The Why: How Much Do You Really Need?

THE WHY

Why are you investing in real estate? Do you have a plan?

Every business that seeks to grow and achieve success has a detailed business plan. Any real estate entrepreneur that expects cash flow and asset growth in any reasonable time period should have a detailed plan as well.

The first question is where do you want to be in 5 or 10 years? Just saying you want to be rich is not an acceptable answer. “Rich” is a nebulous word and one we will remove from our vocabulary for this discussion.

We will replace it with two concepts that we can define, Cash Flow and Asset Building. Cash flow generates current dollars available to spend now. While cash flow is required to put food on the table and a roof over your head, it is also taxed in the year you receive it. Even with the new tax laws, it can be taxed up to 60% between federal, state and self-employment taxes. Once you think about it, it makes no sense to earn any more than you need to live comfortably, not spartanly or exorbitantly.

This is true since the next dollar you don’t need can be taxed up to 60 cents. And after paying the taxes, you must find a good investment for the remaining 40 cents. You would need to more than double your return on the after-taxed money to generate the same dollars as you would on before-taxed dollars. That should debunk the old “Cash Flow is King” thinking.

A popular way for real estate entrepreneurs to generate cash is with quick-turn property. But this is just a business where you are the boss. You may generate high income, but you will never be truly wealthy doing this. See if you can name just one person you know that retired wealthy from this business alone.

“Assets are King,” is a much truer statement. Asset values grow without current taxation. Rental property can provide both current cash flow and asset growth. You decide when that asset growth is taxed. Growing assets is the true path to wealth.

So, how much do you need? We answered the cash flow part of this question above. That was pretty easy to determine. Asset accumulation is much more subjective. After about 4 million between spouses, estate planning becomes complex. For the vast majority of you, 4 million in today’s dollars in investment net worth will carry you through the rest of your lives.

INHERITANCE

One of the biggest disservices done to children is to leave them large inheritances. A study was done of lottery winners in Massachusetts in the 1980′s. Any winner of $5,000 or more was tracked for 5 years. After 5 years it was found that 85% of them were in the same OR WORSE financial condition than they were 5 years earlier. This directly relates to inheritances–windfall money given to someone who has not earned it. You probably have your own stories of wasted inheritances. Bottom line–human nature is that people value what they earn themselves more than what is given them for free.

If you really want to make a difference in the lives of those you love, teach them to invest rather than just leaving an inheritance. The self-esteem you will be giving them is greater than any inheritance. And knowledge is not taxed!

Put some thought into these concepts when you are on vacation. To be truly successful, you must have a plan.