How you answer this question speaks to your level of financial sophistication.
How Far Would You Go for $200?
Most people would not go very far out of their way to make an extra $200 a month. When compared to a monthly salary of $3,000 or $4,000; $200 sounds pretty insignificant.
A person might pick up an extra shift on a Saturday for a little vacation money; but the idea of losing a weekend day keeps them from making a habit of it. Someone might sell an outdated computer or game system for a few hundred bucks, but that money’s usually gone by the end of the weekend.
As a way to create wealth, $200 doesn’t even cross most people’s minds. The average person spends more time buying lottery tickets and gambling in casinos than looking for ways to add another $200 to their monthly cash flow.
Successful Real Estate Investors
I’ve found that all the successful real estate investors I meet are excited about $200 a month in cash flow from one of their rental properties.
In most cases, that $200 a month is the main reason they pursued the property.
The Definition of Wealth
How you feel about $200 a month has a lot to do with how you define wealth. Most people associate wealth with a large dollar amount: Alex Rodriguez signed a $80 million dollar contract, or Bill Gates is worth $80 billion.
Throughout most of my childhood and early adult years, my definition of wealth was 1 million dollars. The day I opened up my bank statement and it said “$1,000,000″ was the day I was going to be wealthy.
Rich Dad, Poor Dad
My definition of wealth changed the day I read the book “Rich Dad, Poor Dad [1],†by Robert Kiyosaki. If you have never read the book before, your next click should be Amazon.com [1] to order yourself a copy. This book changed the way the world looked at investing.
One of the most important concepts in “Rich Dad, Poor Dad†is the definition of wealth. While most people look at wealth in terms of a large, one-time amounts of money; Kiyosaki says that this has nothing to do with wealth.
Wealth is determined by this simple test:
Quit your job today; and without touching the principle on any of your investments, how long can you live on your passive income?
Passive Income
A few forms of qualified passive income are:
 Interest from Checking and Savings accounts
 Dividends on Stocks (not capital appreciation)
 Cash flow from Real Estate
Passive Income
A few forms of qualified passive income are:
 Interest from Checking and Savings accounts
 Dividends on Stocks (not capital appreciation)
 Cash flow from Real Estate
All of these things A) give you cash on a consistent basis, and B) once set up, are relatively easy to maintain.
How Long Can You Live on Your Passive Income?
To figure out how long you can live on your passive income, you first need to know how much your personal bills are each month. Add up all of your expenses: everything from the house note and car note, to toothpaste and tuna. If you’re married, just do it for your half of the bills.
Let’s say that the average American needs $3,000 a month (after taxes). Since a month is about 30 days, that’s $100 a day.
So how long can you live on your passive income?
So how long can you live on your passive income?
I would suggest that most Americans can only live a few hours… maybe a few minutes on their passive income. Most people don’t have anywhere near $100 a month in qualified passive income. They might be getting a few cents in interest from their savings account, but that would only cover a few seconds.
One Single-Family Rent House
Let’s say, in the next three months, you go out and buy one single-family rent house that cash flows $200 a month. Can you see how you may have done more to retire yourself in 3 months than you had in your entire working career?
That one house, and it’s $200 a month cash flow, pays for 2 days out of your month. If you don’t have more than $200 a month right now in passive income, this one house did more to retire you than you had done for yourself in your entire working career.
Now, go buy another one… that pays for 2 more days…
Buy another and you’ve now paid for 6…
By the time you have 15 rent houses, you’ve now paid for all 30 days in the month… and the month starts over again.
Theoretically, you can now live forever on your passive income.
$1,000,000 401k
Buy another and you’ve now paid for 6…
By the time you have 15 rent houses, you’ve now paid for all 30 days in the month… and the month starts over again.
Theoretically, you can now live forever on your passive income.
$1,000,000 401k
Now, let’s compare our 15 rent houses to a million dollar 401k. Let’s assume you were the world’s greatest at-home stock trader in the early 2000’s.
You listened to Jim Cramer every day and managed to act on his good advice and avoid the bad advice that lost everyone else 40% of their portfolio in 2008. You sold everything before the market crashed and now you’re ready to retire.
The challenge you now face is how much money to take out of your 401k in your retirement so that it lasts the rest of your life
The Conventional Wisdom Plan
You seek the advice of a financial planner and they give you the conventional wisdom on retirement:
The Conventional Wisdom Plan
You seek the advice of a financial planner and they give you the conventional wisdom on retirement:
1. Conservative Investments
You’re told to put your money in conservative investments that will only yield 2-4%, but at least you can have some peace of mind in retirement. Sounds reasonable.
2. 4% Drawdown
You’re allowed to draw down your 401k at the rate of 4% per year to live on: $40,000 per year.
Before the crash of ‘08, 4% was generally accepted to be the right amount to draw down in retirement. The book “The Number [5]†lays out research from William Bengen [6] showing that those who drawdown at 5% have a 30% chance of running out of money.
3. A Little Interest
Won’t I be getting some interest, too?
Yes, but it will be at a very low interest rate and getting smaller each year as you eat into your principle. Let’s say, another $10,000 per year.
$50,000 a year doesn’t sound as great as you had always imagined, but at least you don’t have as many expenses as you used to (you did pay off your house, didn’t you?).
4. Pay Taxes
Wait, I thought we were done!
You’re told to put your money in conservative investments that will only yield 2-4%, but at least you can have some peace of mind in retirement. Sounds reasonable.
2. 4% Drawdown
You’re allowed to draw down your 401k at the rate of 4% per year to live on: $40,000 per year.
Before the crash of ‘08, 4% was generally accepted to be the right amount to draw down in retirement. The book “The Number [5]†lays out research from William Bengen [6] showing that those who drawdown at 5% have a 30% chance of running out of money.
3. A Little Interest
Won’t I be getting some interest, too?
Yes, but it will be at a very low interest rate and getting smaller each year as you eat into your principle. Let’s say, another $10,000 per year.
$50,000 a year doesn’t sound as great as you had always imagined, but at least you don’t have as many expenses as you used to (you did pay off your house, didn’t you?).
4. Pay Taxes
Wait, I thought we were done!
Sorry, here comes the worst part… Now you have to pay taxes. You were sold on the 401k as a way to defer taxes, but you didn’t realize that defer was not the same as avoid. You pay roughly $14,000 in taxes which leaves you with $36,000.
$36,000 a year just happens to be $3,000 a month or $100 a day.
15 Rent Houses Did the Same Thing Faster
15 rent houses did the same thing as your million dollar 401k, but did it take you your whole working career and a huge chunk of your paycheck to build?
15 Rent Houses Did the Same Thing Faster
15 rent houses did the same thing as your million dollar 401k, but did it take you your whole working career and a huge chunk of your paycheck to build?
You can buy 15 rent houses in 5 years or less.
The Five Year Plan
Here’s how to buy 15 rent houses in 5 years:
Year 1: Save $5k from employment to buy 1 house with a hard money loan. (1)
Year 2: Save $5k and refinance $5k out of the 1st house to buy 2 houses. (3)
Year 3: Save $5k, refinance $10k out of last year’s 2 houses, to buy 3. (6)
Year 4: Save $5k, refinance $15k out of last year’s 3 houses, to buy 4. (10)
Year 5: Save $5k, refinance $20k out of last year’s 4 houses, to buy 5. (15)
This example only took $25,000 out of pocket over a 5 year period… much less than a million dollar 401k …and much faster.
But Wait… There’s More
The story doesn’t stop there, with 15 rent houses and $3,000 a month in cashflow. The beauty of real estate is that there are so many different ways it makes you money.
While a 401k gets smaller and smaller in your retirement, rent houses continue to increase in value and cash flow year after year.
Year 1: Save $5k from employment to buy 1 house with a hard money loan. (1)
Year 2: Save $5k and refinance $5k out of the 1st house to buy 2 houses. (3)
Year 3: Save $5k, refinance $10k out of last year’s 2 houses, to buy 3. (6)
Year 4: Save $5k, refinance $15k out of last year’s 3 houses, to buy 4. (10)
Year 5: Save $5k, refinance $20k out of last year’s 4 houses, to buy 5. (15)
This example only took $25,000 out of pocket over a 5 year period… much less than a million dollar 401k …and much faster.
But Wait… There’s More
The story doesn’t stop there, with 15 rent houses and $3,000 a month in cashflow. The beauty of real estate is that there are so many different ways it makes you money.
While a 401k gets smaller and smaller in your retirement, rent houses continue to increase in value and cash flow year after year.
1. Equity Capture
If you bought those houses correctly, you should have captured equity in each house. Let’s say you captured $20k in each house. That’s $300,000 added to your net worth.
If you bought those houses correctly, you should have captured equity in each house. Let’s say you captured $20k in each house. That’s $300,000 added to your net worth.
2. Market Appreciation
Real estate doubles in value every 20 years. That means: by the end of your retirement, your real estate holdings would have exploded in value.
Real estate doubles in value every 20 years. That means: by the end of your retirement, your real estate holdings would have exploded in value.
If each house was worth $100,000 when you bought it, then all 15 were worth $1.5 million. You could potentially add another $1.5 million to your net worth over the next 20 years.
3. Cash flow
Rents rise over the long run, adding to your cash flow year after year.
Rents rise over the long run, adding to your cash flow year after year.
4. Principle Pay down
Your tenants will be paying down the notes on all of your houses. If you had 20 year notes on each house, you would have them all paid off in 20 years, adding another $1.5 million to your net worth.
Your tenants will be paying down the notes on all of your houses. If you had 20 year notes on each house, you would have them all paid off in 20 years, adding another $1.5 million to your net worth.
5. Tax Advantages
Real estate investors pay the lowest taxes of any for-profit group in the United States. The cash flow is virtually tax-free when you account for the depreciation deduction the IRS allows you to take.
If you decide to sell and capture your equity, you can roll the profits into a 1031 tax exchange to defer the capital gains tax. When you pass the properties down to your children, they take over the property at the new cost-basis, wiping out all the capital gains tax.
Real estate investors pay the lowest taxes of any for-profit group in the United States. The cash flow is virtually tax-free when you account for the depreciation deduction the IRS allows you to take.
If you decide to sell and capture your equity, you can roll the profits into a 1031 tax exchange to defer the capital gains tax. When you pass the properties down to your children, they take over the property at the new cost-basis, wiping out all the capital gains tax.
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