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What advice would I give my 18-25 year old self, knowing what I know today

January 11, 2020 By Erion Shehaj Leave a Comment

One of the most frequently asked questions I get from readers of InvestingArchitect.com is some variation of: Knowing what you know today, what advice would you give your 18-25 year old self?

I’ve thought about this question a LOT. The critical concept I didn’t know at that age that I know today is that Money is not the only resource/currency that matters. In fact, 18-25 year olds have a MAJOR advantage when it comes to TWO other resources that can help overcome the lack of investment capital: Flexibility and Time.

So, the advice I’m giving my sons when they are that age is:

Build and take care or your credit score. Don’t dig a hole that will take you years to fill up again
Buy a home with low/no down payment as a primary residence. Live in one of the secondary rooms or the couch and rent out the others to roommates (it’s okay to be a little uncomfortable)
After a year or so, turn that house into a full rental property and purchase another property as primary residence.
Leverage your flexibility and rinse and repeat that process 3-5 times in the next 3-5 years.
With time on your side, you’ll be AMAZED at what this strategy will do for your financial future. You will easily be in the 90th+ percentile of your peers, with lots more options to live the kind of life you want, not the one you have to.

3 Smart Strategies to beat Analysis Paralysis for new real estate investors

January 24, 2019 By Erion Shehaj Leave a Comment

If you have thought about getting started in real estate investing but haven’t taken action yet, you are in good and plentiful company. Most everyone knows that real estate investing can help you achieve all your major financial goals often with less risk and volatility than other alternative options (i.e. stock market). You probably already know that if you succeed in building a solid real estate portfolio you can create a stream of passive income that can serve as retirement income you can enjoy much earlier than your typical industrial revolution retirement age of 65. Or, that quality real estate investments can help you build a seven-figure net worth over the next 15-25 years. Last but not least, you’ve probably heard that investment properties can serve as a hedge against the eroding effects of inflation while they help you diversify your investments and lower the risk across the board.

The main reason behind the lack of action rarely has anything to do with doubts about the benefits of investing in real estate. Instead, there is one main reason that holds people back from real estate investing. Today, I will give you an overview as well as offer mental models, mindset shifts and strategies you can use to keep it at bay so you can finally take action.

The Obsessive Research Loop

By far, the main reason that holds real estate investors back from taking action is Paralysis by Analysis. This reason typically holds back investors who are otherwise ready to go: The capital has been saved and ready to deploy and financing pre-approval is in place. The main questions that paralyze you are:

What’s the best real estate investing strategy
Which market(s) you should invest in?

In a way, this is a sign of the times. We live in an era where new investors have unprecedented access to incredible amounts of real estate investing information. The good news is that there’s never been a better time for information-hungry prospective investors. It’s an all-you-can-eat buffet of blog posts, articles, podcasts, youtube clips, books, classes, forums, social networks and everything in between. The bad news is the same as the good news. When we’re presented with endless choices, humans tend to freeze and do absolutely nothing.

After all, how are you supposed to know what’s the absolute best strategy for you? One day you read an article by a very bright and experienced investor that tells you that you’re crazy if you invest in anything but single-family homes. The very next day you watch a video that professes the exact opposite is true. Does this sound familiar: “Single-family homes are from amateurs and multi-family is everything”? Then that weekend, you go down the rabbit hole in a forum full of investment horror stories that make you question the whole investing thing.

Reframe your questions

The main reason why you find your main questions difficult to answer and enter a vicious circle of never-ending research is that they’re the wrong questions in the first place.

The first thing you want to do to get unstuck is to reframe the questions. Instead of asking what’s the best investment strategy, try asking what’s the best investment strategy for my goals

It might seem like semantics at first glance but stay with me. There is no one-size-fits-all best strategy because strategies are just tools meant to solve a certain problem. Different problems call for different tools. A saw is a fantastic tool if you’re trying to cut a piece of wood but it’s a very poor tool if you used it to drive nails into it.

The strategy you use to create a passive income stream of $50,000 per year would probably not work if your goal is to build a real estate empire that owns 1000 apartment units. You must start with your goals and then fashion the appropriate strategy for those goals.

Simplify with Occam’s Razor

What’s the appropriate strategy? This is the time to bring in Occam’s Razor principle: Among competing hypotheses, the one with the fewest assumptions should be selected. Or in simpler language, Occam’s razor states that the simplest solution is usually correct. In other words, if you build an empire of 1000 apartment units you will also create a passive income stream of $50,000 per year in the process but that’s not the best strategy to achieve that goal. A simpler strategy of acquiring four to five single-family homes and paying them off would be a better option.

Then, once you’ve decided on the simplest strategy for your goals, you can ask: Which markets offer the types of assets prescribed by your strategy? Keep it simple here as well. If your local market does offer a reasonable supply of your target properties, then keep your investments local. If not, then you can expand the range and look at other markets.

Broad, then Narrow

The second thing you can do to get unstuck and take action is the following mental model: Broad Then Narrow. This model is very effective especially if you are the analytical type (as I am). Let’s put it this way: If you’re the type of person that likes to analyze all the possible what-if scenarios that could ever happen from now until eternity then this mental model is for you.

Here’s how it works. When we work with a client on strategy, we first go broad. We start with your income goal and the amount of time in which you want to achieve it and work backward to the present day. What’s the simplest solution to solve that problem and the most appropriate asset type (single vs multi-family, residential vs commercial) to solve it? Then, we determine how many of those assets you need to purchase to create that income stream, how much capital and how long it will take given your current capital and savings rate. As a result, we lay out a broad plan for the next 10-20 years.

This is the critical point where analytical real estate investors usually get stuck. They start thinking about what if the interest rates change or the economy goes into a recession or I lose my job etc. Therefore, they analyze infinite possible scenarios to death and never take any action at all.

The key concept to understand is that once you go broad with your planning, you have to go narrow with your execution. In other words, when the time comes to execute your plan, you can’t worry about what might happen 3, 5 or 10 years down the line. Instead, you narrow your focus to what you want to accomplish this year and in order to do that what you must do this quarter or this month. If your plan calls for two acquisitions this year, all your focus should be on completing one acquisition over the next 6 months. If you narrow your focus to each step you must take now and take it, the 15-year plan takes care of itself, doesn’t it?

In Conclusion

Most real estate investors fail to take action on their real estate investing strategy the enter the never-ending research loop in an era where there’s an incredible supply of real estate investing information. In this environment, it becomes difficult to know what’s the best investment strategy and which markets you should focus on. Planning and research are prudent and necessary activities to the success of your investment strategy but they can paralyze you when that’s all you do. Therefore, in order to get unstuck, you can stop trying to find the perfect real estate investment strategy and Apply Occam’s Razor principle to determine the simplest real estate strategy that’s suitable to your unique goals. Once you’ve determined your strategy, go broad and plan out your course. Geek out by working backward from your goals in the far future to the actions you must take each year to accomplish them. But then, go narrow and focus only on the action you must take this month or this quarter to make those big goals happen and EXECUTE. There’s definitely a prominent place in your real estate investing journey for planning and research but not while you’re in execution mode.

How to budget if you want to reach financial independence

June 22, 2018 By Erion Shehaj Leave a Comment

Today I want to tell you about one of the biggest myths in real estate investing. It is the disempowering belief that people who succeed in building substantial portfolios and reaching financial independence early do so because they hit a financial “home run”. Usually, it involves some type of windfall event like an inheritance, large bonus, help from rich parents or lottery winnings.

The reality I have experienced firsthand is the exact opposite. With rare exceptions, the overwhelming majority of real estate investors that have reached financial independence have done it by doing “hitting singles” consistently. A pile of money didn’t drop on their lap from a long-forgotten uncle. Lady luck didn’t grace them on the lottery numbers they played. Instead, they mastered the basics. And here’s the kicker: You can do it, too and I will show you how.

If you’ve been a reader of mine for some time (both here and on BiggerPockets), you know I like to present case studies of how investors can reach financial independence by building real estate portfolios that produce $50-$100k in passive income. I frequently get bristling responses after those posts are published from readers that see the large numbers on display and cannot fathom how they could possibly replicate that performance. “How am I supposed to save all that capital on my $_______/year salary?”.

Listen, I get it. It can seem overwhelming when a real estate investing case study is presented from a 10,000 ft view and you see large figures being thrown around like it’s nothing. Also, I’m not oblivious to the fact that it is substantially easier for someone making $200k/year to save money for investments than someone making a quarter of that. But I also know that while a higher income does impact how fast an investor can save up capital, the principle that makes savings possible is exactly the same. And that powerful principle is this: The capital for your investments is nestled in your income statement like a fossil inside layers of rock. The tool that allows you to uncover that capital is your budget. The problem is the way you’ve been taught to budget is all wrong and doesn’t work. It’s time we fixed that.

The wrong way to budget

I might not know you but I have a pretty good idea about how you budget. Most likely, you write down your take-home pay for the month then you list all the current expenses where that money is being spent. The difference between the income and expenses is what you have available to save and invest and it’s usually not much. So, if you are trying to increase the amount you save you go through each expense and try to decide if that expense is absolutely necessary or if it can be cut from your budget. This usually yields very modest savings because it turns out all your expenses appear to be necessary and you can’t see how you can cut most of them.

There are three principal reasons why this budgeting method does not work.

Your budget prioritizes the wrong things

Take a look at the basic equation that governs your budget:

Income – Expenses = Savings

That equation is the main reason why you aren’t saving more of your income. In his excellent 2014 book Profit First (read first two chapters here), Mike Michalowicz talks about a behavioral principle called The Primacy Effect. It says we automatically place more importance and significance on what we encounter first. Therefore, when we think of our budget in terms of income minus expenses equals savings, we are hardwired to focus on income and expenses and leave savings to become an afterthought. That’s why the first thought that crosses our mind when we decide that we want to save more money is: I need to find a way to earn more.

This is a structural defect in the mental framework we have been taught about budgeting. If we want different results, we can turn the tables and put the Primacy Effect to work for us. So, instead of covering expenses and then saving what’s left, you should first save a target percentage of your income and spend what’s left. Therefore, the new and improved budget formula is Income – Savings = Expenses. This way, we make savings a foregone conclusion and then we figure out a way to make our lifestyle fit in the remaining amount allocated to expenses.

No one likes to be wrong

When you try to go over your current expenses and make a decision on which ones you should eliminate, there’s a very strong resistance that’s working against the decision to cut anything. And that resistance comes from the fact that if you decide an expense should be eliminated, you’re essentially admitting that you were wrong in making it in the first place. No one likes to admit that they were wrong. Therefore, as you’re going through the “elimination process”, your brain becomes a cacophony of rationalization. All of a sudden, you can think of perfectly good reasons why each and every expense is absolutely justified and untouchable. As a result, any cuts you make are minor and inconsequential.

Your budget needs structural work

What you’re currently attempting to do with your budget doesn’t work because you’re trying to make cosmetic repairs to a “building” that has structural damage. Instead of “lipstick”, it needs to be torn down and started over. You’re trying to work within a system that will not produce the results you want, no matter how many tweaks you attempt. If you want to increase your savings rate so you can invest in real estate and reach financial independence early, you need a completely new system.

So put down the pen you are using to redline through expenses and let me show you a better way to budget that prioritizes spending and investing and makes cutting expenses simple.

The Zero Budget

Take a blank sheet of paper and draw a line right down the middle.

On the left side at the very top, write your take-home income.

Then, decide what percentage of your income would you need to save each month so you can invest and reach financial independence early. You can start small and increase as you see more opportunity. For example, you can start with 10% of your take-home pay. If your income permits, do 15, 20 or even 30%. Multiply the savings percentage rate by your take-home pay and write that number on the right side at the very top.

Next, subtract the take-home income from savings to determine the Total Amount you have available for Expenses.

Then list and add all indispensable expenses. In this category belong expenses you can’t live without like rent/mortgage, health insurance, childcare, food, utilities, gasoline. Add it all up and subtract the total from your total amount available for Expenses. The result is what you have left to spend on discretionary expenses: car payments, debt payments, cell phone, eating out, cable/satellite, shopping, etc. Write this down on the left side of the sheet.

Finally, spend the remaining amount on the most important discretionary expenses until there are zero dollars left (hence the name Zero Budget). Everything that didn’t make the cut… well, it didn’t make the cut. There’s no more money left to spend. Therefore, if saving and investing is your first priority, you must eliminate the discretionary expenses that didn’t make the cut starting from the bottom and working your way up.

Critical Next Steps

If you’re truly committed to your journey toward financial independence, you must take some critical next steps to avoid this becoming an academic exercise. The first thing you want to do is automate your savings. Set up an automatic transfer from your paycheck into a savings account where the funds are purposefully hard to access. This will remove the burden of decision each month and you can’t spend what you don’t have available. This savings account now can become your source for emergency savings and investment capital.

The next critical step is to take action on the expenses you must cut right away. Call and cancel any recurring bills (i.e cable or that gym membership you haven’t used in months). Make a meal prep plan so you can avoid eating out as much. And so forth.

Finally, make an appointment with your self at the beginning of each month to review how you did on your previous month’s budget and to set the budget for that month. There’s always deviations from the plan – that’s normal. But if you create a habit of reviewing your budget regularly you will become more aware of your financial situation so you can make necessary adjustments.

One More Thing

Now that you’ve done the process by hand and understand the thinking behind it, I’ll make your job even easier.

Below is a screenshot of what the Zero Budget would look like in a spreadsheet that does all the calculations for you. And if you’d prefer using a spreadsheet instead of the slow (but necessary) torture of running calculations by hand, I’ll give you the spreadsheet I use. You can get the Zero Budget Spreadsheet if you click on the link. Be sure to make a copy of the Google Sheets file so you can use it for your budget.

Should I sell my house or turn it into a rental property?

June 15, 2018 By Erion Shehaj Leave a Comment

You’ve made the decision to move. Maybe it’s because you were bursting at the seams and your family needed more space. Or you wanted to get the kids into that excellent school district. Or perhaps it’s time to enjoy the good things in life and you really wanted a backyard paradise with a great swimming pool. Whatever your reasons for moving, now you face a critical decision that could have important repercussions for your financial future.

Should you sell your current house, unlock your equity and take any capital gains that might have accumulated off the table tax-free? Or, should you turn your existing home into a rental property and use it as a building block for your real estate portfolio?

It’s a very good (and common) question that like most good questions doesn’t have a one-size-fits-all answer. But, I’d like to offer you a mental framework to help you think through this important decision.

Eliminate bad options

A decision is only difficult if it’s a choice between two very good options. If one of your options at your disposal isn’t particularly attractive, the decision makes itself, doesn’t it? So the first thing you should consider carefully is the validity of your options.

Is selling your house even an attractive outcome? For instance, if you were upside down on your mortgage as many homeowners were coming out of the Great Recession of 2008, selling your property isn’t a great option on its own, regardless of the alternatives. So that option will eliminate itself and make your decision more obvious.

Alternatively, would your property make a good investment property? There could be physical aspects of the property that would make it unsuitable for investment. For instance, the property could be very old and it would require significant capital expenditures or it could be too large. Or, the numbers on the property don’t work to generate a fair return on investment for the risk you’re taking in turning it into a rental property.

This is the point where you get out your pencil and run some simple numbers: Rent minus Operating Expenses minus Mortgage Payment equal Cash Flow. Are you looking at a positive return or will you need to “feed” the property from your pocket each month? While considering the validity of turning your house into a rental property, you may eliminate this option from contention and make your decision easier.

Side-by-Side Comparison

I assume that if you’re asking this question, you’re most likely facing a decision between two equally attractive options. If that’s the case, let’s move to the next level of the mental framework: the side-by-side comparison.

First, let’s look at the selling option. Let’s say you’ve built up nice equity over the years courtesy of your initial down payment, value appreciation and paying down the mortgage.

The first thing you want to do is determine the exact value of the equity you could unlock by selling. This isn’t a simple problem where you take your estimate of value and subtract the mortgage balance because that’s not what you’d get if you sold. You have to account for closing costs, selling costs, prorations and make ready. Closing costs are fees you pay at closing for things like title insurance, title company fees, recording fees, HOA statements etc. Selling costs are fees you pay to real estate brokers for facilitating the sale and any incentives you might offer the Buyer (i.e. closing costs contributions) to entice them to buy the house. Prorations are your share of property taxes, insurance costs and HOA dues for the portion of the year you owned the property. And finally, make ready costs are what you’d spend to get the house ready for sale (i.e paint, carpet, landscaping). Once you’ve accounted for all these costs, you can determine your net proceeds at closing otherwise known as the amount on your check after closing.

Next, you want to consider what you would do with this money if you sold. Would some (or all) of it make up the down payment of your new house? If you have that covered with other funds, where would you invest that money and what is your expected rate of return? You could purchase a different investment property or invest the proceeds in the stock market.

Now, let’s consider the option of turning your house into a rental property. Earlier we ran numbers to determine your annual cash flow. Divide the annual cash flow into the net proceeds you’d receive if you sold. That’s your return on equity – the return you’re earning on your equity by turning the property into a rental. How does that figure compare to the return you could earn by selling the property and investing the proceeds into an alternative investment? Beyond the side-by-side return comparison, it’s critical to make a judgment call on how your house is likely to perform over the long term. Do you feel that the property will see more value appreciation, solid tenant, and buyer demand or is the area in decline and things are about to get worse? If the long-term fundamentals don’t look promising, it’s time to sell and deploy that capital into an area that is poised for solid growth.

Another way to ask the question is this: If you were to sell your house, would you buy it again as an investment if given the chance or would you purchase a different investment? This focusing question removes the confirmation bias fog that tends to skew our judgment to confirm decisions we’ve already made. If you wouldn’t buy the property again if given the chance, then the only reason you’re considering keeping it is that you already own it.

In Conclusion

The decision between selling your house and turning into a rental property can be complicated. Sometimes, the right decision is obvious because one of the two options at your disposal is not feasible or favorable. But when presented with a choice between two good options, you should use a mental framework that walks you through the benefits and drawbacks of each option and compares them side-by-side in a long-term outlook context. This way you will see the empirical differences and make the smarter decision for your financial future.

The Freedom Formula: How to turn $244,000 into $1.4M in 14 years

September 10, 2016 By Erion Shehaj 10 Comments

Today’s post is exciting for me to write primarily because of what it can do for investors that actually heed the advice.

Since the beginning of Investing Architect, I’ve argued that quality real estate purchased in the context of and according to a sound overarching long term strategy can alter an investor’s life in fundamental ways. Surely, it can have an impact in that investors financial life – namely her passive income and net worth. But that’s only part of the magic. Most importantly, through their financial impact they can offer what I believe most of us are truly after: The freedom and independence to craft a life well lived.

I have a Freedom Formula that I’d like to share with you:

(Quality real estate + Strategy+ Discipline + Execution)^ Time = Freedom

The case study I’ll go over with you today is the “proof” of the validity of this formula. Let’s dive in the numbers.

Case Study

Suppose you were presented with an opportunity to invest in brand new small multifamily (4 units) properties in a new development in an established Texas market with impressive population growth and solid tenant demand with strong median household incomes to support your rents.

Annual Income: $55,200 (4 units leased at $1,150 per month)

Total Operating Expenses: $22,563 (property taxes, insurance, management and repair reserves, vacancy provision)

Net Operating Income: $32,638 per year

Debt Service and Leasing Fees: $23,485 per year

Positive Cashflow: $9,152.64

Purchase price: $460,000

Cash to close: $122,000 (25% down payment plus closing costs)

Why Strategy matters

This is usually the point where first time readers get a puzzled look on their faces. “Wait a minute – how do we go from a potential investment property that throws off $9,200 a year in positive cashflow to turning $244,000 into 1.4 Million?”.

In one word: Strategy.

There’s a reason why strategy is the second ingredient of the formula. Quality real estate comes first because in it’s absence none of the remaining factors matter. You could have the most sophisticated strategy in the world, the discipline of a buddhist monk, and Jason Bourne’s execution skills and none of it matters. But once you’ve purchased quality real estate your strategy makes the difference between magic and meh. Every month I meet with investors that through sheer gut feel have acquired a couple of quality properties. But only minutes into our conversation it becomes abundantly clear that their investing efforts lack a general direction, an overarching strategy. Therefore, they do okay with their investment but they leave massive potential on the table.

Let’s get back to the numbers to illustrate the opportunity cost of a solid strategy. If you were to purchase this same exact property but lacked a long term strategy, what would happen? Well, you would be earning 7-8% on your money (conservatively) and would take advantage of leverage as the property appreciated over time. That’s not a bad investment but it doesn’t exactly change your life.

Here’s a better option. For the investor with available capital resources, I’d recommend the purchase of two fourplexes (8 rental units in total). The completion of these two transactions requires $244k in capital (+- 1%). Upon the completion of acquisition, I would have this investor utilize the positive cashflow from both properties to aggressively pay off the mortgage on the first property while making regular payments on the second. To add more “wood to the fire”, I would recommend that the investor contribute an additional $500 from her income to accelerate debt retirement even faster. Think of this as a 401(K) contribution that actually works.

What’s the effect of this strategy? The mortgage on the first property is completely paid off in 112 months (just over 9 years). After the first property is free and clear, the positive cashflow from that property is no longer $9200 but rather the entire Net Operating Income of $32.6k since there no more debt to service. Now I’d recommend that the investor continue the same process with the second property. The only difference is now we’re attacking that mortgage with a LOT more money every month. Therefore the mortgage on the second property is paid off in 57 months (just under 5 years.

Final Results

Let’s look at the only thing that ultimately matters: Results. If you heed my advice, you invest $244,000 of your hard earned capital and after applying a Domino Strategy you end up with two free and clear properties in 14 years that assuming an appreciation rate of 3% (inflation) would be worth $1.395M at that time. Also at that time, these two properties would produce $65,000/year in investment income. That’s the difference between just buying a couple of good properties and buying a couple of good properties according to a solid strategy mixed with discipline and laser focused execution raised to the power of time.

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Important Note: A project with 11 new construction 4plex and 4 new construction 6plex multi family properties in a growing Texas market is about to break ground in 2-3 weeks. We have partnered with the Developer to offer first shot on these properties to our clients during the construction phase. Over the next few weeks, we will be holding one-on-one conference calls with our clients to discuss the opportunity. Typically we sell out projects of this magnitude in 2-4 weeks.

If you are interested and would like to receive an information packet containing detailed cashflow analyses, location map, site map, demographic and psychographic data about the location, contact us or if you’re reading this from your email, just hit reply.

Forget the Nest Egg Approach: How to create retirement income, grow your net worth and leave a legacy

September 6, 2016 By Erion Shehaj Leave a Comment

Take a good hard look at the Net Worth Timeline Comparison graph below:

It’s a colorful, damning indictment of the Nest Egg approach to retirement that an overwhelming majority of investors in the developed world follow.

Let me set the scene for you so the meaning of the graph can come into better focus: A very disciplined high net worth individual (over $1MM) with a six figure job income maxes out contributions to tax advantaged retirement accounts (401k) and college savings accounts. Her family lives well below their means so even after those contributions there is surplus income that is invested regularly in a taxable stock/mutual fund account (dollar cost averaging).

The return assumptions are the same shade of conservative we use on real estate investment projections. We are assuming that all accounts will average a 6% linear return annually and that stock markets don’t shed 40-50% of their value every 8-10 years. In addition, we’re also assuming that the surplus is invested without fail (continued discipline) in brokerage accounts. Finally, on the real estate side, we assume that property values track inflation (3% per year) and base income and expense projections on actual figures.

The first graph at the top illustrates the investor’s net worth projection should she follow the current investing path (securities) projected out over the next 50 or so years.

The second graph at the bottom illustrates the investor’s net worth projection if she followed our Blueprint strategy. Under the Blueprint strategy, she would utilize current investable capital plus a portion of the income surplus (60%) over the years to acquire and pay off quality income-producing real estate assets. That leaves the remainder of the surplus to fund major purchases, travel etc. As she executes on her real estate investments she would continue to max out tax-advantaged accounts and invest those funds in securities for an all-of-the-above approach to investing.

Two critical junctures

Let’s take a look at two points in time – The first is the projected retirement date in 2033 (at the age of 55). On that date, the projected net worth under the Blueprint Plan is $1MM (22%) higher than under the current path ($6.2MM vs $5.1MM). But that’s where these paths only begin to go in two opposite directions.

During the retirement years until the end of the plan (life expectancy 90), under the current path the investor’s net worth drops by 60% (to $2MM) while on the Blueprint Plan the investor’s net worth increases by 70% (to $10.6MM).

What happened here? Why such vast difference in the two approaches in the years following retirement? The answer: The differences originate in the structure and basic concept of the two strategies.

The Nest Egg Approach

By definition, the Nest Egg approach retirement investing has two phases: Asset Accumulation and Asset Distribution. In other words, during your productive years you are to set aside and invest a portion of your disposable income so you can accumulate assets. Then following retirement, you will distribute (read: plunder) a sizable portion of those assets to fund your income needs during retirement. In fact, on tax advantaged accounts such distributions are mandatory.

Therefore it should come as no surprise that the investor’s net worth dropped by 60% during retirement years. That was the plan all along!

Now – you might ask – what’s wrong with a plan where you save for retirement, arrive there with $5MM in net worth and leave $2MM to your heirs when you are gone? It’s not that it’s wrong – it’s just that you could do so much better!

If the legacy you leave behind for your loved ones is important to you, why not explore a different path that leads to better income at retirement while allowing your net worth to rise instead of plummet?

The Blueprint Approach

The approach I’m suggesting is fundamentally different. I don’t believe that the optimal path to retirement is to accumulate assets so then you could live off of them in retirement. Instead, I would advise you to accumulate cash flowing real estate assets and pay them off over time so the income they create takes care of your retirement lifestyle while the principal (net worth) is untouched and rising. Live off the yield and don’t cannibalize the principal.

The results speak for themselves. If by using the same resources (capital, income, time) you can end up with a net worth that’s 20% higher at retirement and 5x higher at the end of your plan, why wouldn’t you?