Yesterday we talked about why the “nest egg” approach to retirement doesn’t work. And to illustrate, we showed how a retiree creating $70,000 a year in income from a $1 million nest egg would be completely broke in twelve to sixteen years.
A big part of the problem is that taxes eat into a significant portion of the nest egg. In our example we assumed a 15 percent tax rate. That required our retiree to sell $83,000 in assets each year just to get the $70,000 in income.
This is why I see real estate – old fashioned rental real estate – as the best vehicle for building income. It’s an incredibly tax-advantaged asset.
That’s because for every property we buy, the Internal Revenue Service (IRS) says we can “depreciate” a fixed percentage of its total value every year.
In other words, we can write off a portion of the property’s value against our income every year… even though we didn’t lose the money.
So depreciation is a phantom loss. Just for tax purposes.
And that’s just one element to it.
When we talk about investing in real estate, we’re really talking about building a business. So we run everything through LLCs. And then we take deductions.
Home office expenses… subscription fees… educational resources… travel… we can write off any expenses for our business against our rental income. This includes expenses that we may have incurred anyway.
As a result, we shouldn’t owe any taxes on our rental income. That’s 100% by the book.
And it can get far more advanced than that. There are ways to create massive paper losses to offset other sources of income. Again, all by the book. Doing this takes advanced tax planning and a good CPA… but it’s possible.
So the bottom line here is that when we talk about creating extra income using rental real estate – it’s not like the nest egg approach where we get hit with taxes every time we want to access our money. Quite the opposite.
It’s tax free money that we’re talking about. And it just shows up in our bank account. Month in and month out.
And let’s quantify this for a minute. Let’s compare the income approach to the nest egg approach using the same example from above.
As we explored earlier, if we have a financial nest egg of $1 million, we have to sell $83,000 worth of assets each year to end up with $70,000 after taxes to live on. And we can do this for twelve to sixteen years before we run out of money.
But what happens if we spend our working years buying real estate that throws off monthly cash flow for us?
Let’s assume that we spend our time buying single family properties that produce, on average, $600 a month in cash flow. That’s $7,200 a year per property.
In this case all we need is ten properties to have an extra $72,000 in annual income. That’s it.
This is something that’s fully within the grasp of anyone. At least if they have the right resources and network.
And guess what?
These ten properties are going to crank out that $72,000 a year for us indefinitely. Meanwhile, our friends who built a $1 million nest egg will quickly tear through their savings in retirement.
Do you see the magic here? Focusing on income is simply a better way to go.
So I hope this gets the gears turning for you a little bit. Hopefully, I made it all sound simple. Because it is.
Of course, that doesn’t mean it’s easy. Real estate is a slow game at first. It takes some discipline to get started with it.
But what it doesn’t take is luck. Not when we buy real estate right, anyway.
And that’s where our new investment membership The Phoenician League comes in.
The Phoenician League provides comprehensive training around a range of asset classes. It also connects members with investment opportunities across these same asset classes. This includes real estate investments that throw off hundreds of dollars a month in cash flow from day one.
The Phoenician League also helps members plug into a larger professional network. This takes all of the guesswork and the grunt work out of achieving financial independence. Our goal is to help everyone work up to having $10,000 a month in extra income.
If you’d like to learn more about what we’re doing and how we do it, please sign up for the wait list right here: The Phoenician League Waiting List.
We’ll be opening our doors to new members for just the third time very soon.
-Joe Withrow