What Can A Prudent Real Estate Investor Do In 20 Years With $55,000 Today And Some Periodic Cash?

You’re in your mid-30′s and have, give or take, between $50-60,000 to invest in real estate. Your income allows you to set aside another $500 monthly to augment any Plan you may set in motion. You believe me when I tell ya no Purposeful Plan these days should factor appreciation into the analysis — appreciation is officially a luxury ’till further notice. From where I stand, those who insist on imputing future appreciation into their before and/or after tax cash flow return analysis are playing with fire.

The strategy to be used in this environment is one of conservatism — combined with an ever watchful eye on your originally invested capital. Boring? OK, ya got me there. Will it get ya to your own Point B? It’s far more likely than having faith in appreciation the next few years. Let’s explore how you might grow your capital and create a sweet income stream for your retirement without the luxury of appreciation.

Let’s look at a $250,000 income property with a $4,000 annual after tax cash flow. You put 20% down and obtained a new loan for the balance at 5.5%. (Closing one tomorrow for 5.375%.) What would happen if you used the cash flow, plus spendable cash each month to methodically reduce the loan’s balance?

After 10 years without adding anything to your monthly payment your balance would be an ounce more than $165,000. On the other hand, if you applied both the cash flow and an additional $500 (if you can afford to), your balance at the end of those 10 years would be a tad over $32,000! Without any appreciation whatsoever your equity has grown from $50,000 to almost $218,000.

Of course there are all kinds of ways to figure the return on an approach like this. Allow me to apply Grandma’s Analysis. “Let’s see, I put in $55,000 now. Over the next decade I put the property’s cash flow plus another $500 of mine each month to reduce the loan balance. I end up with way over $200,000 in real equity — and the property never went up in value? Works for me.”

This works way mo betta if you’re strong enough to qualify for a 15 year loan, which will probably come with an interest rate below 5%. You’ll need to come to the table with a larger down payment, but with the same $500 added to your monthly payment, you’re free and clear in a decade, give or take a month.

Think about that. No appreciation and you’ve gone from an original capital outlay of $55,000 + $500/mo., to a free and clear quarter million dollar equity, which would, assuming the Net Operating Income never rises in that period, result in a cash flow of about $17,000 a year.

This approach allows you to create an ever increasing flexibility when it comes to exploiting opportunities arising from time to time. For instance, with the original 20% down and the scenario above (30 yr fixed rate), your equity position after five short years would be almost 50%. If there was an opportunity to trade, tax deferred, into more property, and it made sense to do so, you’d be in perfect position to do just that — again, without a drop of appreciation ever. You’d be able to more than double your portfolio’s value, which would bode well for future capital growth and increased retirement income.

In 20 years there are so many things that are possible. What I’d like you to take away from today’s missive, is that you can create capital growth without the magic of appreciation. As your career advances you can increase, if you wish and it makes sense, what you add to your Plan periodically. The more you have prudently available, the more income you’ll ultimately be able to generate upon retirement.

In fact, add a small monthly premium for your EIUL, and in 20 years, 30 if you choose, you’ll have fashioned yet another basket of retirement income — all of which will of course be tax free. How much? In 20-30 years a small monthly premium can result in a tax free income in the range of $50-100,000 depending upon your particular factors. (Age, health, life expectancy, etc.) Having a Plan and doing things on Purpose is the foundation for a magnificently abundant retirement.

Just so ya know, I haven’t had my daily fix yet. What’s up with that?! Gimme a call at 619 889-7100 and we’ll figure stuff out. Have a good one.

Related posts:

1. Where Will The California Real Estate Investor Be In 20 Years?
2. As A Real Estate Investor Ya Gotta Pick — Capital Growth or Cash Flow
3. Retirement Date More Than 5 Years Off? — STOP Your Love Affair With Cash Flow
4. Are You Chasing Chump Change Cash Flow? Sacrificing Tomorrow’s Dollars For Today’s Pennies
5. Real Estate Investors — Is Your Addiction To Cash Flow Lowering Potential Retirement Income?