• Property 2 takes an additional 4.2 years. We are now up to $600 monthly in cash flow ($200 original savings, $200 from Property 1, $200 from Property 2). • Property 3 takes 2.8 years, and we have $800 monthly in cash flow. • Property 4 … I’ll save you the agony of the math and just show you the total at 30 years. At 30 years, we will have a rental cash flow of $4,000 per month and own 20 properties. Let’s just wrap our heads around that: $4,000 per month in cash‑flow—even though we didn’t get to purchase our first property until 8.5 years into our savings. Compound interest has a way of exponentially increasing your retirement accounts. But real estate investing can outperform compound interest. WHAT WE DIDN’T CONSIDER We made some obvious assump- tions in these examples both for and against real estate investing: All rental properties cash-flow for $200 and the purchase price was only $100,000. What we didn’t even dive into was property appreciation or rental income increases. Rem- ember rental income has the potential to increase by around 2-3% each year. The average rate of return on the retirement account was “only” 8%. Even if we allowed for a 12% return, which is likely unrealistic, our retirement account would be $579,198. Using the 4% rule, that would lead to $23,167 a year, or just under $2,000 a month. That’s still substantially less than the returns on real estate.
We didn’t incorporate any large expenditures on our buy-and-hold properties, which would likely occur if we held them for more than 30 years. Although we do consider capital expenditures for large issues (e.g., roof, HVAC, appliances), holding a property for this long will likely impact our cash flow. We also didn’t evaluate what selling our properties (using the equity created from debt pay down and appreciation) and purchasing larger properties with higher rent would lead to. We didn’t look at all the tax benefits and potential securities that come from real estate investing. We didn’t account for our net worth if we were to sell the properties. We also didn’t evaluate taxes on selling properties. Although we are receiving rental income from all 20 properties, we do not own most outright and will have a mortgage on a vast majority—but we are still receiving that income. Although it is impossible to consider all the potential variables with real estate, it’s clear the potential upside of real estate investing far surpasses that of investing in your typical retirement accounts. Real estate, like saving for retirement, is a long-term play. However, it can set you up for a future that you could not imagine. The best thing is to learn about real estate investing to find out if it is a suitable strategy for achieving your financial dreams. •
INVESTING IN REAL ESTATE Now, let’s look at an alternative strategy for saving for retirement: real estate investing. Real estate investing (REI) can include a multitude of endeavors, but for this discussion, let’s focus solely on single-family buy-and-hold rentals. When we talk about REI, we are talking about purchasing a property and renting that property out to someone else. In doing so, we receive rental income that should cover the mortgage on the house, potential maintenance and repairs, large expenses (capital expendi- tures), and potentially a property management company (if desired). If the deal is executed correctly, our rental income should be more than all our expenses. So as the investor, we are creating passive income, known as “cash-flow,” on a monthly basis. The cash- flow generated is extra income that can be used for paying bills, entertainment, savings, or buying more real estate! Let’s reconsider the previous example in which we saved $200 per month for 30 years. This time, we’ll purchase real estate instead. So, we save $200 a month until we achieve enough for a down payment on our property. We’ll combine the cash flow we generate from the monthly rent on the property with our ongoing $200 monthly contribution to allow us to purchase more properties in a timelier fashion. Let’s see how it plays out! We assume all properties cash-flow $200 per month, a $20,000 down payment (20%) on a $100,000 property. • Property 1 takes 8.3 years to save the $20,000. We receive $200 monthly in extra cash-flow.
Zach Lemaster is the founder and CEO of Rent To Retirement. Lemaster is a
seasoned real estate investor who has accumulated a large portfolio of rental properties across multiple markets, including single family, multifamily, commercial, and new construction. He is passionate about educating others on the numerous benefits of real estate investing and how to use real estate as a means to create the lifestyle each person desires.
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