash flow. It took Bailey 18 months to go from house #1 to house #2, but only 5 months to go from house #13 to #14. This increase in velocity is 100% a function of exponential growth.
The more time we have as investors to let this powerful equation do its work, the greater the results can be. On the surface, Bailey continued to live the typical life many of her peers did—working the 9-5, getting raises now and then, saving some of her income for retirement. The difference is Bailey’s savings were being deployed into real estate instead of the more standard 401k. My point is, Bailey didn’t live a crazy life or get super lucky to live the life of financial freedom she had. She simply utilized time to her benefit and let that powerful factor do the work for her.
Loan amortization happens over time.
In real estate, time is working to your advantage in several channels. While one is certainly the cash flow that we all love, another is the loan pay down. Bailey was able to scale up to apartments and then commercial triple net lease property using the equity in her properties. Much of that equity was accumulated through the monthly mortgage payments chipping away at the principal amount owed to the bank on her properties.
All of these mortgage payments are, of course, covered by the rental income and therefore were never a financial burden to Bailey—rather, just an expense before her cash flow. Because she had time to let the properties’ debt be paid down, she was able to reap that massive reward. Without time, this fantastic benefit cannot work.
If you play the long game, you’ll likely benefit from appreciation.
Not always, but frequently—and if purchased correctly, managed correctly, and with a bit of luck—the majority of real estate tends to increase in value when looking at large chunks of time. Sometimes appreciation keeps pace with inflation, sometimes more, and sometimes property goes down in value. In our example, Bailey experienced very moderate appreciation simply by holding the properties for such long periods of time like many investors do. This is yet another benefit of utilizing time to allow the natural forces of the market to behave in ways that may benefit you as the investor through appreciation.
Starting early affords the option to time market cycles.
Although not specifically mentioned in the example, another massive benefit starting sooner rather than later and having more time is being able to have more flexibility in you choices of when to buy and sell. If Investor X is starting in real estate with the goal of retirement and financial freedom, in 5 years he may have no choice but to buy now and buy fast, regardless of market conditions.
If Investor Y has 30 years to reach the same goal, he has more flexibility to time his purchases throughout market cycles to the most advantageous timing. In our example, maybe Bailey noticed the slight appreciation she had achieved in her 14 houses and decided now was the time to cash out refi while the market was being good to her rather than wait and potentially see a dip down in value. Because she had time on her side, Bailey could be patient and strike while the iron was hot.
Your Story Can Look However You Want it to
It doesn’t matter if you’re 65 or 25. The time you have is the most powerful asset you control. By taking action toward financial freedom now rather than later, you are setting yourself up for the true prize of freedom of your time. Our example with Bailey is a very achievable, easy-to-implement strategy that anyone can do. The example is very conservative and has Bailey fully retired at age 35. If Bailey’s example of living off $150k a year isn’t enough for you, that simply means you up the velocity of the money, the cash input, or the time you spend continuing to grow your financial freedom number.
Your story can look however you want it to, but it’s time to realize with each day you are not taking action, you are losing some of the most valuable assets you control. For my peers who are in the younger generation, you are sitting on a goldmine of time. Don’t let it go to waste. Do something now to set the wheels of exponential growth in motion. That can be real estate or any other investment. Just realize that you have nothing to lose and so much to gain.
The Real Benefits From All of This
The obvious and glamorous benefit to this idea of starting sooner rather than later and harnessing the power of time in your investing is the financial success. Being rich, raking in the big bucks, buying whatever you want! But financial success is only a pawn in a much bigger, more important game of freedom of time—the ability to do what we want, with whom we want, where and when we want to. It could mean that you get to spend every morning with your kids before school making sure they get a good start to the day or being able to spend quality time with loved ones before they are gone. It could even mean the simplest things, like being able to go the gym at 2:00 p.m. because that’s what time of the day you enjoy exercise most. Being able to do all of those things while still fulfilling the many other important needs and luxuries that we all want for ourselves and our family is what this all is about.
This game of life we are all playing in is about time. On your death bed, do you think you will be lying there thinking, “I wish I had just one more million to spend?” Of course not. You will be cherishing the things you have and have experienced and wishing you had time for just a few more. The thing so many keep missing is time itself is the key that can give us the power to have true freedom of time. Harness it.
[Editor’s Note: We are republishing this article to help out our newer readers.]
Investors: What do you think of this assessment? When did you start investing, and how has time affected your returns?
Let me know your thoughts with a comment!