What can you do twenty years before you retire? How does this retirement look like to you? For most Americans, retirement means leaving behind a legacy of financial stability for the next generation of their family. Most Americans like to plan their retirement on their own. Some succeed, but for the others who don’t, retirement is poverty. One way of avoiding this scenario is buying four houses every year for twenty years. This translates to 80 rental properties on your retirement that will give you $500 per rental. Learn how you can make this two million dollar retirement possible.
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Retirement Is Poverty
I am coming to you live from the snowy tundra of Houston, Texas. In fact, our studio is so far south, we are south of I-10. I could stand up here and see out of the studio windows through my office windows and see I-10. We are pretty far south and it has snowed here in Houston. We had two events. We had our base camp meeting, which is our meeting for folks that are taking their real estate business to the next level. We had that meeting, and then we were giving our free Intro to Income and Wealth Workshop here at the office as well. I was at the Christmas Musical which my oldest son was in at the elementary school. We left the house, it was a little chilly, and by chilly here we mean 40. The rest of you throughout the country, just bear with me while I explain the frozen tundra that is Houston, Texas right now.
We left the house, and normally if it were not raining, we would have just walked to the school. It might be a quarter mile away. We go to school, Cameron does his thing. He was an elf in the musical, which was great. He had a part on stage in front of the elementary school. We go back to the house and I told my wife, “It might snow.” She’s like, “There’s no way.” I said, “We’re getting the right amount of precipitation and it’s getting pretty chilly.” We don’t watch TV anymore. We don’t watch the news. It’s either the Texans or the Astros or it’s stuff we’re watching on YouTube. That’s really all we watch these days, occasionally Netflix and that sort of thing. Sure enough, I’m checking my phone, and I’ve got this new Note8, I guess is what it is. I’ve got a weather app at the top, and of course in Houston it’s winter time. In the last couple of days, it’s had these little cloud pictures, and then it had this funny little star underneath it instead of a water drop. I said, “Sarah, I think it’s actually going to snow.”
Sure enough, sometime in the evening, we were checking Facebook, we had our Facebook feed open. For those of you who are out of town, Houston is 100miles by 100miles. It’s 10,000 square miles. Just because your friend on Facebook posted that it’s snowing in their neighborhood doesn’t mean it’s going to snow in yours, because Houston’s big. It’s 100miles long. If you really include Galveston to north of Conroe, it’s about 120 or 130 miles. I’m seeing friends of mine on the north side of town starting to snow, and I’m thinking it won’t come down this far south. We’re in Sugar Land, which is the southwest corner of Houston. I walk outside, it’s still rainy, I don’t even see any snow, and I’m using a flashlight. We’re on snow watch at this point. We’ve got the fire going in the house, which by the way we have a fire just about every day. It’s absolutely fantastic.
I woke up this morning, and Sarah looks out the window to our bedroom and there’s snow all over the palm trees. Our backyard is a little oasis back there. We’ve got a lot of palm trees, we got the pool, the Jacuzzi, and we’ve got this fire pit area and all this stuff. It’s really a sweet little backyard. In fact, the irony in all this is as the snow is coming down and accumulating in the yard and on the house, this is the day we get our new pool heater installed. It’s perfect timing, and I told Sarah, “If we would’ve gotten that heater sooner, we’d have some great Instagram pics of the Jacuzzi going and putting all that steam up in the air. “In any case, it’s snowing here in Houston, Texas. We got into a little snowball fight in the front yard before the kids left for school. They rode their bikes to school, mom did not drop them off. It’s like, “Get on your bike. It’s only 38 degrees out here. You will live. There are humans that live in a 38-degree temperature.”
I’ll tell you the coolest thing that happened. The house we live in; we did a big rehab before we moved in. I should have taken a picture of all the people that were taking pictures of our house. It was really interesting, just neighbors coming out. We have a gray and white theme on the house, which is what we use on a lot of our flip properties. It was neat to see all the neighbors coming out and taking pictures of the house because it looked really cool with all the snow on it. One of the things I’ve forgotten about snow is that when it snows, obviously it’s the color white, and it makes everything look so much more alive with the dreary winter sky. Our neighborhood is all tree line. We got trees everywhere. It’s like living in a rain forest. It was amazing to see the snow on everything because it makes it just so much brighter. Those of you who got snow, you are the lucky few. It’s a great. It will not stick, hopefully. Maybe it’ll snow again, but I doubt it from here on out. What a heck of a lot of fun.
Aside from snow, I want to talk about a surefire way to poverty for most Americans. The absolute easiest way to ensure poverty in America. Does anybody out there know how to get on the fast track to poverty? Some people say, “It’s a job. It’s too much debt. It’s keeping up with the Joneses and buying the houses and the cars and all the nonsense.” That’s not really true. The fast track to poverty is retirement for most Americans. If you look at any of the statistics as it relates to retirement, the vast majority of Americans’ retirement planning is praying that they die before they run out of money. The vast majority of Americans, their prayer at night as they get older is, “I hope I die before I run out of money in retirement.” That’s most people’s retirement planning.
Here’s the problem. If you want to live on $5,000 a month, let’s just call that a baseline, just to survive, you need to save nearly $2 million before you retire. Most Americans won’t even make enough to be able to save to retire with $2 million. That’s for $5,000 a month. You need $2 million. Most Americans I know, if they’ve got anything, maybe $100,000or $200,000, but you need $2 million to be able to enjoy $5,000 a month in retirement. We’re doing a deal right now putting in my wife’s portfolio. I just got the rehab estimate back, we’re actually going out to the house, probably going to do a Facebook live from the house and show you guys what a flooded house looks like and we’re going to tune up the rehab estimate. I’ll tell you this. This house we’re buying is going to cashflow $500 a month with a mortgage for the next 30 years. $500 a month for the next 30 years. What happens after 30 years? Simple, it’s paid off, and then it will cashflow $1,000a month. If you’ve got to retire 30 years from now, let’s say you’re in your 30s, just buy ten of those. Cashflow is $500 a month, buy ten, that’s $5,000 a month in cashflow. Here’s the crazy thing. You don’t need $2 million to buy ten rental properties. In fact, this house, if I wanted to, we’d have no money out of pocket. Let’s say the worst case scenario is it costs you $5,000, and the bank lends you everything else and you need ten of those, you would have to deploy $50,000 in cash to make $5,000 a month. Who wouldn’t do that deal? Your alternative is to pray that you saved $2 million and your bitcoin investments work out, and the market doesn’t crash two years before you retire. A lot of people enjoyed that experience in 2008. There were a lot of people in 2008 that had $2 million or $3 million in 2007 that were planning on retiring in 2008 and couldn’t, and had to work another six or seven years. I can go back and look and see how long it took for the S&P to recover, but they had to work another six or seven years just because of market timing.
I was just checking the Secretary of State’s website, one of my LLCs somehow fell into an inactive status, which is not true because we write Texas franchise taxes for that one all the time. In any case, it looks like we’ve got all that fixed and got our account all up to date so I can go out there and open up some new bank accounts for something we’re working on. I just saw a note on Facebook. “I saw a post regarding the five keys to money mastery.”That is actually one of the things that we teach in our financial education business. Five Keys to Money Mastery, which is manage your money by saving your money, protect your money, and grow your money. They said, “My take is that single-family real estate, once mastered, is an investment which encompasses all five keys. Would you agree?”That is absolutely correct. However, you’ve still got to manage your family budget. Sarah and I are looking at our budget for 2018. We always like to tighten that belt up. I don’t care how much money you make; the wealthiest people play good offense and good defense. Defense wins championships. That’s what you hear in the NFL all the time. What is defense in building wealth and income? Defense is making sure there’s not a lot of money blown out the back door.
Sarah and I are looking at some numbers right now. We think there’s an opportunity with two things, if we make two changes at home, they’re going to save us $600 a month. Most of you are like, “You’ve got all these companies, you’re doing all this business, what’s the big deal if you save $600 a month?”Do you know what I could do with $7,200? That’s 600 times 12. We started a 100-house-buying-a-year company with $40,000. Think about that. We took $40,000, Tom and I put $20,000 each into a joint checking account and built a 100-house-buying-a-year company. What can I do with $7,200 that most Americans can’t, what our students in Right Path can do with $7,200 that most Americans can’t? $7,200 isn’t $7,200. $7,200 is hundreds of thousands of dollars. I’ve got a buddy of mine ask me a couple of times, “When are you getting a Lambo and a huge house? When are you getting a Ferrari?” Do you know what a $100,000 car costs me? It costs me millions in opportunity cost. I went to lunch with a good friend of mine. He’s just a great guy. He’s been in this business for twenty years. We were sharing stories, and he’s got way more than I do, about being broke real estate investors. If you’re a real estate investor who has a bunch of cash in the bank, you’re not doing this right. You might be out there working. You don’t make any money and have it sitting in a bank account somewhere. Nobody makes money with a lot of money in a checking account.
It was funny, he was telling me about the first couple of years he was in business. They were looking at how much they were making, what was net to them and their partners at the end of the year. They were like, “We don’t have any money.” It was like a couple thousand bucks a month, that’s really what they’re making, it was $5,000or $6,000 a month. Then they went over and looked at the balance sheet. “We’ve added $2 million to $3 million in real estate to our portfolio.” It’s like these guys that brag on Facebook when they get these checks. It’s like, “I don’t want a check. I want a real asset.” From accounting standpoint, cash is an asset, but I define an asset as something that makes me money. You know what makes me money? Buying more houses. Having a 401(k)with $10 million in cash or 100 bitcoins, whatever the price of Bitcoin is today, is really not attractive to me. Do you know why it’s not attractive? Because cash is worthless. Currency is worthless. That’s why all these Americans are going broke when they go into retirement. They don’t really own any assets. They’ve got the house they live in and a depleting balance in their 401(k). You hear that analogy all the time, the goose that lays the golden egg. They’re just sitting there eating the goose. They’re killing it. When you’re not retired, most Americans’ goose is their W2 job.
Here’s the other problem with that. To go back to the five keys of money mastery, if you’re not playing good defense, managing your finances, managing your credit profile, managing your expenses every month. I’m not saying live like a pauper, that’s not what I’m saying. I’m not saying live in an apartment so you could pay cash for a house. There’s this company out there that’s teaching this. It’s like Dave Ramsey on steroids. It’s so wild. Pay cash for everything, have absolutely no debt, you live this miserable existence. I’m not saying don’t do those things. Here’s one thing I am saying. I see this a lot. I see people pay for their kid’s college at the expense of their retirement, which is insane. Just from a time value of money, your kids have a lifetime to pay off their college. You as a parent only have a few short decades to get your house in order so you can retire. Here’s another caveat a lot of people miss. Most Americans stop working because they can no longer work. What does that mean? That means they’re too sick to work. In fact, I’ve got an article that a friend of mine sent over to me from Bloomberg, “Americans are retiring later, dying sooner and sicker in between,” meaning our lives as we age are deteriorating. I have a theory on this. I’m going to let this theory out. It’s going to make me enormously unpopular, but I’ll tell you. I’ve already seen some studies about this.
If you look at prior to American smoking, all the smoking cessation and the big tobacco lawsuits- and we will see some studies that come out over the next decade about this -I believe that Americans that smoked actually had a better life. They didn’t live as long, but they actually had a better life than Americans do today because the vast majority of Americans now are not just overweight, they’re obese. I think obesity is worse than smoking. People are living longer in part because healthcare technology allows people to live longer, but when I look at these retirement stats, most people are not able to function in a healthy manner. They can’t go out and walk around the block, on 900 different meds.
What does that have to do with retirement? It’s simple. Not all of you listening to this radio show right now will be able to work until you’re 90. You’re just not. You need to start planning for retirement today. If your retirement plan is to save and then retire and pray that you die before you run out of money, that’s not going to work. Why don’t you instead come out to the Right Path Weekend Retreat? If you want to learn how to retire and not eat dog food, you need to shoot us an email. Send us an email at Support@RightPathRealEstate. If you do that, we’ll send you a special code to go to our weekend retreat. Here’s what I’ll tell you. If you can’t get this stuff figured out, if you think, “I’m just going to save my way to retirement,” it’s not going to happen. Over the next couple of years, like a year and a half, two years, you can buy ten rental properties at cashflow of$500 a month. If your bills are $5,000 a month, you’re set. Let’s say you want to retire at $10,000 a month, buy twenty rental properties. Over the course of five years, you could have twenty rental properties cashflowing you $10,000 a month. All you have to do is buy four houses a year. It’s not that hard. If you join Right Path, we’ve got the vendors that are going to rehab the houses, we’ve got the money that they’ll lend on those houses, we’ve got the property management company, it’s all done for you over here. You just got to show up.
I got a note.”Is the new deal analyzer on base camp yet?” If it’s not, I’ll email it out to everybody, and I’ll email you the one that’s not locked. If you guys want to play with the new deal analyzer, you can do that to your heart’s content. For those non–Excel users, it’s not locked. Only change the things in the yellow cells.
I was looking at a deal we’re doing for my wife, buying the house for $53,000 and doing $50,000 in repairs. We’re going out to look at the house and take a look at the scope of work, because I think $50,000 for the rehab is a bit much, it should be about $40,000. It was worth $185,000 before the storm. We think it’s worth $160,000 after the storm, so we’re all in for $110,000on a $160,000 house that rents for $1,550 a month. I get this question a lot, “Jason, what is a house cashflow?” What a lot of real estate education companies do is they talk about cashflow, but they don’t talk about profit. If you’re not paying attention, this is the important piece about why you should be able to see the seams on the fast ball, and that is people assume cashflow and profit are the same thing, and that’s not true. I’ve got a big thank you for all the guys that are really experienced real estate investors that listen to this show. I run into the guys all the time that say, “I do 40 houses a year, I do 50 houses a year, I do all this and I listen to your show all the time.” I think that’s really cool. It means we’re giving out a lot of really valuable information, not only for new investors but for experienced investors. I really appreciate that, for those of you who are long-time listeners.
Let me go back to this point. Cashflow is not profit, and a lot of real estate education companies will teach cashflow is profit. They’ll never come out and say it like, “This is your profit,” because that’s not true. They’ll call it cashflow and the new investors and their clients will assume, “That’s profit.”Nothing could be further from the truth. When you’re doing your calculation to figure out what a property profits as a rental, you’ve got to take out management fee. You’ve got to take out make-ready costs. You’ve got to take out vacancy. We do all of that when we do our calculation. When somebody comes to me and says, “Jason, this is a really great deal. No money out of pocket and it cashflows you $250 a month. Is that cashflow or is that profit? You said cashflow, but what does that mean to you?” “What’s the difference? They’re the same thing.” “No, they’re not. Did you include vacancy, make-ready? Did you include a management fee? Did you include all those costs?” “No, it cashflows this.” “Right, that’s what it cashflows if you’re not accruing for those future expenses. Typically it’s a wholesaler.” They look at me and they go, “Accruing? I’m not on a row team. I’m not a rower.” “This is different. This is accruing, meaning, we’re saving today for expected future expenses. That’s what that means.” We’re accruing those expenses to deploy that in the future, which is the difference between cashflow and profit. It has nothing to do with the rowing team.
If we look at this deal here that my wife is going to do, it cashflows $406 a month. Here’s what’s changing in single-family real estate in 2018.It’s happened a little bit in 2017, but the big change is happening this next year, and that is companies are going raw. Lenders are going to move away from after-repaired value. After-repaired value is going the way of the dinosaur. What is after-repaired value? It’s the value of the house when it’s all fixed up. You send an appraiser out there, they close their eyes, throw a dart at the board, and they come up with a number. I’m just kidding, that was a little appraiser joke. All the appraisers in the audience, don’t call me all angry, but that’s what everybody thinks an appraiser does. We know that’s not true. What is going to change is you’re going to see debt service coverage ratio come into play. They have already been using DSCR in single-family real estate portfolios. You’re now going to see it on single-family in a single house. Your DSCR must be greater than 1.25%. What does that mean? It really means that if I put a loan on this property, there needs to be a 25% net margin. In other words, your profit margin must be 25%. By the way, I want everyone to remember this, who’s been preaching for five years now about having at least a 20% margin? That would be us. Why do you think the lending industry says you need to have a DSCR of 1.25%? Simple, because they want to make sure you’re able to cover the debt and any other expenses. How they determine that debt service coverage ratio is by including not only the cashflow but the actual profit, meaning make-ready, management costs, and vacancies.
There are a lot of people out here teaching real estate, running around saying, “This is a great deal because it cashflows you $300 a month.” It doesn’t, unless you include those other numbers. A lender who is a professional, is going to look at that deal and go, “That doesn’t cashflow$300 a month. It cashflows $150. We’re not going to lend on that. Get out of my office.” That’s the difference between running this like a professional, building a real portfolio, and pretending like you’re in real estate. That’s the difference. When people ask me all the time, “What’s the difference between your company, Right Path Real Estate, and everybody else out there?” I give them one explanation like this and they look at me and go, “I’ve never heard that before.” “Really? That’s how it works?” “That’s exactly how it works.” “How do you know that’s how it works?” “Because we’ve done 400-plus of these things. We do 100houses a year. That is exactly how this thing works. I know because 100 of these come across my desk every year.”
You want to work with a company that’s doing this every day. The reason we call ourselves Right Path Real Estate is because when you are climbing the mountain, and the summit of your mountain can be building wealth to leave as a legacy for your family, the summit of your mountain can be retirement. Here’s what I’ll tell you, you’re going to need a guide that takes you up that mountain. You can’t do it yourself. It’s impossible. You want to climb Everest by yourself? Good luck. You want to figure out retirement by yourself? I hope you don’t waste 30 years doing that because I’ll tell you what, most Americans do. That’s why they retire in poverty, if they retire at all.
You’ve got to get on the right path. The first step in doing that is coming to one of our events.
If you haven’t gotten this figured out, it can be detrimental. I’m not one of these guys that says, “It’s never too late.” Here’s what I will tell you. You can miss enormous opportunities by waiting. Let’s say you’re my age, you’re 39, and you got twenty years until you want to retire, what if you bought four houses a year for twenty years? You’d end up with 80 rental properties. What’s 80 times $500 a month? Why don’t you do that math? Buying four houses a year isn’t exactly a full-time job. We had one of our basecamp students that just went hog wild with our marketing and bought four in a week. It’s buying single-family houses and holding on to these little assets and then letting your tenant pay these things off over time.
I’ll tell you what’s even cooler, this is one of my favorite plans. Spend two years working real hard. Instead of going to grad school at night, spend your time and really focus and buy twenty rental properties, and then put those houses on fifteen-year notes. Then in about six to seven years, sell half the portfolio and use the proceeds from that sale to pay off the other half of the portfolio. In fact, if you want, I can work the numbers up based off this deal right here. In this deal analyzer, I can run an amortization schedule with an early payoff and we’ll see how long it takes to actually pay the property off. I’ll share with you some more numbers. You don’t have to be poor in retirement, just join Right Path Real Estate.
Let me share this strategy with you. I’m looking at a deal that my wife is going to do. We’re buying it for $53,000 and need $50,000in rehab. There’s a strategy that some clients are using in our group, and the strategy is buy the house, put it on a fifteen-year mortgage, and then when the equity in the portfolio reaches a certain point, they’re going to sell some houses to pay off the mortgage on the other houses. In other words, they own the houses free and clear. I am not one of these guys that introduces you to crazy terms like dead equity. It’s the equity you have in a house less the difference of what you could get a loan for. I’m like, “Why do you have to re-leverage these things every time?” “So you can take more money out and buy more houses.” “Why do I need to do that? If I got a large enough portfolio, it ought to be able to self-fund and be able to buy me more houses.” That was my first hint that something was wrong with their model.
Here’s the deal we’re looking at. I’m going to put it on a fifteen-year mortgage. Our payment on a $103,000 loan goes from $585 to $842. That drops our monthly profit, not just cashflow. If it were cashflow, it would be a lot higher. It would be about $250 higher. Not just cashflow but profit is $150 a month, but we’re making a fifteen-year payment. We know in Houston right now, houses are appreciating at about 7%.In five years, this house, if I were to save the cashflow and sell the house, I should make $147,000. My outstanding loan will only be $73,000. What should I do? Take that $147,000 and pay off two houses in my rental portfolio. What does that mean? If I bought 30 houses and put them on a fifteen-year mortgage, based off this model I’m looking at right now, I could sell ten of those houses and pay off twenty. Those twenty houses go from $150 a month in profit to $1,000 a month, because they’re paid off. In five years, if you bought 30 houses, based on the assumptions I’m looking at in this model on the house we’ve already bought, you could have $20,000 a month in cashflow coming in.
That’s probably a pretty decent retirement for most Americans. If you want to learn more about that, go to RightPathRealEstate.com. If you want to go to the weekend retreat, send an email to Support@RightPathRealEstate. We’ll send you a discount code there. Thanks for listening. I’ll be back to talk more about retirement and how to use real estate as a vehicle to get you to where you want to go.