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.

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