STEP 1: Know Your “Number!”
STEP 2: Calculate Returns
This first step is probably the most important, yet usually the step that is missed so often. My number consists of how much money I think I’ll need for retirement and how long I need it to last. Once you have that number, adjust and revise it each year so that as you approach retirement, it gets more accurate. Think of it like a 401k—you look at it on occasion and make some changes, you don’t need to adjust it daily. When you know your number, you need to see how short you may be if you stay on your current path. That shortage is your gap amount. If you know your gap amount, then you will know how much extra investing you’ll need to do in order to hit your goals. My own gap is filled with real estate investments.
There are many ways to evaluate properties and returns and each investor has their own parameters. I use the following criteria when calculating returns on each property to fill my gap amount. 1. Cash Flow. Many investors chase cash flow as their sole goal and so purchase poor assets. Ask yourself, “How can this cash flow be invested to earn more cash flow?” Turn it into another investment vehicle. Reinvest your returns. 2. Property Appreciation. The first type of property appreciation is natural market appreciation. Meaning the market went up but you didn’t do anything to the asset to earn that increase. The second is appreciation that we create, typically from improving the property. Utilizing both types of appreciation is one of the best benefits of owning real estate and can be most impactful if you only purchase a few homes. When looking at appreciation, remember that the value only matters on one day—the day you sell. 3. Principal Paydown. Become well educated in financing options and how to structure your debts - don’t pay more interest than you need to. If you know your timeline, goals and gap amount, you can make better financing decisions that will pay dividends over time. 4. Tax Write Offs. One of the biggest issues I see with novice investors is that they have no long- term tax or exit strategy. They give too much to the IRS because they have planned poorly. Understand depreciation recapture, ordinary income rates, 1031s and capital gains. The rules say we all have to pay taxes, but they don’t say we can’t use those same rules to pay fewer taxes. 5. Leverage Strategies. The reality is that usually the “cost of entry” is steep to purchase rental property. The average buyer needs a 20%- 25% down payment. However, using leverage strategies, such as turning your primary home into a rental, HELOCs, cash-out refinancing and short-term hard money can be effective to grow in a shorter amount of time. Each one has its pros and cons, but don’t be tied to the old mantra of having to save for each purchase. Learn the various ways to use the same money over and over.
DON’T BE TIED TO THE OLD MANTRA OF HAVING TO SAVE FOR EACH PURCHASE. LEARN THE VARIOUS WAYS TO USE THE SAME MONEY OVER AND OVER.
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