Hello @Tony Leighty ,
I got the same response when I first started. At first I was dismayed by their negative comments but I continued because I found that nothing came close to real estate in terms of achieving financial independence. Most people do not understand that when you buy rental real estate you are buying long term revenue streams. With other types of investments the purpose is to accumulate funds. Streams continue while funds eventually run out over the long term.
Below is what I share with prospective clients who are also wondering if real estate is the right investment for them, and I hope it will encourage you to continue to pursue real estate.
=========
Why Real Estate
Most people do not understand the fundamental difference between real estate and other investments. When you buy investment real estate you are buying a long term revenue stream. With other investments the purpose is to accumulate funds. Let me explain the difference between the two as it applies to achieving financial freedom.
How much money would you need to achieve financial freedom? My answer would be a monthly revenue that would cover all my bills plus additional monies to enable me to live where I want and never need to work a normal job again. The specific amount would vary depending on your cost of living and such but I will choose $5,000/Mo. as a working number.
There are basically two ways to generate a monthly revenue stream. One way is to accumulate enough funds and live off of those funds. How much you need to accumulate depends on how long you need the revenue stream to last. If you only need the stream for 1 year then $5,000 x 12 = $60,000 is all you need to accumulate. One year would not work for me and probably not for you either. Suppose you need the stream to last for 20 years? The math is $5,000 x 12 x 20 = $1,200,000. Not only is that a lot of money (post tax) to accumulate but I am not certain any fixed number of years will work because you do not know how long you are going to need the monthly income (live).
Another factor to consider is inflation. Official inflation during 2014 is at 1.7%. However, remember that the “official” inflation numbers do not include energy or food. Personally, I use energy and eat so the inflation I experience at the gas station and the grocery store is much higher than the “official” number. Depending on whose numbers you use, actual inflation is between 6% and 10% per year. For simplicity, let's assume that from now on inflation will be 5%. What this means is that we will need 5% more each year just to have the same buying power as the previous year. (I am ignoring interest income since CDs and such are only paying 1% which is lost in the inflation numbers.) How much do you need to accumulate assuming 5% inflation, 20 years of revenue at $5,000/Mo? By my calculation: $2,055,000! This does not make sense. There are fundamental problems with the lump sum approach:
• Since future inflation rates are unknown you do not know how much you need to start with. Remember that in the 1980’s the “official” inflation exceeded 14%. If I recalculate the amount needed based on 14% the lump sum needed to generate $5,000/Mo. is $6,505,830!
• How are you going to accumulate the $1,200,000 (after tax) starting capital let alone $6,505,830?
Now let's look at investment real estate. How much money do you need to build a $5000/Mo. revenue stream? Suppose you purchase a property for $100,000 and rent it for $900/Mo. The monthly PITI would be about $550/Mo (20% down, 30 year note). (Warning, over simplification coming!) If I assume the property is always rented the numbers work out to be: $900/Mo rent - $550/Mo. PITI results in a revenue stream of $350 per month! If I obtained 15 such properties I have a lifelong revenue stream of $5,000/Mo. And it's going to improve over time as mortgages are being paid off. Let's compare the amount of money necessary to establish a $5,000/Mo. revenue stream with real estate vs. a lump sum (with zero inflation).
Comparing the amounts needed to meet our $5,000/Mo revenue stream:
• Lump sum: $1,200,000 provides 20 years at $5,000/Mo. assuming no inflation.
• Real estate: $300,000 provides today's buying power of $5,000 perpetually regardless of inflation.
There are huge differences between the lump sum and a real estate revenue stream:
• Inflation: If you are drawing from a lump sum, inflation is your enemy. With a real estate based revenue stream inflation is your friend. This is true because rents tend to track inflation but debt service is constant. Further, when inflation occurs interest rates increase limiting people’s ability to purchase homes thus increasing demand for rental properties.
• Tax savings: With the lump sum approach the IRS will love you (not good) because everything is visible and easy to tax. With real estate there are lots of expense deductions (like coming to Las Vegas to check on your properties!) plus the IRS mandates that you depreciate the property over 27.5 years. Depreciation will be about $2,900/year/property (in the above example) that will be deducted from the rental income and may shield other income.
• Little money needed to start: With the ready availability of 20% down investor financing you can begin your revenue streams with $20,000. And, accumulate more properties over time using the profits of the existing revenue streams to buy more revenue streams.
• Forgiving: As long as you buy in a good area, all but the worst mistakes will be corrected over time through inflation and rent increases.
• Convertible: Suppose single family homes are the best investment today and 5 years later the best investment are condo medical offices. IRS 1031 enables you to sell (swap) the single family homes in exchange for condo medical offices and, if handled correctly, is not a taxable event. I know of no other type of investment vehicle that would allow exchanges of like kind with no tax consequence.
In summary, real estate investing is the easiest, safest and least time consuming (common man's) path to financial independence.
===================
Best Wishes,
Eric Fernwood