It’s so enticing to be able to buy a home relatively cheap, for cash, isn’t it? Sometimes, though rarely, it’s even better when they’re young and pretty. If there’s little or no fix-up, the high lasts extra long. You’re in that sweet career spot where you’re above the middle point in your career earnings, say 40-55 years old or so. The cash flow literally makes you giddy at times. You’ve got four of ’em now, and are takin’ a breather. Though you paid around $70-80,000 apiece plus closing costs, they’re worth a bit more — you got ’em at a discount. Does the good news ever end?
Well, maybe, and maybe at the worst possible time.
Let’s say you were in your early-mid 40s when you acquired this portfolio for cash. You plan to retire somewhere in the range of 60-65, but sooner is a much better concept than later when you’re pondering that day, right? The assumption here is that those four rental homes were bought to supply you with income when the big paycheck ain’t automatically arrivin’ at your bank account twice a month any more. Good plan — as far as it goes. But allow me to help you find the black fly in your chardonnay.
When you think end game, think retirement income and net worth.
The same time you were happily writing checks for the purchase prices of these nice homes plus the closing costs, others were doin’ something a bit different. They weren’t thinkin’ about the cool cash flow now, though it surely doesn’t hurt their feelings. No, they were thinkin’ in terms of the last guest leaving their retirement party. They saw themselves huggin’ their wives, while realizing they only had a couple days before they had to be at the cruise ship. See, they spent the same original capital on the same number of real estate investment properties, the same time you did. The only difference was they didn’t pay cash. They didn’t sacrifice location quality either. In fact, what they bought cost a bit over triple what yours did.
Remember though, they were thinkin’ way down the road, even as they were closing their acquisitions, knowing that yeah, they’d have loan payments, but would still be enjoying some fairly significant cash flow. Again — they were thinkin’ end game, NOT how cool it felt to buy cheap houses with super sexy price rent ratios.
Fast forward 15-20 years.
The four homes are still renting for a monthly total of around $3,800 or so. This results in an annual cash flow (read: retirement income) of (being kinda sorta generous) $30,000. Your net worth is, well, the same as it was when you bought ’em. Maybe around $400,000 +/-.
Our couple who bought the much higher priced props? They’re also debt free now. Their gross monthly rent is about $10,200. Their properties are just 15-20 years old. Their annual cash flow (again, read: retirement income) is roughly $75,000 +/-. Their net worth from these properties alone is in excess of $1 Million.
I dunno — which properties do you wanna have at retirement?
BawldGuy Axiom: It’s about the cash flow and net worth when you retire, not a decade or two before retiring. If your Plan doesn’t have that as a foundational assumption, the Plan has little if any value when it comes to creating the retirement income you wish to generate. It’s about the end game — key your eye on that ball — or pay the price when it’s too late.
Retirement planning is not a sprint, it’s a marathon. The smart runners do well cuz they realize it’s about the long, slow process. They know the end game of the marathon is about gettin’ to the finish line — not racin’ around the track once or twice. Look at what you’ve been doin’ or at least planning to do.
If it’s all about the end game, pat yourself on the back, you’re doin’ a great job.
For those who already own the cheap ‘n pretty homes? There’s still time for ya. Trade your net equity now into the bigger, better properties. Even the new math tells us that $75,000 a year is a lot mo betta than $30,000.