The Magic of Real Estate

In order to retire it is not about an age and it is not about a big pile of money.  The problem is that the pile of money is never large enough.  Why is the pile never large enough?  That is because what keeps you from retiring is that there is a bill that comes every month and what you need to pay that bill is income.  So piles of money do not retire you income retires you.  The problem with stocks is that they don’t create income.  If you buy stock for $1.00 and it goes up to $2.00 the only way to get the $1.00 of profit is to sell the stock.  That means it is not making you money anymore.  That is why real estate is such a good vehicle to retire you.  A rent house will produce you $500/month every month forever and you still own the asset.  Remember the story of the goose that laid the golden egg?  What do you think that was designed to teach you?  The problem is that teachers taught you that story and they don’t have a golden egg laying goose of their own.  Heck they don’t even know that this goose exists.  Real estate is the goose that lays the golden egg.

The way to retire is to look at how much money it takes for you to live.  Not the amount that you make but what it takes for you to live.  The way to do that is not to do a budget.  Budgets don’t work because what they are is wish lists. You will say, I am not going to spend any money on going out and then you will go out eventually.  My mentor told me that people have a financial thermostat.  That means  you have an amount that you will spend no matter what you want to do.  If you try to spend less, your spending will eventually creep back to your thermostat setting.  The way to determine what that number is; look at your bank statements from the last 3 months.  The reason you want to do that is, you didn’t know you were going to look at them so you don’t do anything artificially to make the numbers look better.  These numbers are true numbers.  You want to put every dollar spent from the last 2 months into categories.  You want to know what you spend from rent to dry-cleaning.  If that number is $5,000 then all you need to do is generate $5,000/month of passive income and you are retired.  You may continue to work but you will be working for other reasons than to live.

This means, if you can find rent houses that yield $500/month you want to buy 10 of them.  You may ask what about income taxes.  One of the best things about rent houses is the rent is basically tax free.  This is because the house is depreciated on your taxes over 27 ½ years.  So if you have a house that is worth $100,000 then the lot is probably worth $20,000.  The remaining $80,000 is the house.  You take the 80,000 divide it by 27.5 and you get to deduct that depreciation from your income taxes.  That is $2900, if the house rents for $1000/month or $12,000 for the year, almost $3,000 of it is taken off the top for depreciation and then the normal deductions equal it out pretty regularly.

I believe in changing out houses after 5 to 8 years with another house.  You should always have 10 houses but not the same 10 houses.  That is because the house is getting closer to some major repair.  The way to switch out the house is by using a 1031 exchange.  This is a tax treatment that allows you to roll the money from the sale of one house into another, without it being a taxable event.  That means you never have to pay the taxes until you die.  Now when you die your heirs inherit the house at the stepped up basis so nobody ever pays taxes on rental property.  That is why 80% of rich people get rich in real estate.

Let’s Get Rich

I looked at several ways to make enough money so that if I worked or not I would have enough money to live my lifestyle. I deceived I needed a business. I had a vending business, a video store and real estate. Although they all made me money the only one that took virtually none of my time was real estate. So real estate is a business that I can own and take weeks off at a time and the business still makes me money month after month.

In Houston Texas you can buy a single family house for around $100k with a payment principal interest taxes and insurance) of around $600 per month. That house will rent for around $1200 a month. If you take out a little for a buffer you can put $500 a month in your pocket. So if you buy 10 of them you will have $1million in real estate and make around $5,000 a month.

You may ask how you can afford $1million?  You don’t, you need to borrow that $1million.  Dave Ramsey promotes debt is evil and he is correct when you look at credit card and personal debt. Income producing debt is the only way to get rich. If you have to wait until you save $1million you won’t get there until you are 50 years old. What you want to do is get there in 5 years or less. I always say that retirement is wasted on the old. You want to retire and travel to tropical locations but you want to do it while you still look good at the nude beach.

Let’s look at debt. If you have $100,000 and you buy a rent house and charge $1200 month for rent you will make $12,000 per year. That is 12% on the money you employ. That is good but what I would do is put down $10,000 on that house, take out a mortgage for $90,000. The PITI on that will be around $600 per month. Rent it for the $1200 and you make about $600 per month. That will make you $7,200 per year but since you only have $10,000 in the deal you get a yield of 72%. Of course you can’t live on $7,200 per year but since you have $90,000 left over from your pile of $100,000 you can do it nine more times. So you now have 10 houses yielding $7,200 per year per house for a total of $72,000 per year.

It gets better. The loans that we use are hard money which funds the money to buy the house and fix it up. The beauty of this is you don’t have to buy houses that are habitable, which is one of the requirements of an FHA loan. So you buy this house and it needs carpet appliances paint and one major system. Because of that you buy this house for $65,000, borrow the $10,000 to fix it up along with the $65,000 to own the house. Once the rehab is done, refinance it into an FHA loan and boom you end up with that $100,000 house for $75,000.