Do you actually have savings, investments, or retirement plans in place? If you are like most people, you don’t have an appropriate investment or retirement plan established.
Americans love to spend money, as seen by the crowded malls, number of credit cards, fancy cars on the road, and our fondness for expensive vacations. As a nation, we may be better spenders than investors.
Unfortunately, most of the people I know have a short-term outlook in regard to their investment strategies.
Whether your short-term financial planning is as simple and unlikely as winning the Lotto, or you plan to buy and sell an investment property or stock within the next month or two, investment strategies tend to be more in the near term rather than over the long term.
Fix and Flip vs. Fix and Hold
There’s a trend for real estate investors to purchase “fixer-upper” homes with all cash or private money loans for short-term “fix and flip” deals. Sometimes the numbers aren’t as solid and realistic as projected. That $200,000 “fixer” home may need $50,000 in repairs to make it livable or salable–as opposed to the estimated $15,000 in repair costs.
After factoring in holding costs to cover private money loans, utility bills, landscaping and gardening costs, brokerage commissions, title and escrow fees, that potential $30,000 “quick profit” may turn into a negative return.
I suggest to investors that they make sure their numbers and budget estimates have been double-checked by third parties who are experienced with construction budgets and know the local real estate markets.
Had there been a nice gain of $15,000 or $50,000+ in profits within just a few months (which are very profitable returns when annualized), what were the tax consequences for those gains? Was the risk worth it in the very short term?
If so, where is the next great “fix and flip” deal in the same neighborhood? There are many people out there making very solid returns by “fixing and flipping” deals as a full-time job, but they consistently do their homework when analyzing potential deals.
Let’s look at another investor who purchases a $200,000 home below the current market value of $250,000 and holds the property as a rental for several years or decades. Regardless of the size of the 30-year mortgage, a savvy investor can pay it off in 15 to 18 years by paying an extra 1/12 payment per month–or an extra full mortgage payment, per year. The lower the interest rate, the faster the mortgage debt will amortize and pay off.
If the rental income covers the monthly mortgage payment, insurance, property taxes, repairs, and other costs each month, inflation becomes the owner’s “best friend.” If that same home appreciates at a 7% annual appreciation rate each year, the home will double in value over a 10-year time period ($500,000 future value).
When factoring in the tax benefits associated with mortgage interest and other deductions and long-term capital gains tax rates, the buy and hold scenario may prove to be the better investment option.
Did You Sell Too Soon?
Based on historical trends, a long-term outlook to investing is a safer and surer way to prosperity. A long-term investment strategy may not be the most exciting way to invest, but it has shown to be consistent and successful.
Do you regret selling your previous home or investment property? Most successful people I know have maintained a long-term outlook, holding on to their real estate, stocks, bonds, and other parts of their financial portfolio over a longer period of time.
These investors know there are up and down cycles that still traditionally boost their diversified investment portfolios with potential 7% to 10% average annual returns over the long haul.
With real estate, inflation tends to be a favorable ally by helping to increase home values and rental incomes. Over time, the mortgage(s) on your real estate will eventually be paid off in full. “Free and clear” real estate may likely represent the bulk of your monthly income and assets in your retirement years.
Real estate values have increased at phenomenal annual levels for most of the past fifty years. Many areas have experienced 20% to 30%+ annual price increases during the past few years partly thanks to the Fed’s ongoing “Quantitative Easing” strategies, which weaken the U.S. Dollar and boosts asset prices like stocks and real estate. (Don’t count on the absurdly high appreciation rates that we have seen these past few years, as 3% to 5% annual home appreciation rates are closer to the historical annual norm.)
If you’re a parent or grandparent, please teach the younger generations about the importance of saving and investing money. Instead of another toy, open a small checking, savings, or a college fund account for them. With the combination of time and compound growth, small amounts of money can turn into large amounts in the future.
The Real Estate Nest Egg
According to an article in the New York Times several years ago, the writer conducted a study that concluded that the average American homeowner who retires by the age of 65 may have a net worth close to $115,000.
The average non-homeowner at the same retirement age of 65 may have a net worth closer to $800. Yes, eight hundred dollars!
Can you imagine trying to live another twenty or thirty years with that “nest egg”?
“Home is where the heart is” as the old saying goes. What is another nickname for the word “nest”? Home. While it is very wise to diversify your investment options, your home will probably still represent the core of your overall family’s “nest egg” or net worth.
The smaller a person’s “nest egg,” the shorter their lifespan, according to various studies worldwide. With that in mind, consider starting an investment and retirement plan today, either on your own or with a professional real estate or financial mentor or adviser. You may live a longer, healthier, happier life!