When it comes to retirement planning most people tend to do what everyone else does - invest in retirement accounts and worry about whether social security will be bankrupt or not. Most people have followed the path that has been instilled upon them of getting an education, get a career, raise a family, hopefully retire at 65 and then enjoy retirement. That is if you managed to save enough.
At Buckingham Investments, our goal is to change your mindset and show the power of real estate as a catalyst to create and maintain wealth. Real estate is not a get rich quick scheme but Buckingham Investments thrives in inspiring people who hold a career, are financially comfortable but may lead busy lives to look towards this amazing long term investment vehicle called investment property for the incredible returns that can come from real estate.
This planning workbook is meant to demonstrate the astonishing power that can work on conservative real estate investments. We also want you to DREAM. Focusing on a simple exercise about the life you wish you had or the one you would have, if you won the lottery. Build your aspirations of the life you want and the goals you want to achieve.
Now that you’ve made it this far, let’s motivate you further on multifamily investing. By reading this guide you are in a very small group of people who realize that they need to do something in their life to invoke change and enhance your life. Looking at real estate you are in an even smaller group and we encourage you to build your plan to success.
Step one is to show you the power of leverage combined with inflation. Real estate goes up in value for the same reason that bread, milk, clothes, and haircuts do…Inflation! In the real estate world we call the effects of inflation “appreciation.” In a bad economy inflation is very low and prices don’t always go up, in fact, for some items they actually go down. Demand usually drops way off and sellers of those products have to reduce prices to sell inventory.
As this negative demand often produces negative results there is a positive light for investors because usually when the economy returns and the demand comes back, prices tend to go up at a rate faster than inflation. You can’t build more houses or apartments very quickly, so values tend to jump fast when demand increases. If more people want a product than there are products that have been made then prices increase until the highest bidder gets the product. If you’re selling shirts or bread it’s easy to make more in a hurry to satisfy demand. In real estate that’s not the case. Also, don’t forget we keep having more babies to house even in bad times. Economics supply and demand theory is at play.
Now that we have gone through inflation let’s move towards the understanding of leverage. To show the power of leverage and inflation as it impacts real estate, we have included a chart of future values of various investment amounts. What we want you to do is find an amount closest to what you would feel comfortable investing in a property today as your down payment. What this chart will give you is an idea of what that amount might grow to in the future.
Based upon our years of experience we have included conservative projections for a 20% and 30% annual growth rate. Remember, property offers four components of return and these percentage returns combine all four components (Appreciation, Cash Flow, Amortization, and Tax Benefits).
We are using the compound interest formula FV = PV (1+r)^n to calculate the numbers for the present value chart below.
As an example of how the following chart works if you have $50,000 to invest and you want to see what it will be worth in 15 years and you chose a return of 20% it will grow to $770,351. If you chose a return of 30% it will grow to $2,559,295 (examples are highlighted for illustration purposes).
For those who aren't sure returns like this really happen we encourage you to grab a copy of our Basic Investment Guide. In that guide we go over and illustrate how returns in real estate are calculated. You’ll find that returns in the 20% - 30% range are very common and conservative.
What this chart will give you is an idea of what that amount might grow to in the future. We have included the projections for a 20% annual growth rate and 30% which are conservative based upon our years of watching values increase. Remember, real estate offers four components of return and these percentage returns below combine all four components (click here to get a refresher on the four components of return, page 8 of Real Estate Investment Principles Guide).
**ENTER WHOLE NUMBERS WITHOUT COMMAS, PERIODS OR DOLLAR SIGNS IN THE FORM BELOW**
The next step in the process is to DREAM. We want you to determine how you want your future to look like and put it on paper. Dig deep inside you to discover how you really want to live and what your retirement needs will be once you decide to step away from work. You don’t need exact numbers for this exercise, so it’s okay to estimate what your financial freedom looks like here. Financial planners often emphasis that we will need 70-80% of our pre-retirement income to maintain our current standard of living. Over the years, this number has been estimated as being short of reality, so if you want to be conservative you might shoot for 100% of your current income.
BUCKINGHAM INVESTMENTS SAMPLE DREAMS – JOHN SMITH