Shaping Your Financial Future through Investing in Real Estate

Buying rental property or other real estate investment methods can be a great way to shape your financial future and retirement. That’s the topic of Episode 86 of the What the Wealth Podcast.

Bigger Pockets

Over the last 10 to 15 years, there has been a huge movement among young professionals who have become very savvy real estate investors. BiggerPockets has created its own little subculture for “one door at a time” real estate investors who buy rental properties as a way to grow their wealth and provide income in retirement.

Some have been so successful they’ve quit their jobs to become full-time real estate investors. There are different ways to grow a real estate portfolio; many of these full-time investors use leverage, i.e., using mortgages to buy properties.

Cash Flow

There are many people on both sides of the aisle, for and against, when it comes to real estate investing, and there are a lot of factors involved; interest rates, inflation, borrowing costs, finding the right properties, just to name a handful. But historically, real estate as an investment does well.

The conventional wisdom tells us that in order for real estate to be a sound investment, it has to cash flow, to make a profit immediately. And, of course, that’s true. If you own a rental property and the rent doesn’t cover the mortgage, taxes, insurance, and maintenance costs, it might not be worth the risk of owing it.

I believe owning real estate should be an intentional decision; meaning don’t turn all houses into rentals just because it’s an easy process. Don’t make your family home an “accidental” rental. Your home is for your family. Go out and find a property with the sole reason of renting it.

This means doing a lot of research and due diligence; how are the schools, how walkable is the area, are there a lot of amenities nearby, what are similar homes renting for, what are the historical rent increases, 3%, 5%, 8% per year? The last point is important because many rental property owners are lulled by good tenants who pay rent on time and take good care of the property. But over, say, a five-year period, taxes, insurance, and maintenance costs have risen, but your rental income has not. It’s a trap a lot of landlords fall into.

Going Against the Grain

The issue of cash flow is where I think a lot of real estate and financial professionals get it wrong. When discussing whether or not you should include real estate in your portfolio, they talk about cash flow, mortgages, interest rates, vacancy rates, etc. And many of these professionals say that if you are only breaking even or making just a small profit, it doesn’t make sense to take the risk on real estate.

I disagree. If you’re close to retirement or retired, buying a property that doesn’t have a lot of cash flow may not make sense. But if you’re years away from retirement and can use leverage, putting down 20%, for example, and getting a mortgage for the rest, buying rental property can make a lot of sense.

Using someone else’s money, leverage, to make money when you have another ten or twenty years to work can make a lot of sense, even if the asset is just breaking even or making a small profit because you’re building wealth.

Compounding wealth happens in bite-sized steps; it’s a long-term game. It doesn’t matter if a property is only breaking even or making a small profit. You have years to let someone else pay for that asset. As you move towards retirement, you can use the income from that asset to supplement your pension, Social Security, and investments. People will always need a place to live.

This strategy is the velocity of money. Smaller investors don’t need to have hundreds of doors and don’t have to have substantial profits immediately. They’re using someone else’s money to pay for an asset.

You do want to break even, as you don’t want to reach into your own pocket for a property’s expenses. But you don’t have to immediately clear $500 or $1,000 a month. That’s the beauty of accumulating doors with someone else’s money; in the future, you can turn that investment on to provide income. Or you can sell that asset down the road. This is a huge wealth-building tool that many overlook because they aren’t thinking long-term; they’re only thinking about immediate cash flow.

We ignore day-to-day things like volatility in the market; we’re long-term investors. If you’re comfortable owning real estate, you can apply that same philosophy. Don’t think of it in terms of one month or six months, or even one year. I own several rental properties myself. Owning real estate is a long-term tool for wealth building.

If you have questions about adding real estate to your portfolio or any other aspect of financial planning, reach out to us. And check out my new YouTube channels. The videos are short, walk and talks, where I take a stroll and talk about whatever’s on my mind. I also have a Paradigm Wealth Partners channel and have recently created an Instagram page.

Listen to the Full Episode:

What You’ll Learn In Today’s Episode:

  • Investment philosophy and why I like real estate investing.
  • The various factors that you need to pay attention to when investing in real estate.
  • What the bigger pockets movement is and how many of them are buying properties.
  • Where cash flow comes in and the importance of having the right investments.
  • Why all houses shouldn’t be rentals.
  • Things to look at when searching for a property and how to determine rent.
  • A common issue people have when it comes to rent (and raising it).
  • Where not to get caught up and how to harness the velocity of money.

Ideas Worth Sharing:

  • “There’s a lot of due diligence you can do on the back end to determine, ‘Does real estate investing make sense?’” – Jonathan Bednar
  • “When you own real estate, it should be an intentional decision.” – Jonathan Bednar
  • “If you can use someone else’s money to pay for that asset for you, then you are building wealth.” – Jonathan Bednar

Resources In Today’s Episode:

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