Take the next step
Now that you know how much money you need to retire, the next step is to come up with a plan to get it.
I have two basic approaches to this problem, the "one hit wonder" and the elephant feast:
The "one hitter wonder" is like the singer that has one big hit and manages to live a lifetime on the proceeds and the fame
The elephant feast is the answer to the question "how do you eat an elephant?" One bite at a time
A "one hit wonder" could have been a $25,000.00 investment in Apple Computer in July 1984 at $25 per share. Today's value of that investment is in the neighborhood of $420.000.00
But if you don't have thirty years to wait and a crystal ball to point you in the right direction, then an investment in some real estate that could be "developed" within the next ten years (such as a lot for a gas station or shopping center) could produce the needed result.
One hit wonders are great but not everybody is able to pull them off. They take money to get started and money to complete. Plus they require exceptional vision or luck to be in the right place at the right time.
One Bite at a time
The more practical method is the "one bite at a time." If your goal is ONE MILLION DOLLARS then you could accomplish this by doing twenty deals that generate FIFTY THOUSAND DOLLARS each.
"Fix and Flip" is the obvious solution, but there are other ways to invest in real estate that is not quite so capital intensive and risky.
High on my list of favorites is syndications. A "Syndicator" finds a good real estate investment opportunity and packages it up and sells it in "bite size" pieces. A typical investment might be a residential income property (apartment house) that the syndicator sells to investors as "units" for about $2,500.00 to $5,000.00 each. You can buy as many units as you can afford and that the syndicator will allow. He will establish "limits" so that no one has too much exposure or too much control.
An investor can plop 5 or 10 thousand dollars into ten different syndications which gives a fairly well diversified portfolio. Syndicators "promise" all sorts of things, but with careful scrutiny a net return on invested capital of 15% or more per year compounded should be obtainable.
If your current retirement fund has $100,000.00 in it and you can invest it for an ROI of 15% compounded annually, then you could have your MILLION DOLLARS in about 17 years.
If you need it sooner, or you need more, then you'll want to get a higher rate of return. Generally speaking, rates of return and risk are in a direct ratio.
The higher the rate of return, the higher the risk.
But that is not always the case. Sometimes greater returns are possible because of superior knowledge.
Knowing that a new freeway will by-pass a town means that the property on the main syreet in town will probably lose value, while land near the new off-ramp will soar in price. A little knowledge can be worth a lot. It has nothing to do with risk/reward ratios.
Knowledge is not always secret either. Knowing that sunbelt states and right-to-work states are going to prosper while northern states are going to continue to see declines is not privileged information. We all should know this.
All information is already baked into the price
Stock market analysts like to say that most "information" is "baked" into the price. Maybe so in the stock market, but it seems there is a little delay in the real estate market. If you can see the trend, there is probably time for you to profit by it.
Increasing your ROI from 15% to 20% will cut four years off the time necessary to get your million. At 25% ROI your $100,000.00 will grow to one million dollars in just a little over ten years.
But even greater returns are possible utilizing one of real estate's secret weapons: leverage.
Assume you bought a small apartment building for two hundred thousand dollars. You put one hundred thousand dollars down and financed the rest with the seller at 8% interest for 10 years at which time it would be completely paid off. The seller doesn't want his money any sooner than this. These apartments are currently rented for three hundred dollars per month each. A total gross scheduled income of $1,200.00 per month. This is just about enough to cover the mortgage payment. This small sunbelt town is about to get a new automobile plant. You figure that you can "double" the rents in the next couple years.
Three years later you "exchanged" this four-plex for twelve units just down the block. The owner of the 12 units lives in another state and has the property managed by a local real estate firm. They are also the listing agent for the property. They have not aggressively raised rents like you did because it would have caused disruptions.
You sold the four units for $400,000.00 and bought the 12 units for $750,000.00. You "moved" your $300,000.00 gross equity into the new building, and after all costs were paid you ended up owing $500,000.00 on the new building. You got another ten year mortgage this time at 9.5% interest amortized over 25 years. Your mortgage payment is about $4,000.00 per month. Taxes, insurance, maintenance, water drive your monthly cost up to $5,000.00 per month. Current rents are only $4,200.00 per month. You are negative about $800.00 per month. The seller is very happy. He thinks he screwed you.
By increasing rents $100.00 per month on each apartment you have completely covered the negative cashflow. You are still under the market. You "feel" that another $100.00 per month is justified. You let your tenants know that all new tenants moving in will pay the higher rent but theirs won't increase, at least not now. The property becomes very easy to manage. The auto plant went in. The rental market is good. A few tenants moved out and the new tenants paid the higher rent. You've managed to keep all the units rented. You've maintained the property beautifully. You've paid the increased cashflow down on the mortgage.
It is now ten years since you bought the original four-plex. You sunk your complete retirement fund of $100,000.00 into the property.
Your twelve unit building is almost paid off. It is a "Cash Cow." You could probably sell it for a million-five.
So we have obviously beat the 25% ROI necessary to grow your $100,000.00 into a MILLION DOLLARS. Was the higher return because of higher risk? Or was it the result of better knowledge?
The Real World
This was a hypothetical example but real ones similar to this do exist in the real world. You just need to look.
If the idea of being a landlord and dealing with the "Terrible Ts" doesn't appeal tp you. you can probably find a syndication the approximates the above scenario. Or you could call me.
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