What do you have to lose?

I was talking to a lady the other day, (lets call her Mary), Mary is 55 years old. Mary has been saving for retirement and has about $100,000 left in her stock portfolio and about $50,000 she could tap in home equity. She knew at her age she had to do something to avoid a less then desirable retirement. She has been trying, using the methods most people use such as saving her money, buying mutual funds etc. Then came the stock market slide and her investment shrank 50%. Too many things were out of Mary's control (interest rates, the market, job security, etc) and, when you rely on things out of your control, diversification of investment funds is critical to your financial survival. I asked her what she was going to do? More of the same I guess came the reply!

Here's how the conversation went: I asked Mary the definition of crazy? Doing the same thing over and over again and expecting different results! So why not invest in other things? like what? Real estate or mortgages! I don't know anything about them. I can not afford a loss. She was afraid. Scared of? loosing all that I have worked for. Ending up with even less. Mary! lets take a look at what you would be risking. Let us suppose that you made an investment and loss 100% of the invested money, which it very unlikely. You have $100,000 that is earning 3% interest ($250 per month). When you are age 62 the total saved will be about $125,000. Assuming 5% interest when you retire, that amount of money will earn you $6,250.00 per year, or $520 per month in retirement income. That is what you are risking.

What if you could be earning $980 per month right now! How? Let us assume you take the $100,000 and another $30,000 from your home equity and purchased a duplex house for $125,000 cash. Each side should rent for about $700.00 per month or more. That is $16,800 per year in income, allowing for 30% to cover taxes, maintenance and vacancies, that leaves $11,760 per year. Over the seven years from now until you are age 62, your duplex would earn $82,320. Lets ignore for now the fact that the original value of the duplex would increase about 5% per year and rent rates would increase a little each year. At age 62 you would have about $232,320 plus interest earned on the $82,320 income. I assumed you would pay for the home equity loan out of the money you are currently putting in the mutual fund each month.

Now doesn't that sound better? Well what if the renters tear up the house? Let us look at that! What is the worst case scenario that would not be covered by insurance? That they bust up the house and cause a few thousand dollars damage? Say $3,000 to fix it back up? So one year you only make $13,000 because of repairs and you get to take a bigger tax deduction. The risk to reward is really small.

What about the trouble of dealing with the tenets? You can make a deal with the renters to do their own minor repairs for reduction in rent, or hire a real estate agency to handle the rental for 10% of the rent collected. What I do is start out asking $50 more per month than I really want and lower the rent if they will handle minor repairs. Mary's reply; I had not thought about that. I will consider it. It sounds better than what I am doing now. When you describe the process it doesn't seem scary at all.

By paying cash you can not lose your investment unless you fail to pay your property taxes. What you are at risk of loosing is the $250 your $100,000 is making today. What you are losing by not considering all the options is the money the $100,000 could be making. Your $100,000 can make five times the money over the next seven years with an active investment verses the passive investment you are now doing. Lack of knowledge is the problem, not real fear. What Mary did not know is what made her afraid. All she had ever heard of was how terrible renters could be. She had never talked to investors who own all those rent homes out in the world who have been getting quietly richer. At age 62 Mary could sell the house and have all the cash or better yet take the $82,000 income and buy another house for cash. She could probably get her rental income up to $25,000 or $30,000 per year to go with her Social Security and pension from work. She might actually be better off financially after she retires.

What are you really afraid of? Failure? Loosing cash? Looking bad? Appearing uninformed? I will tell you what scares me, being retired and not having enough money to enjoy it. Or, worst case, depending on my children or the state to take care of me when I should be enjoying my life after all the years of work. What is stopping you? Holding you back? Overcome it. Get educated in your area of interest and take action to become rich. You did it once before in order to enter the work force, do it again this time for your future. Make educated decisions and you just might find yourself very well off. It does get easier each time you venture forth

Each of us gets 24 hours each day! "What did you do with yours today?"