Ben Baran

Started by Millennials about a decade ago, the FIRE Movement (meaning “financial independence, retire early”) has really taken off. Growing numbers of young people plan to work only as long as they have to and live off their assets and savings. Sounds nice, right? In this article, I’ll explore what it would really take to retire early.

How to Retire Early

My rule of thumb is that you need at least 25 times your current yearly expenses to comfortably retire and maintain your current standard of living. Meaning if you spend $100,000 per year, you’ll need to save over $2 million dollars. I like this formula because it allows for a comfortable withdrawal level in retirement while maintaining your invested assets.

I’m not saying saving that much is easy, but it can be done. It requires a Spartan lifestyle while you save a large portion of your income. For some, this can be as much as 50% of after-tax income put into savings and investments. This may mean cooking more at home and seeing your friends vacation photos on Facebook instead of being there with them. However, it can be worth it for the years of stress-free retirement.

Investing for FIRE

Sorry to say, you can’t just put your paycheck in your piggie bank and hope to retire early. You’ll need to make smart investments. Most rely on the power of compound interest and the cooperation of the stock market. Most expect it to grow at a 7-8% rate per year, but not to rain on their parade, I wouldn’t be so sure about that.

It might seem obvious that there is a potential for a rocky road ahead as the stock market is at all-time highs after a ten-year run. No one really knows if the market will deliver this rate over time. If you look history squarely in the eye, you’d have to accept that doesn’t always perform as expected. I worry for those who’ve already quit their jobs and are relying solely on the stock market.

Diversifying your Portfolio with Real Estate

For both those looking into FIRE and early retirees looking to diversify their portfolio, I recommend investing in real estate. Real estate is a great complement to the stock market and other asset classes because the real estate market and the stock market aren’t directly related. If the stock market takes a hit, people will still need places to live. Moreover, it offers an excellent return that can be better than the stock market.

“Diversification” may sound like a buzzword, but it can mean the difference between going back to work and lounging at home.  I’d recommend a first-time real estate investor buy a 2-3 unit building and live in one unit and rent out the other.

A lot to unpack here, I know, but if anyone would like more information you are welcome to contact me at howard@atproperties.com.

I always ask my clients a few questions at the start of their investment journey:

-If you started today, how well could you retire in 10, 20, 30 years?

-What lifestyle will you enjoy?

-Will income be a curse or a blessing?

-Will the taxman be a problem or a memory?

-Will you own a second home for those bad weather months?

-Will your income be tax sheltered and/or tax-free?

-Will your Social Security check be your monthly walking around cash?

Honestly and objectively answer all these questions. Your answers will determine the actions you take today.

An Investment Plan

If you’re like most Americans, you didn’t like your answers to those questions. Maybe you didn’t even know how to answer. It’s okay. I’m here to tell you that there is still time to earn the retirement you want.

But, you’ll need a solid plan.

Actions taken while following a solid plan are like positive financial dominoes falling against each other, one at a time, building to your preordained result — an abundant retirement.

Sounds good, right? Your first move is to begin a conversation with me to get your retirement ball rolling.

-Howard Abell, Investment Expert

Real estate and stocks are two of the most popular investment vehicles. It is always important to have a balanced portfolio, which will usually include both. However, if you have to pick one, it is my experience that real estate earns stronger and more consistent returns. In this article, I will explore some of the reasons why real estate can better serve your investment goals. Let’s get down to it:

1.) Real Estate is a Tangible Asset. 

Real Estate is a physical investment that you can see and touch. Shares in a company are nothing more than a piece of paper giving you an interest in a company. While these shares have value, real estate is essential! People must have homes to live in and businesses must have places to operate from. You can live in a house or an apartment, but you cannot live in a share of stock from Google.

This tangibility leads to the most important benefit of real estate – it’s not as volatile as the stock market. Stocks can plummet for any reason at any time, leaving investors at the mercy of things beyond their control. Global events, such as natural disasters, corporate bankruptcy, and high-profile white-collar crimes, can all negatively affect the value of stocks. Any of these events could wipe out your portfolio, but a piece of property… and its value… will still be standing.

2.) Real Estate allows for Leverage.

Now leverage can be a double-edged sword, and over-leveraging a property can cause your asset to become a “money pit” faster than you can say “Bubble”. The over-leveraging of properties (coupled with greed) is the primary reason for the 2008 real estate market crash. However, responsible leveraging can allow an investor to put up 20-30% of the purchase price of a property and borrow the remaining amount. It is this leverage that allows the investor to realize higher gains than the stock market.

Not convinced? Let’s look at an example: Say you have $100,000 dollars to invest in real estate, you can generally leverage that into a $500,000 property. So your $100,000 will serve as a 20% down payment on a $500,000 property and you will get a mortgage for the remaining $400,000. If the property appreciates at 5% ($25,000) over the course of a year, that is an unrealized gain of 25% on your invested capital of $100,000. In addition, if the property was generating a positive income, then your returns would be even greater.

Now just to be straight forward, this is the broad view of the investment. It doesn’t take into account closing costs, loan costs, illiquidity of the investment, etc. So there are more costs that would be associated with this investment that would take away from that 25% return. Additionally, you would have to sell or refinance the property to realize that 25% return. However, over the course of a few years with responsible leverage, real estate returns far outpace the stock market. 

Stocks can generally only be leverage at a 50% – 100% ratio if you are trading on margin. So if you have $100,000 to invest, you can generally purchase $150,000 – $200,000 worth of stock. Assuming you purchased $200,000 worth of stock and it appreciated 5% ($10,000) over the course of a year, that is an unrealized gain of only 10% on your invested capital of $100,000. And just with the real estate investment you still have additional fees that will take away from this gain, including brokerage fees and interest on the borrowed capital.

3.) Real Estate allows for more Control.

When you invest in real estate, you have more control in how that investment will perform. You can implement strategies to maximize your returns. With stocks, you really don’t have any control over how the company operates. At best you can submit suggestions to the board of directors, and maybe they will implement some of your suggestions… MAYBE!

Real Estate also provides other advantages for the risk-averse, and in terms of how gains are realized and in terms of the overall volatility and manipulation of the markets, which we will delve into with greater detail in another post, but we can always carry the conversation over into the comments below so please let me know your thoughts and comment below.

Comments and Questions are always welcomed and encouraged! Let me know your thoughts below in the comment section and feel free to post this piece in media.