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Real Estate for Retirement

I read an article in USA Today this morning about how the word “saving” for retirement might need to be reworded into “investing” for retirement, and I couldn’t agree more.

The article talks about how most of us have always been told we should “save” for retirement but that word makes most people think of stashing cash somewhere and waiting until you are 65 to access it.

The problem is, if you simply “save” money, because of inflation, the money you save today will most likely be worth way less in future dollars. So if you have $10,000 saved today, but don’t invest it, that $10k would actually only give you about $5500 in buying power 20 years from now assuming a 3% rate of inflation.

Just like 20 years ago $100,000 would have bought you a nice house–but nowadays, it’s much more expensive.

If saving for retirement isn’t good enough to get you where you want to be, what do we do?

There are plenty of investments that we talk about in my book, “The Boss Lady Investor, You Don’t Need a Dick to Understand Money.”™ You can invest in stocks, bonds mutual funds and more in your IRA or 401k. You can use some life insurance plans as retirement plans. Or….you can use my all time favorite retirement plan…investing in real estate!

How does it work? Let me explain:

First, you do NOT need to be a real estate investor, agent, guru or have any special knowledge to invest in real estate for retirement. You only have to be able to understand pretty simple math. You do NOT have to follow the stock market, worry about a Board of Directors or stress about when to buy and when to sell.

You DO have to believe in yourself, be patient, stay calm and wait. You DO have to understand that things can and definitely will go wrong and that is totally ok. You DO have to pay attention to your investment. But don’t worry, I can guide you through all of it!

The way it works is this:

1. Decide what part of the world you want to invest in-maybe (like me), you want to one day live near the beach so you start investing in beach communities so that you will be near your retirement egg. Maybe you want to invest in an up and coming area or in the neighborhood you live in or maybe you want to invest in your favorite college town. It doesn’t matter, just pick an area that suits you!

2. Find a good rental property. What makes a good rental property? Think of the area you are investing in and what types of people live there that would rent. Maybe it’s young families, maybe it’s snowbirds, maybe it’s a college kids. Learn about the rental market in your area and find a house that fits the mold.

For me, this is usually a 3 bedroom, 2 bath home that is under $200k (price will vary by area you invest in). I invest in Florida so we draw from all of the above-young families, snowbirds and college kids. I don’t invest in fancy-schmancy homes because of two things…1. Usually if people can afford a fancy-schmancy home they are less likely to rent so you have a smaller pool of people and 2. Renters tend to (though not always) take less care of a home and so why invest in super nice stuff that will likely not be taken care of the way you would like.

3. Finance-YES! I am suggesting you FINANCE your retirement. Why? Because that way OTHER PEOPLE will pay for your retirement. You will need to come up with a downpayment (most likely 20-30%) so be prepared for that (and “save up” if you need to).

Here’s the math:

Purchase price of home: $160k

Downpayment: $32k

Balance to finance: $130k at 6% interest.

Monthly payment: $780

Taxes and Insurance (vary by location so let’s assume): $300

Monthly repair budget: $200

Total monthly cost: $1280

Monthly Rent: $1650

Leftover monthly funds: $1650-$1280=$370

What do you do with the leftover funds? Well, I usually put the funds into the bank and then at year end make an extra mortgage payment (or more) with half of the funds and leave the other half there to save up for when major repairs (roof, A/C, etc) are needed. On a 30 year mortgage I am usually paying off the home in about 15 years because of the extra payments I make.

In 15 years, when I am ready to retire, the home will be paid off and my monthly rental home budget will look like this:

Monthly expenses:

Taxes and Insurance (likely will have increased in 15 years): $450

Repairs (home is now older so likely more repairs): $350

Total monthly expenses: $800

Monthly rent (also will likely have increased): $1850

Leftover monthly funds: $1050

If I own one rental property such as this, I would now have $1050 a month in income in retirement. PLUS, did I mention that home prices generally appreciate about 3-5% over time (yes, I am aware that prices go up and down but this is a LONG term investment so I don’t really care about what happens short term…my purchase price and interest rate don’t change anyway).

Assuming 3% appreciation over only 15 years, I now also have an asset that is worth $250k that I could sell if I needed.

Let’s review….you initially put down $32k of your OWN money. Over 15 years, someone else (your renters) contributed monthly to pay down your mortgage. 15 years later you have $1050 in monthly income and an asset worth $250k that you only paid $32k for. That is a hell of a deal.

Let me ask you this….if you invest $32k in the stock market, how confident are you that in 15 years you will get a monthly dividend of $1050 and that the value of the stock will be $250k?

Okay, for my naysayers, Debbie Downers and all around negative people. Here you go:

Let’s say that in 15 years the entire economy collapses. That means both stocks and home prices would fall right? Not to be an ass, but want to point out that if you thought stocks were better they would fall in this scenario too. Maybe in 15 years home prices crash to levels never before seen and your rental property DECREASES in value to $100k.

Guess what folks? You STILL have $1050 in monthly income and STILL have a property that is worth $100k that you only paid $32k to purchase and other people paid the rest. You still tripled your asset value in 15 years even if the house depreciated. And if the market tanks, a lot of people would likely lose their home and need someone like you to rent them a home.

Does the scenario above sound too good to be true or unrealistic? Well, it shouldn’t. I just described one of my rental properties and used my actual numbers. What would make this type of investing even better? What if you bought a property every year or two (trust me people, this is way easier than you think as many banks love to lend money on rental properties)? What if in 15 years you purchased 10 homes? Using the numbers above, you would have $10,500 in monthly income and $2,500,000 in assets! Now THAT is a great retirement!

Like this lesson? Make sure to pre-order a copy of The Boss Lady Investor, You Don’t Need a Dick to Understand Money to learn more fun saving and investing ideas (and how to pay off debt and leave a legacy).

If this interests you and you have an interest in investing in Florida shoot me a message, I am a licensed realtor and would love to help you find your next investment!

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