$900 a Month for 20 Years...

[Dominique]

$900 a Month for 20 Years...

By Ray Reuter

So, interesting story...stick with me for 5 minutes, you'll like this. I'm sitting around the REIN lunch room chatting about real estate (weird) and it was as if the sky opened up, the fog lifted and I had this epiphany...


"My worst case scenario... if I buy the way REIN teaches... is a free and clear asset... some years down the road... that my tenants bought for me."


I think I can live with that! Here is some super simple math showing exactly why residential real estate is so cool.


Let's say you go out and buy a single property TODAY for $300,000 (call it a suited house) and based on your conservative numbers, this property does nothing more than break even every month (and we're buying in a stable, well-performing market based on the fundamentals). No cash flow - just break even.


Then we're going to assume that the market will stay flat forever. We both know the market will go up, it will go down, but assume that over the next 20 years those ups and downs equate to a FLAT market...it's still worth $300,000 in 2033.


Still with me? Good.


Now over that 20 years the property just breaks even, nothing more, nothing less. Sure we've been up some months, but we've had some repairs & maintenance, some vacancy...so, over those 20 years we just break even. Some would call this a boring piece of real estate... even a 'non-performing' piece of real estate.


Call me crazy, but guess what, I call that a $900 a month savings plan that someone else (called my tenants) paid for.


That's right - after 20 years of holding this 'non-performing' piece of real estate I'm left with the equivalent of someone giving me $900 every single month for 20 years...I call that one heck of a savings plan.


Tell me, do you put $900 away every month right now? Maybe...but that's still YOUR money, money you had to work hard for! I'm talking about $900/month that someone gave me for the last 20 years, and it's mine...all from an unexciting, 'non-performing', piece of residential real estate. Want the math?


Here it is. I purchased for $300,000, I put 20% down plus closing costs, so roughly $65,000. In 2035, 20 years from now, I sell it for the exact same price...$300,000. I get my $65,000 investment back. I pay the Realtor and closing costs and I'm left with roughly $215,000.


That's with no cash flow, that's with no appreciation, that's simply my tenants paying down my mortgage (both principle and interest) for the last 20 years and leaving me with a free and clear property.


So $215,000 divided by 20 years = $10,750 per year. Divide that by 12 months = $896/month... that someone else gave me.


Sure we can calculate opportunity cost for your $65,000 investment, but tell me, would you be even mildly happy if someone, some stranger, was contributing even $500 a month into a savings plan for YOU & YOUR FAMILY for the next 20 years????


That's like someone else contributing to your RSP fund every month. You OK with that?? Of course! Go ahead and poke holes in it if you want...


"Ray, no one gets a 20 year mortgage!" OK, do you think with some strategic planning you can have this property paid off after 20 years...especially if you bank on no cash flow? I say of course!


"Ray, what about the roof, the furnace, etc???"

You're absolutely right. But let's be serious - over the next 20 years do you think my rent is going to go up or down? Do you think my property will be worth more or less in 20 years buying in a fundamentally strong area? Heck, even WHEN interest rates go up, guess what? So will my rent! This is a no-brainer.


Maybe...just maybe, this makes sense. Bottom line - real estate is simple...it's just not easy! And we're not talking get rich quick, we're not talking some 'sexy' investment strategy that 0.1% of investors ever pull off, just a simple old piece of real estate that you rent out and maintain for 20 years that YOU have 100% control over!


IT'S SIMPLE - I invest $65,000 to make $215,000 (before tax)...I'll take that all day long, and that's ONE PROPERTY. Now imagine if you bought 10 properties just like that over the next few years (which isn't rocket surgery).


It's the power of leverage, the power of having control of your investments, and the power of being in the business of putting a roof over someone's head (a business that ain't going anywhere any time soon!!!)


Think about it, read this a few times - this stuff works.

 

[DonCampbell]

Slow and steady. Tough for many to follow, given the "Instant Result" society we have created.

But those of us who live by the Slow and Steady lifestyle truly do create lifetime results.

Thanks for sharing this one!

 

[Tina Myrvang]

Love it Ray thank you!!!!

 

[Thomas Beyer]

True, but a little too simplistic.

First of all it is very hard to find an asset that cash-flows with 20% down and a 20 year amortization right out of the gate. As such, use 25 year amortization and/or 25% down.

Secondly, we cannot assume the world is flat and real estate within is also flat. You must assume at least 2% a year, on average, value upside. Often well above that, say 3-6%, on average !

Thirdly, especially in years 1-3, and on occasion you will need some extra cash for repairs, vacancies or upgrades.

Fourthly, it makes no sense to buy only one asset as you will not get rich on one townhouse. $900/month is nice, but not all that much. As such, plan on increasing the value of the initial asset, and every 5 years you increase the mortgage and pull out equity to buy another asset [ unless of course you wish to invest $65,000 several times in a tax inefficient way].

Fifthly, real estate income is taxed as "passive income" at the highest marginal rate. As such, it is best to not have such taxable income while you hold, by using higher leverage, i.e. higher tax deductible expenses.

Sixthly, the cash-flow from residential real estate is quite low on an un-levered basis, often sub 5%. Real estate is mainly a premier tax-preferred and tax-deferred wealth builder, not a cash-flow provider. The math on that is here: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

Cash-flow to live on is over-rated. It exists mainly to cover your expenses and to create equity through mortgage paydown and asset appreciation. If you want 6%+ cash-flow, buy a REIT and retire on the cash-flow. But to do that, you need quite a few assets, and to get that you need cash-flow from levered real estate!

Hence, ask yourself: do you want cash-flow or do you want to create wealth ?

 

[GaryW]

If you're brand new and looking to buy that very first property, Rays post really helps to remove the fear. As yourself and T.Harv Eker says "Read, Fire, Aim". Your post is also extremely helpful as well, especially when you own it and now have to aim!