Financial planning 101 says create equity first, then invest it for cash flow later.
Of course, real estate investors know cash-flow creates equity … but that’s a different discussion.
With paper assets, the basic formula is to buy stocks young to grow equity, then sell them later to buy bonds in retirement that will produce cash flow to live on.
But for folks trying to retire today (and there’s millions of them!), today’s pitifully low rates pose a BIG problem.
They either need to have a TON of equity … or be willing to live a miserly existence.
Think about it … even $1 million dollars invested at two-percent only creates a meager $20,000 per year passive taxable income.
In other words, thanks to the Fed, you can be a cash millionaire … and only have enough interest income to live just above the poverty level.
When someone is trying to retire on savings and they can’t get enough yield to live on, besides staying in the workforce (which many boomers are doing), other options are …
… consume the principal and hope you don’t outlive your savings …
… or stay in equities (stocks) and hope the next inevitable correction (crash) doesn’t cut your nest egg in half.
Of course, if the stock market crashes, history says the Fed’s probable response is to LOWER interest rates. For retirees, that’s a DOUBLE-WHAMMY … crushing both asset values and interest income.
Thankfully, as real estate investors, we don’t have to worry about most of this.
But non-real estate investing boomers have a BIG problem. Their best hope of getting the Fed on their side is to stay in the stock market.
We think it’s fairly easy to make the argument real estate is a FAR better equity play than stocks … but that’s not today’s message … and you probably already know it anyway.
Today is about OPPORTUNITY … the HUGE opportunity for real estate investors because of what’s going on in today’s market.
For small-time operators, this is a great time to search for equity-rich owners who are selling so they can retire on liquidated equity.
So don’t just offer to buy the property … ask the seller what they plan to do with the proceeds. Uncover their problem so you can offer a solution.
If their plan is to put the money into bank CDs or government bonds … they’re looking at puny yields of less than three-percent.
Sure, we know there are bond funds with TOTAL returns of six to eight percent, but that includes capital gains on bond values. If rates rise, those capital gains become LOSSES.
And if anyone wants to compare total returns … a typical leveraged single-family rental destroys bonds. But that’s also a conversation for another day.
Our point today is LOW interest rates are creating a BIG PROBLEM for a HUGE group of people … and a TREMENDOUS opportunity for real estate investors to profit from helping.
Because when you approach equity rich property owners with an offer to pay them six or eight percent when they carry back their equity …
… you can triple or even quadruple their income compared to bank CD’s or bonds.
Let’s do the math …
$1,000,000 carried back equity at six-percent = $60,000 per year taxable
Of course, you may not want their specific property, so a carry-back isn’t always the best play. But it doesn’t mean you can’t create a win-win deal anyway.
Suppose you have other properties you do want, but need financing … and for whatever reason you can’t or don’t want conventional loans.
The approach is the same, except the equity-rich property owner uses their equity to loan against the property you do want.
Now if you take this approach to the next level, instead of just one property owner and one or two properties …
… you could set up a syndication and aggregate several individual investors into a bigger pool to do bigger deals.
So even though the scale is bigger, the concept is the same …
Help people who need income and have stock or real estate equity, by showing them how to move the equity into higher yielding vehicles … with YOU.
Even if there’s interest expense involved in freeing the equity, as long as the risk-adjusted spread is positive, it’s a win.
For example, if a property owner has $100,000 in idle equity which can be unlocked with a fixed-rate long term loan of four-percent … they have interest expense of $4,000 per year (typically tax deductible).
When you offer an eight-percent yield through a private mortgage (loan) or a cash-flowing property (equity share) … you provide them $8,000 per year passive income.
Now you’ve delivered them $4,000 per year of additional free cash flow, while YOU own all or part of an investment property funded with their equity.
Once you understand the concept, you can just add investors, zeroes, commas … until you have a portfolio that’s as big as you’re capable of making it.
The bottom line is low-interest rates create HUGE opportunities for real estate investors big and small … and it’s not just simply going out and getting bank loans.
When you learn how to help people solve their cash flow problems through strategic equity management, you set yourself apart from investors who aren’t as creative.
Until next time … good investing!
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