Real estate, like any other business, takes time. A mentor once told me that in Japan a business is not expected to turn a profit until the 7-year mark. In the United States, you hear a lot about tech start-ups plowing through venture capital for years before becoming a profitable venture. The point is, making money in any business is not going to be about getting rich quick.
Real estate is no different.
We looked at a real-life example of this in our previous post about the employer 401(k) match vs. buying one rental property. In the first year, in terms of raw numbers, the employer match technically earns more by about $1,500 bucks.
But that’s just in the first year. What happens after that? Real estate income is just like any other business income. It takes time to build up as a source of residual income. But as you build it up, the more powerful your asset and potential for residual income gets.
A concept I’ve been working on – kind of like a Japanese business – is that residual income and business, in general, is not about the 1st investment, but the 7th.
What do I mean by that? Well if you take a look at the example in the previous post you would be purchasing a single investment property. The first difference between owning property and an employer match on a 401(k) is that, with the rental, you are spending 1/10th of the time on it – about 200 hours – compared with working full time (around 2000 hours!) for a year to qualify for your employer match program.
What if we kept going and that investment kept growing? What if we took the equivalent of an employee contribution from years 2-3 plus the money you save in the bank and combined them and got another property? Then in years 4-5 you purchased another property. Then in years 6-7 you bought another property? You would then have purchased four potential rental properties in 7 years. With the mortgage accruals, the price appreciation and rising rents of 2-3% a year, by year 7 you could be receiving upwards of $20,000 a year of wealth creation. The equity in your properties could then be used to put a down payment on a 5th property.
The great thing is, this is now money, not money hidden away in a financial instrument you can’t touch without penalty before age 60. You can build towards money and time freedom (retirement) while also generating residual income for those dreams you have right now.
Good things in life take time, energy, intention, and capital. But, if you want to build wealth that helps you now and can provide inflation resistant income in the future, play the long game. If you are looking only at what happens in year 1, you miss the potential. Gain perspective and a view of years 2 through 7 and beyond before you start out. See what you can accomplish in those 7 years and our bet is, you will find not only the possibility of your money working for you right now but a future of time and money freedom.