Real Estate Investment plan for ANY economyPosted: September 27, 2008
I thought I might share some of our financial plans for the upcoming years, at least as we see them now. I am going to go on the assumption that James will graduate in about three years. If that does not occur then the time frame for the first home slows down.
***This is a little long but there is good information in here about budgeting and working on a plan slowly and safely. If you are serious about looking for a plan that any family can accomplish, read on.
I also want to make it clear that this is something that I will be doing while I plan on homeschooling my kids. This will be my small business. James will be working and earning money in biochem, something he has always said he wants to do until he dies. He currently has no plans on retiring although I want to make sure that he can at any point that he wants to. The reason that I want to make this clear is that even though I will not be the bread winner during these early years that does not mean that I cannot be the bread winner later in life, just using the power of owning a home. This is without me stepping foot back in a job once he has graduated. I will also be financially independent regardless of what happens to James…ladies THIS IS IMPORTANT! Know how to run your own financial life no matter what your spouse does for a living.
This plan is not hard, in fact it is almost pathetically easy – in theory. The reality though requires that you are willing to live low and maintain a budget without getting caught up in how much you make. This plan is also in conjunction with a solid investment plan. Although by necessity the market investments will be a smaller portion of our overall strategy for the first ten years while we are paying off the first home, it will become a bigger part of the plan as the homes start paying for themselves and we have more spare cash. We also have a ten year jump on investing in mutual funds at this point and that money will continue to grow even with the small additional funds we will be putting in over the next few years. (Basically, we will maintain current investment levels of about $350-400 a month for a few more years.)
The most important thing in your financial life is to remember that you can live off of 30-40k a year. You did it when you were young and you can still do it now. Use Netflix instead of buying DVD’s, go see a movie during a weekend matinee, if you do go out – share the meal…you don’t need that huge plate anyway, pack a lunch, bring your bagel and coffee to work (a good coffee maker and good beans are still cheaper than Starbucks), do you really need cable – everything is already on Netflix or at the library, etc, etc, etc. You just can’t give yourself a taste of the next level…and if you have already had the taste you have to wean yourself off of it slowly. Think of the things that you don’t want or need in your life and back off of them. All of that extra money then goes to build your little empire. Once you see the ball rolling you will not miss cable as much as you will enjoy watching wealth build. Knowing each night when you go to sleep that the economy doesn’t bother you because you are above the wave is wonderful. Once you are no longer worried about changes in the world around you, they stop being a source of fear and become opportunities waiting for you to scoop them up. I know I sleep better at night knowing I have over a year’s worth of bills saved up for a rainy day (years of living just under our means to accomplish this.) And this cash on hand sure as hell gives me the ability to watch my portfolio go down with the market and still get excited about buying more while it is cheap!
*****It is very important to remember while you read the rest of this that I do not plan on speculating, I don’t care if the home prices go up or down. I am also not reaching to make mortgage payments, I will only be considering homes that are within our means and the plan’s budget. I WILL NOT have more than one outstanding mortgage at a time and will therefore be protected from bills piling up if one or more of the homes is without renters for any period of time or needs repairs. This will not allow me to “get rich quick” but it does minimize risk to VERY acceptable levels for a family with children and one income, as I intend to be. And it still allows for a very rapid build up of wealth once the ball gets rolling (about 15 years or so.)
Back to immediate plans, when James graduates he should be making about 80K a year. We should have a mortgage (including taxes and all that jazz) of about $1700-1800 a month. This is assuming that we decide to buy a car in cash and not put any more of our savings into a down payment, i.e. opt to go the emergency money v.s. down payment route. We should have around $3500 to $4000 coming in a month (with about a year’s worth of bills still in the bank.) If we keep the living expenses low (no going out to eat or heavily decorating the house for the first two years) I should be able to pay at least $3000 a month or if things do well, I will be able to make double monthly payments until the house is paid off.
We figure that it should take us 6 or 7 years to get everything paid off and own a $240,000 home outright. This will save us, according to USAA’s mtg calculator, $269,921 in interest over the life of a typical 30 year home loan. Once we get the place paid off we are thinking that we will live mortgage free for about 2 years saving up money toward another home. We will be able to put 80-90k down on a new home without selling this one and we will have an instant cash generating rental property. As the place that we would like to purchase is 4 minutes from an army base we should have no problem renting in any housing market.
At 37 we will then be paying on our second personal home (while qualifying for first time home buyers incentives and rates again) with our first rental property paid off. I was thinking at that point I would then start a corporation that I will sell that rental property to (separate the personal income and wealth from the rental income for legal and tax reasons.) All of the money that the rental makes will then go toward paying off the corporate mortgage (to me) until the company owns the home outright and I have all the money that I invested in the home back. The money that I get from the corporate mortgage will then go to help pay off the second home that we have purchased. This should allow us to at least double the mortgage payments if not triple them every month. When that house is paid off and we have lived mortgage free for a couple of years, we will repeat the process. In about 20 years I should be able to do this with about 4-5 homes. (Think about 4 rental properties paying off your home, you could get it paid off pretty damn quickly. an extra 8,000 a month gets a home paid off in just over three years) I will then have a corporation that owns outright 4-5 homes with a projected rental income of at least 8-10 thousand a month or 48-60 a year (before expenses.) This will be right about the time that I expect the first of my future kid(s) to start heading off to college.
At this point we can take a look at the financial situation and see if it is worth it to continue add more homes (at this point the corporation will be generating enough capital to purchase additional homes on its own without us being involved in living in any of them) or expand the business to invest in other things. This is a money generating vehicle that will not retire. If we get tired of dealing with renters we can hire a company to handle the rental and repair aspect of the business. It will cut down on the profits but not enough to want to get out entirely, even if we do not feel like actively managing them. But I don’t see it being a problem until I am very old.
And as owners of a corporation I can make my children partners in the business when they are older and gradually transfer partial ownership (and profits) to them as time goes on and they can take a more active role. Ensuring that they will have independent wealth continually coming in as they are ready to leave college and start their own families and careers. A leg up sure would have been nice when I was younger. This seems like a much better idea than buying them a home or leaving them mine when I die. Having control of a company is the surest way to be wealthy for life and I will be able to teach them how to build and maintain wealth during their formative years. This will allow them to support themselves (and me when needed) while at the same time pursuing careers that they want to have, not have to have.
Combined with a solid investment strategy we should be millionaires with a profit generating corporation by the time we are in our early to mid-fifties. That is all while we have a secured income (James’ job) of about 80-100k a year. While that is high for a single income family it is not high for a two income family. I want everyone to have this, and everyone can…you just have to want it and build your plan.