On this episode of the FortuneBuilders Real Estate Investing Show, Jeff sits down to discuss how investing in real estate can set you up for a comfortable retirement. Many people in the US struggle to find a successful strategy to create a retirement plan. If you are interested in a way to set yourself up for success, tune in to hear how Jeff has created his method for retirement through real estate.
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Retire Comfortably with Real Estate
Hey, everyone, welcome to this week’s episode of the FortuneBuilders Real Estate Investing Show. Jeff Rakowski here. I’m going solo this week. I’m excited about what we’re going to get into today. Last week I had a talk with a group of people that were not necessarily real estate investors, but there were a lot of concerns and a lot of questions about retirement. I believe real estate is one of the best retirement plans. I’m going to get into real estate as a vehicle for retirement today.
Word of the Week
As always, let me hit you with the Word of the Week. This week, the Word of the Week is a “defined benefit plan”, also known as a pension plan. Some of you may be familiar with it, and some of you may not know what I’m talking about. And that’s because there are not too many of them left around. That’s actually one of the things we’re going to get into in today’s show. But the defined benefit plan or a pension. My brother-in-law has one, for instance. He worked for about 22 years for the West Haven Police Department in Connecticut. And when he retires, which is in a few months, he will have a pension plan that pays him a set amount of money per month for the rest of his life. They’re actually really good. They actually put you in a position of cash flow, which is a great thing. Cash flow is what we want. The only problem is there are not many of them around today. We need to switch to a different plan. In order to secure a comfortable retirement, I don’t think there’s any other plan better than real estate. So let’s get into today’s show.
How to Retire
When I look around at the status of our country right now I look at some stats. The other day an article in USA Today stated that about 80% of Americans right now lack retirement planning basics. They don’t understand it. They don’t have the basics. 70% of Americans have no financial plan to retire. That’s a scary thing.
The median retirement savings account right now has an average of just $65,000. The average American feels like they need over a million dollars to retire. We’ve all seen those commercials like Fidelity and Merrill Lynch and all of that. You’ll see all these people walking around and above their heads, they have a specific number. That number represents what they need to save and retire comfortably.
I have a chart here in front of me that shows that if you want to retire in 20 years, and you need 10k a month to live on, then you need to save $3.4 million. If you’re retiring in 10 years and need 15k A month to live on, you need 2.1 million. I’ll give you one more year. For you younger folks out there, if you’re going to retire in 30 years, or let’s say 40 years, and you need to live on 10,000 a month or 7500 a month, that’s $7.8 million that needs to be saved.
Now, the question I always ask this when I’m teaching in a live event if you need $3 million, $5 million, or $7 million, how long would your current path take you to save that much money? Usually, the answer I get in a live event is “I’ll never be able to do that”, or “it just takes either an incredibly long time” or the majority of the room will pretty much say “well the path that I’m on right now, I’m just not going to be able to do that”. That is true. The 401K, in my opinion, is not even proven.
It came out in the mid-80s. People over the past 5 or 10 years have been depending on that as a retirement plan. The biggest thing I want you to take away from that is the 401k is not putting you in a position of cash flow. It’s putting you in a present position of net worth where you have to accumulate and save a certain amount of money.
When you retire, you draw from that every month and hope that it doesn’t run out. Let’s just say that you need to save $3 million to retire comfortably. In my opinion, there are two plans. One is you leverage things like the 401k. You save to accumulate the 3 million, and then pay yourself $10,000 a month when you retire. What I prefer and the path that I’m on, and so many of us here at FortuneBuilders are on, is putting ourselves back in that position of cash flow by accumulating cash-flowing assets.
Real estate is our primary vehicle, but there are so many different ways out there. I was talking to somebody about this (I’m a real estate guy, I love real estate, I’m passionate about it). He’s doing some other things that are cash flowing for him, which is a good thing. I don’t care how your cash flow, I just encourage you to cash flow. I don’t care if it comes from real estate or Bitcoin or ATM machines. I don’t care where it comes from, but let’s tap into cash flow.
Real Estate Cashflow
Real estate is the most proven asset class to develop that lifestyle. We’re over 18 million millionaires right now in the United States of America and roughly 60-70% of them accumulated that wealth through real estate. It’s just the asset class if you’re looking at what is going to give me the highest probability of success. It is definitely that.
That’s why we’re passionate about teaching and training people. The way we look at it is very simple: flip a house, make a profit, invest a portion of that profit into a long-term hold, flip another house invest a portion of that profit into another long-term hold. I love single-family homes. I love multifamily homes. I love commercial buildings. All of these things put me in a function of cash flow.
The advantages of owning real estate and fixing and flipping properties is great. Wholesaling properties is great. I could go back in time, I really spent the first 10 years of my career only wholesaling, only rehabbing. If I could go back in time, the only thing I would have done differently is I would have started buying long-term buying holds sooner. I really got super active with that in 2014 and have accumulated a good amount of properties and have nice cash flow coming from those properties. I wish I had more and I wish I did it sooner. I think that’s anybody that’s in real estate, especially over these past couple of years. Some of these properties have doubled or tripled in value just since 2014, which is absolutely amazing.
I want to give you a high level of what I see as the four main benefits of holding rental properties and cash flow is one of them. We buy an asset. That asset pays us on a monthly basis or should pay us passively. When I use the word passively, really what I’m referring to is not managing the properties yourself. We have many students in our community that does manage themselves and I’d rather have your own real estate and manage it yourself than not own real estate at all.
I just prefer to be passive to where it’s set up and we place it in the hands of really high-quality property managers. My involvement is making sure the mortgage payment goes out of my account every month automatically and making sure my profit comes into my bank account every month. I really enjoy the spreadsheets and the numbers. I probably spend two to three hours a month evaluating my current portfolio and making sure that it’s performing properly. The majority if the time is spent asking “how do I find more of it?” and cash flow is definitely one of the benefits.
There are some larger companies out there that are buying properties right now without cash flow. I struggle with that. I remember a couple of months ago I was listening to the interview, I believe it was the CEO of Blackstone. Blackstone is a big company taking down large portfolios at one clip, but they’re so bullish on the future value of the real estate that they’re buying properties that are essentially breaking, even not cash flowing, because of the tax benefits that go along with it and forecasting the future appreciation.
I’m no Blackstone. I’m a little more conservative than that. I’m personally not going to buy a rental property that isn’t paying me every month. My philosophy is very simple. I like value-add investing whether it’s single-family, multifamily, or apartment buildings. I want to buy an asset. From day one, it’s paying me. Then my job is to make it perform better and pay me more.
I’m not breaking even. I’m not certainly not going into the hole. Cash flow is really what I want to see in different investors all across the country who have different goals. I know many investors are happy making $300 or $400 a month. I know many investors aren’t going to touch a deal unless it’s making them $3000 or $4000 a month, and anywhere in between. When I got started, I’d be buying smaller properties that would cashflow a couple of $100 a month. Over time, I’m looking to do that more and more. To me, I’m never gonna get too big to the point where I’m going to pass up on a property that’s passively paying me a couple of $100 a month. Why would we stop doing that?
Cash flow has got to be there. Another huge benefit of holding real estate is debt reduction over time. We’re big believers in leveraging debt. If you’ve watched the show before, you’ve heard that. I believe that is the greatest accelerator out there to create wealth. We could go leverage and borrow other people’s money or banks’ money to get into these properties with as little cash out of our own pockets as possible.
I remember the first property I ever bought. I actually still own it. I’m actually getting ready to 1031 exchange it into a larger building. I think it was like $126,000 that I picked it up for and I acquired about $93,000 of debt. At the time, I think I only put 20% down on the building so it was about $93,000, give or take, that I owed after buying the property. I had a mortgage payment due every single month.
The beautiful thing is I wasn’t paying it down with my own money. The tenant that was paying me rent was paying down my debt. That’s a beautiful thing. Obviously, that’s not money that hits our bank account every month. I’ve refinanced that property twice since I bought it. Over time, that day reduces which increases my net worth, and it’s being paid off by somebody else.
Over the past couple of years, properties have appreciated so much in value. I always carry that philosophy as an investor:
“Always a buyer, never a seller”
meaning just hold forever. Even myself over these past two years. I’ll be 1031 changing a handful of properties next year, so I will technically be selling them.
Going into larger deals, I strongly encourage the 1031 exchange. It defers your tax liability. If I sold that property outright without 1031 exchanging it, there’d be a portion of that profit subject to capital gains. Taxes are the biggest deterrent to creating wealth over time. I’m able to roll all of that profit into another deal and not have to pay taxes.
If I sell that building, I could 1031 exchange it again into a larger building, and just keep kicking the taxes down the road. Even when I pass away, I could still own those properties and leave them to my children and they could keep doing the same thing. Eventually, if somebody sells outside of a 1031 exchange taxes will be due. That’s one approach that you can take.
I don’t know anybody right now that’s owned property for a couple of years that don’t have equity in it. The way that I view equity in a property is having cash in the bank that’s doing nothing for me. If I had $100,000 sitting with Wells Fargo growing at a quarter percent, that’s doing nothing for me because inflation is at eight and a half percent. I’m actually losing money, so I need to get that money to work.
Most people understand that, but I find many people don’t look at equity in their homes as the same thing, where that’s your money just sitting there not doing anything for you. Definitely on rentals, even on your primary residence, I recommend equity stripping. You’re stripping that equity out whether you’re taking a second position home equity line of credit at 3% or 4%, and then you’re able to invest it and grow it at 10%, 12%, or 15%.
Recently I did an interest-only cash-out refinance on a property that increased cash flow because you’re just paying interest on a monthly basis. I was able to pull out a nice chunk of money at two and a quarter percent and now I’m able to grow that money at 15% easily.
That’s just one of the ways I really love creating wealth, and teaching other people how to do the same thing. You have the cash flow. You have the debt reduction. Another huge benefit of owning property over time is property appreciation. Like I said earlier, I’ll never buy a property that’s losing money monthly hoping that it’s going to go up in value over time.
We don’t make buying decisions that way. Since the early 70s when our US dollar went off of the gold standard and we transitioned to fiat currency, properties have appreciated. The last chart I was looking at (it was right before the pandemic) was January 2020. Our nationwide average was an average of 4.1% appreciation year over year since the 70s.
I understand that in that time there was really only up so there were crashes, but the average 4% that properties have appreciated. That’s not including the last two years (2020 and 2021) where property values just over the last year have appreciated something like 17%. Obviously, that will increase that 4%.
It’s not guaranteed, but anything you buy today, I’m pretty confident that over the next 10, 15, or 20 years, it’s likely to be worth more. You don’t make buying decisions off on that but that is one of the values. Everything that I purchased in 2014 until the current day, even properties I purchased six months ago, everything is worth more than I bought it for that property.
It’s just crazy. Again, you don’t make buying decisions off on that. Then of course you have tax benefits. We’ve talked a lot about that on the show that you have everything from depreciation, mortgage interest, repairs, insurance, write-offs, local travel, long-distance travel where you own properties, home office employees, or independent contractors, repairs that need to be made on it. It’s just huge values.
Depreciation is a big one, though. I was just pulling up here that that $126,000 property that I was mentioning. That’s in Texas. Right now Texas values that building at $112,000 and they value the land at $15,000. In depreciation, you could write off the value of the building, not the land. You would take the value of the building divided by 27 and a half years. That’s the amount of time that the IRS allows you.
In this case, $112,000 divided by 27 and a half years is $4,104. Then you multiply that by the tax bracket you’re in and that gives you your tax savings. There are also ways to do something called the cost segregation study where you could depreciate parts of the home. On commercial buildings, you definitely want to do the cost segregation across the board because there are certain items like fencing and HVAC and appliances that you can actually depreciate at a faster rate (typically over a five to seven-year term) that give you higher savings.
So this is my retirement plan. I’m just trying to buy as many properties as I possibly can to get that cash flow and get the debt paid off by somebody else. Over time, it’s pretty likely that they’re going to go up in value. Then I just have a laundry list of tax write-offs that I can take advantage of on an annual basis.
It puts me back into that position of cash flow. Pensions kind of kicked off in our country and it was a great thing for a long time but they’re just really nonexistent now. We’re able to put ourselves back in that position of cash flow via real estate. We have other people’s money. We have debt that we can learn how to borrow to buy as many properties as we can as fast as we can.
So that’s my story, guys. I’m sticking to it. I hope you enjoyed this week’s episode of the FortuneBuilders Real Estate Investing Show. It will be good to see many of you guys at the Chicago Boot Camp coming up. Come say hello, and let me know how you’re enjoying the show and anything more you want to see more of. We’re trying to talk about relevant topics.
We have JD coming in here all the time doing case studies. We’re gonna start bringing in some students and just walking through their journey and looking at some of their deals. Thanks for tuning in. Share the show with a friend and I will see you next week on the FortuneBuilders Real Estate Investing Show. Take care guys.