Interview 15.2: Jeff Talks about the Two Myths that Get in Our Way

Jeff, What Do You Do?

Yesterday Jeff Brown, real estate investment advisor, explained what he does to help people build wealth toward their retirement. One key he made was that it’s the job of a professional real estate investment advisor to ask and answer teh questions that we wouldn’t think or know to bring up about real estate investing in general or a particular transaction.

It’s also a professional advisor’s job to show us when we’re working with faulty information or hidden assumptions that are incorrect or out of date. That’s the basis for my next question.

Jeff, I’ve heard you talk about the “two myths” that prevent too many people from enjoying a work-free retirement. What are they and what’s the thinking around them?

Liz, I’ll just jump right in and start explaining what they are.

Myth #1 – I must retire with a huge savings account and a paid-off mortage on my home.

This myth is what I’ve come to call Grandpa Economics. Back in his day, few people owned their own home. The goal was to keep your nose to the grindstone, make all of your payments, and retire with a company pension and a free and clear home. That strategy worked for quite some time. The cost of living didn’t really move up much, and Grandpa’s plan served Grandpa pretty well.

Then came inflation, pensions began to disappear, and ‘qualified plans’ such as IRA’s and 401(k)’s put the burden of retirement solely on the worker’s shoulders. It was literally the end of an era. It was also the death knell for Grandpa Economics. Here’s why.

Imagine you’re approaching retirement and have managed to put almost 10 times what the average worker does in your retirement plan. That would be give or take $500K. At 8% interest, you’d receive $40K a year in income, plus the $15K or so from Social Security. That’s $55K in annual retirement income. Don’t smile so quickly.

You see, that’s before taxes. After tax that’s no more than $40K. And by the way, Uncle Sam is likely to tell you in your 70’s to begin paying back some of your principal. This will obviously shrink your $500K, which will then shrink your $40K a year. Not a happy thought.

By the way, since you paid off your home’s mortgage, you now own a 40-60 year old home demanding more maintenance than ever. We haven’t talked about health insurance premiums, replacing that 12 year old car, or just trying to live a life that includes visits to far off family.

Living that way probably isn’t the retirement that you, or Grandpa, dreamed of. Once that die is cast you’re stuck.

One way to climb out of that future is to invest in real estate. That gets your capital growth going. The earlier you do it, the more your investment can gain steam. By the time you’re ready to call it a day, it’s not uncommon to have built up an equity in seven figures. Seriously. You just have to be purposeful in your behavior, and patient with the market.

Myth #2 – I don’t have any money to invest.

I hear this myth the most — usually from folks living in a nice home in a great neighborhood. They almost always have $50-300K in untapped equity in their home. But they don’t have any cash. A business would never let money sit in equity like that, and we shouldn’t either. I help clients in just that position, take money out with a new loan so they can put it to work for them.

Often their new mortgage payments are only a little more than before, and sometimes they’ve actually been less! Really.

They take a big pile of the new loan and lay that money aside as a cash reserve account. I call that a Sominex account. The name speaks for itself — Sominex makes sleeping pills. We set up a Purposeful Plan to use the remaining money from the loan to invest in real estate they can comfortably afford. When we execute the first transaction, they officially become investors.

So you see, Liz, the two myths and Grandpa Economics come down to this.

Would you rather retire with $12,000 a month income and a $2,500 house payment? – OR $3,000 a month income with a free and clear home?

The answer to that question is the path you’ll be on for the rest of your life.

Thanks Jeff. I’m glad I asked.

Understanding and tracking investments can be a full-time job. It’s not something that will take care of itself. That’s why we have investment advisors to help us out. Find advisors you decide are intelligent and have integrity. Never feel like you’re being asked to take an off-the-rack plan. Have your planners justify why their choices are individually suited for you.

Even when your investment is small, your advisors should believe that you are with them because they are going to make your investment grow. So it’s to their benefit to pay attention to you. If they don’t have time, do what you do on the Internet, move on to one who knows how valuable you are.

–ME “Liz” Strauss

Jeff offers a free case study in the sidebar at his own blog BawldGuy Talking. Jeff also writes as a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.

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Interview 15.1: Jeff Brown, Real Estate Investment Advisor