Phil Town talks about investing in Real Estate
So let’s look at the difference between investing $50,000 right now in real estate vs. $50,000 right now with Rule #1 investing.
Here are the numbers: You buy a $250,000 house someplace for $50,000 down with a 6% 30 year fixed mortgage. Your payments are $1200 a month but you rent it for $1200 and cover your mortgage payments. You are, however, in the hole for insurance, maintenance, advertising and taxes.
On the other hand, let’s allow you to never miss a month’s rent and you can increase the rent by 4% a year. By your 9th year, you’ve been able to increase rents enough to cover everything. From there on to the 30th year it’s all cash flow. Then you sell the place. At that point, the house is worth $811,000 and is totally paid for. Plus you’ve pocketed another $175,000 that you reinvested wisely and made the same return on that as on your house over all – about 10% per year for an additional $440,000. Total return equals $1,251,000. Your compounded ROI for 30 years is 11%. Quite respectable although I did not deduct for management which I expect you will do yourself. This is not an insignificant headache and makes scaling up the investment dollars difficult. Nonetheless, let’s compare that to our 15% minimum Rule #1 return.
First, we have no management. We do not have to negotiate. We do not have to drive around neighborhoods looking for a deal. These are not insignificant advantages. What we do have to do is spend about 15 minutes a week managing our few businesses. And we have to know how to do Rule #1 investing, of course, but it’s easy to learn once you see the advantages.
We buy a business (or a part of a business, ie, investment) with our $50,000. Since we’re going to use leverage in the real estate transaction, we’re going to use it here, too. Our online broker will lend 50%. Now we have $100,000 to invest. We buy a wonderful business at an attractive price and sell it when it gets unattractive and buy another one. We do that for 30 years averaging 15% but paying 8% margin costs on $50,000. (I’m not getting taxed in either case because I’m doing both in an IRA). After 30 years, my investment is worth $6,500,000 after deducting margin costs. My 30 years compounded ROI is 18%, only 7 points higher than the real estate transaction, but 5.3 million dollars more in my bank account.
But if you are a Rule #1 investor, you will continue to invest the $6.5 million at 15% and then live on the 15% increase each year. That means you are receiving about $80,000 a month. That’s not a typo. Your income off the 6 million is almost 1 million a year. Of course you do have to pay tax on that so you’ll end up with about $50,000 a month which is only $20,000 in today’s dollars.
You can stay ignorant of Rule #1 investing, go exclusively for real estate and try live on the result the rest of your life or become a Rule #1 investor.
So let’s look at the difference between hypothetically investing $50,000 right now in real estate vs. $50,000 right now with Rule #1 investing.
Here are the numbers: You buy a $250,000 house someplace for $50,000 down with a 6%, 30 year fixed mortgage. Your payments are $1,200 a month but you rent it for $1200 and cover your mortgage payments. You are, however, in the hole for insurance, maintenance, advertising and taxes.
On the other hand, let’s assume you never miss a month’s rent and you can increase the rent by 4% a year. By your 9th year, you’ve been able to increase rents enough to cover everything. From there on to the 30th year, it’s all cash flow. Then you sell the place. At that point, the house is worth $811,000 and is totally paid for. Plus you’ve pocketed another $175,000 that you reinvested wisely and made the same return on that as on your house over all – about 10% per year for an additional $440,000. Total return equals $1,251,000. Your compounded ROI for 30 years is 11%. Quite respectable, although I did not deduct for management, which I expect you will do yourself. This is not an insignificant headache and makes scaling up the investment dollars difficult. Nonetheless, let’s compare that to our 15% minimum Rule #1 return.
First, we have no management. We do not have to negotiate. We do not have to drive around neighborhoods looking for a deal. These are not insignificant advantages. What we do have to do is spend about 15 minutes a week managing our few businesses. And we have to know how to do Rule #1 investing, of course, but it’s easy to learn once you see the advantages.
We buy a business (or a part of a business, ie, investment) with our $50,000. Since we’re going to use leverage in the real estate transaction, we’re going to use it here, too. Our online broker will lend 50%. Now we have $100,000 to invest. We buy a wonderful business at an attractive price and sell it when it gets unattractive and buy another one. We do that for 30 years averaging 15%, but paying 8% margin costs on $50,000. (I’m not getting taxed in either case because I’m doing both in an IRA). After 30 years, my RULE 1 Investing would be worth $6,500,000 after deducting margin costs. My 30 years compounded ROI is 18%, only 7 points higher than the real estate transaction, but 5.3 million dollars more in my bank account.
But if you are a Rule #1 investor, you will hypothetically continue to invest the $6.5 million at 15% and then live on the 15% increase each year. That means you are receiving about $80,000 a month. That’s not a typo. Your income off the $6 million is almost $1 million a year. Of course you do have to pay tax on that so you’ll end up with about $50,000 a month which is only $20,000 in today’s dollars.
You can stay ignorant of Rule #1 investing, go exclusively for real estate and try live on the result the rest of your life. An alternative to fickle real estate investing is becoming a Rule #1 investor.
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