$10k p/yr or $39k p/yr... You Make the Call

Ok, very obvious, I’ll take the $39k.  Easy decision right…but for many clients who have been taught the “fundamentals of investing”, they can’t break away from the idea that their investment advisor tells them that they need to invest everything in the equity markets and hope (rhymes with dope) that the markets will go up and that they will have enough to retire on.  For me, hope is not a strategy.  I know there are no sure things in life, but I am going to at least greatly improve my chances of success by diversifying into other asset classes (i.e.: real estate).

Regarding how to go from $10k p/yr to $39k p/yr by investing the same amount of money, here are the numbers:  Option 1:  Invest $160k in the stock market for 6 years at an annual return of 9% (also assume you don’t lose any money, that you just grow your money slow and steadily upward at 9% per year).  At the end of year 6 you will have approximately $260k.  Using a withdrawal rate of 4% that financial advisors say is the maximum you can safely withdraw per year and not run out of money during your lifetime, and you end up with around $10,000 per year for retirement.   Now I’m not saying $10k a year is nothing ($833 per month), but it’s not getting me where I want to be during retirement. 

Option 2: But what if we take that same $160,000 and invest it in the purchase of 4 affordable investment properties.  Properties that cost on average $80k each (good, solid properties in mid-west markets).  You put down 50%, finance the rest and using your net positive monthly cash flows, pay off those loans over the following 6 years.  So, at the end of year 6, you have paid off the loans on all 4 properties.  You own them all free and clear and have approximately $400k in equity (assuming 4% per year appreciation) and they generate approximately $39k per year in net cash flow after all expenses!   That’s $400k in equity plus $39k per year in positive cash flow, now I don’t know about you but that is something that moves the retirement needle for me.  

But as I always write, to get to these numbers you have to think outside the box, you have to be willing to challenge your financial advisor when he/she counsels you to just stay in stocks because you will be “better off in the long run”.  Maybe you will be…or maybe you will have let a golden real estate investment opportunity pass you by. Until next month….