How To Quadruple Your Money With NO Appreciation

Posted @ 5:19 pm - Filed under 401(k)'s & IRA's, BawldGuy Axiom, Buying Income Property, Cash Flow, Depreciation, RE investment strategies, Retirement Income, San Diego Property Owners, Tax Shelter

Lost a ton in your 401k at work? Most show about 35-45% losses from their peak. Man, that hurts just to write it. Here’s a way you can very safely and prudently build a basket of retirement income without bankin’ on any appreciation. I promise — you can do it.

Here’s an example, using real properties recently purchased by real clients. I’m gonna modify some of the numbers, but the modifications will not in any way make the bottom line better by an inch. (Worse in fact.)

What if you paid $245,000 apiece for four properties, each with an annual gross scheduled income of $28,800. The renters sign year long leases, and tend to stay a little longer than two years. We’ll set the operating expenses and vacancies at just under 40% — $10,950 a year. This results, when using currently available loans, in a negligible cash flow of less than $250 monthly — essentially a break even.

BawldGuy Axiom: Any professional analysis heavily, or even moderately reliant upon appreciation for a respectable return is suspect. Appreciation should be viewed as a luxury.

The down payment used will be 20%, though I’ll use 22% for any return figures. In these transactions you’ll be credited up to 2% of the sales price for your closing costs. The first year’s cash flow will be just under $3,000 or so for each property. We’ll assume any increases in expenses will serve to cancel out any rent increases — and yes Auntie, we’ve had rental increases lately. The loans are fixed rate, amortizing over 30 years, with a 6.5% interest rate.

If in five years the value is still $245,000 — what will you have gained? Of course, you didn’t invest to find yourself in a non-appreciating asset. Since your crystal ball is in the shop, we’ll just consider it your time in Murphy’s barrel.

So, what will put a smile on your face in this chain of events?

Income tax savings of around $7,500 a year, or $37,600 over 5 years

After tax cash flow of almost $12,000 annually, or $59,800 over 5 years

Principal reduction of just over $50,000 over 5 year holding period

It took about $54,000 +/- to close each of the four purchases, meaning you’ve invested a total of $216,000. In 5 years without values increasing, here’s what happened.

Add up your 5 year total for tax savings — $37,600. Your after tax cash flow for the same period is a couple hundred less than $60,000 (exclusive of tax savings). What that means to you is simple. Your Levi’s garnered just under $20,000 ($19,520) annually in spendable cash. That’s an after tax cash on cash return of roughly 9%.

You also owe about $50,000 less than the day you closed escrow. Let’s look at what you might’ve done, if the after tax income was expendable for you. The assumption is you had a generously funded Sominex Account — cash reserves — or ya wouldn’t a been my client.

If you’d taken the after tax cash flow, say $19,000 a year, and applied it monthly to your loans, your total loan balance for all four loans combined, would’ve been only about $622,000 at the end of the holding period — an equity gain of roughly $162,000. If you continued the practice ’till the loans were paid off, you would’ve gone a long way to righting your retirement income ship. The income would be, give or take, $18,000 a year apiece — before depreciation. This will take just over 16 years.

Let that sink in. If you’re 50 now and are still reeling from the cheap shot 40% loss your 401 just took, that’s really not all that long. Plus, unlike the stock market, you’re not relying one bit on the value of your investment rising even a penny from the day you bought it.

Your after tax income would run around $62,000 a year. You would’ve created this without a dime of appreciation — or a dime outa your own pocket. Not bad for only 16 years without any appreciation whatsoever, would you agree?

This is only to illustrate what’s possible for those of you wondering about your retirement. If you now have that $216,000 in capital this illustration is to demonstrate something I was taught when I first made the transition from homes to investments.

Appreciation is a luxury — period — end of sentence. If you go into every real estate investment with that axiom in mind, you’ll be changin’ the way you analyze and acquire property.

For those of you who’ve been decimated via your 401K or similar plan, this is a potential lifeline. Could things go wrong down the line? Absitively. Could those numbers be affected negatively? Yep. But they’re fairly conservative as used. Even if we reduce the ultimate end game income by over 40%, I bet you’d still like it.

If you could invest $216,000 today and end up with 36,000 in before AND after tax income, less than 60% of what would be the most likely scenario, would you be OK with that? Your original capital would’ve more than quadrupled — in less than eight years. The after tax income at that point would be over a 16% yield on the original capital — again, using only 60% the most likely scenario.

And all without any appreciation whatsoever.

Something to chew on while perusing your latest 401K statement.

Hey guys, I need a fix. Heck, I always need a fix. So call me at 619 889-7100. Have a good one.

This entry was posted on Tuesday, January 5th, 2010 at 5:19 pm and is filed under 401(k)'s & IRA's, BawldGuy Axiom, Buying Income Property, Cash Flow, Depreciation, RE investment strategies, Retirement Income, San Diego Property Owners, Tax Shelter. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.