The Case For Real Estate in Retirement Planning by Bill Roberts
If I want to retire I will need more than a million in my retirement fund. Otherwise I just won't have enough monthly income to pay my ongoing living expenses.
Fidelity (you know, the Green Line on the floor) is the largest custodian of retirement funds. They report that about 90% of Baby Boomers have less than $100,000.00 in their retirement accounts. This is barely enough (along with Social Security) to live for two years. Then it is back to work and/or eating dog food straight from the can.
What most people don't realize is that when they retire their cost of living actually goes up. They simply need more money. After all, every day is Saturday.
Every Day Is Saturday
You know what Saturdays are like: a trip to Home Depot; a round of golf and lunch with your buddies; dinner and a movie with your spouse. In other words _ Spend - Spend - Spend.
And with all your "Extra" free time a few extra vacations are in order. Trips to see the kids and grandkids, a cruise or two, that dream trip to Europe or the Far East.
How can retirement cost less than working? It just can't unless you want to sit on the porch and do nothing.
The Solution
So what is the solution? Simply put, it is more money. You must have more money in your retirement plan.
If you are going to work ten more years, where will you be?
Assuming you have $100,000.00 in your retirement fund and you leave it with Fidelity, you can reasonably expect it to double in ten years. Fidelity is one of the best at what they do, but they are generally limited to investing your money in the securities market. They have an historical record (25+ years) of returning approximately 8% per year. Good, but not good enough if you want to retire.
The Case For Real Estate
They say that all real estate is local. That is another way of saying that the real estate market is really many, many markets, no two of which are the same. While one market may be in decline, or static at best, other msrkets are HOT.
Real estate also "offers" you the opportunity to leverage your investment.
An example of a leveraged real estate investment:
Purchase price $1,000,000.00
50% Down Payment 500,000.00
10 Years @ 8% Growth - New Value 2,000,000.00
Increase in Value (Gain) 1,000,000.00
Return on Investment (ROI) 200%
Or, in other words, TRIPLE your money back.
But, if you only have $100,000.00 even a "triple" won't give you enough money to retire.
So, what do you do? Well, simply put, you need to look for a better return than 8%.
Fortunately, ALL REAL ESTATE IS LOCAL. If 8% is an average return, that means that a higher return is possible.
Some of my favorite ways to get a higher return is to look for undeveloped land or under-developed land in the path of progress. This type of real estate investment is called LAND BANKING.
A Winning Strategy
Buy a parcel of land that is "well positioned" but not yet develop-able. Hold it for at least 10 years. Then sell it or develop it.
For example: let's say we found a ten acre parcel of agricultural land a few miles out of town at the crossroads of two highways. The owner wanted $25,000.00 per acre, but wasn't finding any takers. It was priced too high for farm land and wasn't yet develop-able as residential or commercial property.
We see the opportunity for Land Banking. A pro-forma analysis:
Purchase Price $ 250,000.00
Down Payment 100,000.00
Owner Carryback @ 5% interest only due 10 years 150,000.00
Carrying Costs for the 10 years:
Mortgage Interest 75,000.00
Taxes 25,000.00
Weed Control (and other maintenance costs) 25,000.00
Insurance 10,000.00
Management Fee 27,000.00
Reserve 23,000.00
Total $ 185,000.00
Source of Funds:
Rent (tenant farmer) 75,000.00
IRA Annual Contributions 50,000.00
Billboard 30,000.00
Cell Tower 30,000.00
Total $ 185,000.00
At the end of the ten years the land is sold to a developer for One Million Dollars.
Sale Proceeds $1,000,000.00
Costs of Sale 120,000.00
Mortgage Pay-off 150,000.00
Net Proceeds 730,000.00
Initial Investment 100,000.00
Additional Investment 50,000.00
Net Return on Investment $ 580,000.00
This represents approximately a 20% compounded ROI. A much better return than the 8% ROI on our Fidelity account.
We are actually within striking distance of having enough money to retire.
Maybe there is a better opportunity out there, but this seems like a good place to start.
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