We're going to get back to this question from Calvin and Hobbes. It says, "My friends are making over 200k, which is great, and they say they can't save in their IRAs or 401ks. Instead, they want to use real estate to fund their retirement. How do I get them to follow the foo first before doing what is 'quote unquote sexy'?"
First of all, let me be clear; we get a bad rap on this. We're not anti-real estate. Yeah, we're not anti-rental real estate, and we're not anti-multiple rental properties. If that is one of the ways that you choose to invest your dollars and create return and have your wealth grow, however, we are staunch advocates for doing it at the right time. Because here's what happens if you're not following the foo.
Brian, we hold the thing up. We have these nine tried and true steps. If you don't have your deductibles covered and if you don't have an emergency fund, and if you've not built a financial foundation, then when you start getting into real estate, just like leverage can be the thing that's so exciting and makes the money look so good, it can also be that thing that is so dangerous and can cut really deep. Because we all know what the brochure says: "I'm going to get into real estate. I'm going to go borrow some money. I'm going to buy a piece of property. I'm going to put some other human beings in that property. They're going to pay me rent. That rent's going to cover the mortgage, and I'm just going to be on Easy Street."
Unfortunately, it's not always exactly that easy, and there are other things that happen, like great recessions, storm damage, water heaters going out, bad tenants, vacancy. So, if you've not done the other parts of the financial plan to make sure that you have a foundation in place, you're basically betting on, "Hey, I need this thing, and it has to go right for it to work. And if it goes wrong, I might get myself in a really dire situation that I don't want to be in." So, I'll make it easy. Real estate is rich folks' stuff. Like, you do that when you've got deep pockets and you've got some jingle going on.
But look, we love real estate. We do real estate because we did the "get rich" stuff first. You've got to do steps one through seven in the financial order of operation. That's the "get rich" activities. And then, once you get to abundance goals, step eight, that's when you get to do rich folk stuff, which requires, yes, it's kind of fun when you get to watch leveraged real estate make money upon itself. But the reason it can do that is because it's a double-edged sword. The risk that creates that exponential growth is also the risk that can drive you and bleed you of all your money.
I mean, it's just like this building here. We have been trying to replace the roof on this building. It's a multiple six-figure expense for the last nine months. We're five. You know, we've got issues with the government. We've got issues with all these people that are saying yes, no, and then everything seems like it's an extra six thousand dollars, fifteen thousand dollars, all this stuff. None of it was... We knew the roof would cost this, but now this cost has gone another 30 percent beyond that. If you don't have pockets, what would you do? Because you've got to replace the roof. And I think so many people think of all the Airbnb people right now, they're realizing Airbnb right now is really got some issues going on because it's... So all these people are doing these short-term rentals, and you're realizing, yes, there were ways to make money over that with a lot of hassle factor. But now you're getting squeezed by local governments, you're getting squeezed by higher interest rates. It's... It's one of those things. I love real estate, but do it at the right time. You've got to build the wealth that can be your foundation to get you through the volatility and the craziness in the market. That's why you wait until it's step eight to get into real estate because you've got to be in abundance. You've got to have some wealth behind you to weather the storms.
Now, yes, there are people who've gotten lucky because real estate goes through cycles, and there are sometimes when we hit the upside of a cycle to where you don't have... You can be just lucky, you know? But as I'm telling people right now, we've had real estate... I've been down in Florida in the last two months, and every house that I was in, when I was just because I can't help myself, I looked in Orlando, I looked in Sarasota, everything had pretty much doubled over the last four years. Where do you think we are in the cycle of real estate? If everything doubled in the last four years, are we in the side where everybody's gonna get another doubling in the next four years, or are we in a period where it's gonna probably underperform for a period of time?
So, you need to be very careful with the purchase decisions, be careful with making those mistakes because you can get yourself in a heck of a caught situation. I'd much rather you do it the steady way. The majority of millionaires have done it, is that you set up an automatic monthly saving and investment, build that financial bottom and base. Don't skip leg day. So then you get to do the rich folk stuff later.
So, Calvin, how was your question? Hey, I've got some friends, right? And I'm assuming this is not the proverbial friends. I'm assuming you literally have friends that are doing this. I would talk to them about the Easy Button. Hey, you know what's really easy, especially if you're making over 200, 250,000 a year? Man, you should probably think about putting some in your 401k because there's an immediate tax savings to that. Hey, have you heard of this thing called a backdoor Roth? And that might be a really great way to build some tax-free dollars because once you get into higher incomes, there's a lot of incentives for you to pursue tax-incentivized investing inside a liquid account.
So, if you just start doing that, you'll be amazed at how the dollars start building up. So if I were Calvin and Hobbes, I would appeal to the rational, logical mind. Like, okay, you could do real estate, man, probably. I'd do that Roth first, probably max out on HSA first, probably how to do your 401k first because you're going to get immediate returns in the ways of taxation. There's a reason the industry... There's a whole cottage industry called dumb doctor deals. Yep. And your friends might be falling right into that because they get people who have really high incomes don't know what they're doing doing, and they get into some of these situations and these investments that they went for the sizzle more than the substance, and they get caught.
That's not to say some of these deals don't actually turn out to be great, but do your friends aren't even doing their 401k and IRA? Are they the type of investor that's probably going out there and have the keen eye to spot the sweet opportunities out there? Are they more likely the one, if it's back to that rounders quote, where if you sit down at the poker table and you look around and you don't know who the fish is, it's you. You're the fish. So are you the product that somebody's doing just because of your success? You have a high income, but that doesn't mean you know what you're doing with it. Don't get caught and don't be the fish. For more information, check out our
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