Investing for Your Future Self: Real Estate, Time and Rate of Return

It’s probably not a surprise that I’ve chosen real estate investing as the vehicle to create wealth and fund my retirement.

Fact 1:  I’m a Realtor. So, what else would I say, right?  Well, according to Statistics

Fact 2:  Before I was a Realtor, I made more money buying and selling my own homes than I ever did in the stock market. Granted, maybe you get better stock tips or have a more aggressive portfolio strategy given current market conditions.

Regardless of strategy, when it comes to investing, there are actually two important variables that contribute to how much your money will grow:  

1) time and,

2) the rate of return.

Time and Real Estate Investment Returns

I would much rather make a higher rate of return over time than a lower one.  Who wouldn’t?  The bank is making approximately 20% lending your money. Wouldn’t you want to “be the bank” and earn what the banks earn if you could?

The key to earning higher returns on any investment is having access to opportunity.

So, stepping back, just for a moment, let’s peel back the traditional stock market investment opportunity onion a layer:

Q1: If you invested $100,000 over the past 10 years what is it worth today?

Q2: How much have you paid in professional fees for investing your money since 2010?

Like most of us, you probably don’t know how much you’ve paid in fees. Some of you may say that “whatever my Financial Advisor charged at least my money is safe and earning slowly over time”.  To that, I’m calling bullshit. Why?  Because chances are the rates charged by Financial Advisors and their Brokerages combined with the volatility of the stock market the past 10 years has added up to more money than you’ve made by investing. In other words, compare who has made more with your money – you or the investment companies? Check it out. Seriously! I hope that you’re on the “winning” side of the equation. Don’t be surprised if you’re not.

Q3: If you invested that same $100,000 in a $500,000 house in Austin 10 years ago what would it be worth today?

Q4: Lastly,  If you could invest $100,000 today and know that it was worth $1,000,000 in 10-15 years from now would you?

What’s Does a Few Percentage Points on Your Rate of Return Really Mean?

The difference between earning 8% from a diversified portfolio and 5-33% through real estate holdings (yes, it’s a big gap – it varies by strategy) is probably more than you realize. In fact, a couple percent compounded rate of return annually can make the difference between being able to retire in 40 years vs. being able to retire in 10 years. This rate of return is the most fundamental part.

Example 1: Investment $1,000/month for a 25 year old with 40 years to invest:

Expect to earn about $3,500,000 at age 65 by investing into a diversified portfolio earning 8% annually.

Example 2: That same 25 year old invested with a 15% annual return compounded for 40 years

Seatbelt fastened? The answer is more than $31,000,000! That would be 10 times as much! That’s a better financial picture for both personal and generational wealth.

Example 3:  If you’re 45 years old that only has 20 years to save/invest

To have the same amount as the 25-year-old (Example 1) — who is earning the 8% from a diversified portfolio — a 45-year-old needs about a 20% return to have the same amount at age 65. If the 45-year-old can increase her investment return from 8% to 20%, she can cut the amount of time necessary to reach her goal of “not having to work for a living” (or any financial goal) in half!

Here’s the main point: when you are investing if you are only considering the time variable you miss a key element that defines your success as an investor  –  that key is your rate of return.

If you want to learn more about investing in Austin real estate and growing your wealth let’s connect. My team can help you with wealthy building strategies, tax planning and hitting your “I don’t have to work” fund goals.