The #1 Myth — Investing in Real Estate For Retirement — Boomers Beware

Posted @ 1:16 pm - Filed under Real Estate Investing, Retirement, Sominex Account, Capital Growth

No, smart aleck, it’s not buy low, sell high. That’s always been true, right? If that one’s a myth, we’re all in deep…trouble.

Let’s first construct a profile for a first or second time investor.

We’ll make them a married couple between 35 and 45 years old. They live, with their kids, (Maybe one is already in college?) in a suburb located anywhere in the country.

The husband is a hospital administrator making $69,500 a year + benefits. He usually gets a small bonus, normally around $5,000 or less. And, let’s say he’s going bawld. Yeah, that’s the ticket. His wife, once the youngest was in high school, she started a home based business selling diet supplements. She worked around 20-25 hours weekly, and has averaged around $25,000 a year.

“Tom” and “Sharon” “Tillman” bought their current home in back in 1993 when Sharon was pregnant with their third child. Their condo had been cramped for a number of years, and with the third child on the way, a larger place, a house, was on their menu. They paid $91,500 for it. In ‘00 they refinanced, and took out a modest amount of cash to add on a den for Tom, and a family room with a fireplace. The loan was for $125,000 — and their interest rate dropped almost 2%. Their payments went up less than $300 a month.

It’s now 2007, and Tom is beginning to give consistent thought to their retirement — and their lack of planning for it. He’s now 41, and Sharon is, well, younger than Tom.

Their long time friends, Greg and Debbie, are clients of mine. While having dinner at the Tillman’s home one weekend, Debbie said you should call our real estate investment guy.

They called, and came into the office several days later.

What do you think is the first thing they asked me? It’s almost predictable.

We can’t invest like our friends, because we don’t have enough savings.

You gotta know what’s comin’, right?

The #1 Myth when it comes to getting started as a real estate investor is…

We don’t have the money to invest.

Really? You’re making almost $100,000 between the two of you. Your lifestyle isn’t exactly keeping up with the Jones’s. Your house payments, including taxes and insurance, are just over $1,000 a month, which is about what most folks are paying for a decent apartment these days.

Your home is worth how much?

They try to come up with a figure, finally settling on around $300,000 give or take. Between the cool run-up in values we just experienced, and the family room & den addition, they’ve seen the home’s value go up nicely. What this meant was…

Their equity had grown to about $190,000 — a tidy sum, Grandma used to say.

I asked them — What would happen to their current lifestyle if their house payments, including taxes and insurance, doubled to around $2,000 a month? Sharon, at least at first, was just a tad dubious. Tom however, paused only slightly as he began to see the light. He knew they could afford the higher payments easily.

They’d be borrowing about $240,000 at 6% on a 30 year loan. That would put $130,000 in their new investment kitty. They already had, in addition to his 401(k), about $30,000 in savings, held in a liquid account.

Making a long story short — they refinanced their home, which indeed, appraised for a little over $300,000. Their net after loan costs was $129,000. They started a separate investment account.

I advised them their Sominex (Ambient if yer under 40) Account should be roughly $40,000. So we took $25,000 from the loan proceeds, and $15,000 from savings, and they had themselves a genuine Sominex Account. I prefer my clients sleep like babies when Murphy visits — and he will visit you sooner or later.

That leaves them $104,000 for their first round of real estate investing for retirement.

The #1 Myth is once again exploded easily.

It makes me a little sad, knowing their are literally hundreds of thousands of Baby Boomers, and their ‘Echos’ who’re in the same position as Tom and Sharon. Yet they are wondering how to better provide for themselves in retirement. They truly think they don’t have the money. Why do they believe that?

What I’ve heard first hand as the reason most believe in the #1 Myth, it’s because they’ve been following the same path as Grandpa did. Boiled down to its essence — use all extra income to pay down your home’s loan. The goal is to arrive at retirement with a free and clear home.

It makes sense then, that if your goal is to pay off your house, it would follow you’d believe you didn’t have the money to invest for retirement. It makes sense from that perspective.

What really needs to happen? They need to grow their capital.

But then you know it doesn’t make any sense in real life. Folks following Grandpa down his old, beaten path, discover sadly it now is a dead end — with now room to turn around. The combination of Grandpa Economics and belief in the #1 Myth is resulting in reducing the potential quality of life Boomers can have in retirement.

Tom and Sharon now have the next 20-25 years, maybe less, Lord willing and the creek don’t rise, to grow this $104,000 into a robust net worth. That purposely created wealth will be the source, the foundation of a retirement income they never knew was within their reach.

I love this part of the business. There’s simply nothing like it.

This entry was posted on Monday, October 22nd, 2007 at 1:16 pm and is filed under Real Estate Investing, Retirement, Sominex Account, Capital Growth. 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.