by Jeff Brown
Time doesn’t care about anybody. It just is. It can be our best friend or the cause of our retirement plan’s abject failure. What often gets lost in the discussion is that 10 years is just as long for the 55-year-old as it is for the 35-year-old — IF their retirement begins a decade from today. Sure, there are myriad factors involved in what can or can’t be done. But in the end, those pesky birthdays keep coming.
The amount of initial capital you have, plus sources of available monthly cash, make a huge difference in what’s possible, sometimes what’s even an option to consider. I’ve seen some impressive investment goals accomplished in just a decade, but to do it you better have capital, plenty of incoming investable cash, and more than a dab of intestinal fortitude.
After fiercely proclaiming we’ll be working by choice in just 10 years, deciding to be timid in our approach just ain’t gonna make it happen. That doesn’t mean, however, the “swinging from the chandeliers” MO is the way to go. It means we must be decisive, flexible, and most of all, in attack mode at all times. But just what the heck does that even mean, right? 🙂
So glad you asked. The various investment strategies chosen must not remain in a vacuum. What that means is that you should simply combine your strategies when possible and harmonious. Here’s an easy example.
Real Estate Investments
Investors tend to get caught up in schools of thought. We don’t need to open that can of worms today (he said, dodging a bullet), but ALL those schools of thought exist in a vacuum by design. That is, they lay out a strategy to be followed, step by step, without regard for anything else the investor may be doing elsewhere, or with different real estate related/unrelated investment vehicles.
However, by expanding our view to include all four lanes of the investment highway, we can see the advantage, long term, in using all four lanes instead of the same one all the time. In fact, we can have different cars in all the lanes, each with their own Point B in mind, all of which are under our control. Furthermore, they can act as a highly coordinated team, with the shared goal of an overall, team oriented Point B.
Short Term Real Estate Investing
I’m speaking of flipping for the most part — and this form of investing can and should be an excellent turbo charger for our long term investments. Still, I feel compelled by experience to admit that the vast majority of investors should take a nap every time flipping comes to mind. 🙂 One of the fastest ways I’ve found for most folks to make a small fortune in flipping is to begin with a large fortune. Batta boom!
Taking the after-tax profits from flipping to use in speeding up either the elimination of long term real estate debt, the acquisition of more long term real estate/notes/other, or both, is much mo’ betta than merely flipping ad nauseum. It not only increases the velocity of debt elimination, it adds to the ultimate income in retirement. How? We’ll talk about that another time.
Suffice to say, flipping profits should be viewed as an opportunity to open up more options down the road, not as an end in and of itself. It also helps the investor to avoid falling into the trap in which many highly successful flippers find themselves. They end up in their 40s or 50s with a superb lifestyle financed by a handsome flipping income in the low-mid six figures — or more. They then realize their high income and rich lifestyle are really nothing more than velvet handcuffs. The good news is they’re massively successful. The bad news is they literally can’t quit. They never used any of their after tax profits to generate retirement income. Oops.
As does real estate, notes come in all sizes and flavors. But note investors pretty much have the same goal with notes as real estate — retirement income. Many happily learn there are more ways to maximize a given note’s performance and ultimate yield than they ever imagined. Also, notes can be flipped, though that should be reserved for the highly experienced veteran investors. Income from notes can be viewed as octane boosters for the investor’s comprehensive plan. Here’s just one quick, yet specific example of the many, many options note income provides.
For those who’d love to refi their home, but don’t think it’s prudent for their family budget, here’s a solution. If your home’s value is currently $250,000 and you owe $80,000 at 4.5% interest, with payments of around $710/mo, try this scenario.
Refi at the current rate of roughly 3.75% for about $180,000 or so. Your new payment will be pretty close to $834/mo. That’s an increase of about $125 a month. For the sake of this scenario, let’s say it was a $500 a month increase to the family budget, which can be painful.
Take the $100,000 and buy 2-3 discounted notes, all of which are in first position. The range of cash on cash return runs 12-15%, but we’ll assume the bottom of that range, 12%. What that means in simple terms is that the monthly payment on the note coming to you will be about $1,000. Let’s further assume that after taxes that amount will turn into a whole buncha $650. That’s $150 a month more than the $500 monthly increase caused by your refi.
The after tax note income has not only allowed you to easily afford the increased payment amount, it’s provided an extra $150 a month to the family budget. But wait, there’s more! 🙂
You’ve also started your own note portfolio, which will grow ’til you retire. Let’s say you’re 40 when you did the refi/note purchase, and plan on retiring at around 60 or so. That’s 20 years of random note payoffs, all of which will include profits built in via the discount you paid at the point of purchase. Example: You paid $35,000 for a $42,000 note. When that note pays off (we never know when), that profit will be taxed at a rate lower than personal income taxes. You’ll then rinse ‘n repeat, buying slightly larger notes with larger payments coming your way. Over a couple decades this tends to add up, big time. 🙂
The are numerous other examples, but you get the point. The fact of the matter is, in my experience the “spread” between increased house payments and after tax monthly note income is greater than in this example. In fact, I’ve seen investors increase their monthly payments and still have the ability to pay off the larger loan sooner than they’d of been able to pay off the much smaller original loan balance. I know, a bit counterintuitive, but I’ve seen it happen in real time.
Imagine what’s possible in the long run.
The takeaway is this — stop thinking of each investment vehicle and strategy as stand alone. They’re not, or at least they don’t need to be. Short term profit strategies can be seamlessly combined with long term plays to yield not only higher ultimate net worth, but higher income in retirement to boot. Notes can be utilized to enhance and enrich your real estate efforts tremendously. It can also be reciprocal in that real estate can be used to invigorate your note portfolio in many ways. I know, ‘cuz I’ve seen me do it. 🙂
This post is not about specific step by step instructions. It’s to illustrate why, and little about how the serious investor with the goal of a bigger retirement income — sooner rather than later — can take off the blinders worn by the majority of investors out there. Ignoring this one principle — combining multiple strategies — will ensure you’re running the race to retirement toting a backpack full of rocks — and on purpose. Why on earth would anyone do that to themselves?
We need to make the factor of time a huge part of our plans for retirement income. It dictates what we can and cannot do. We can in many cases, however, “buy” time with the wise implementation of multiple strategies. Time may not always be our best friend — attention Boomers — but it doesn’t have to be our worst enemy either.
Investors: What do you think? How are your investing strategies geared towards retirement?
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