Your Purpose for Investing Needs to be Your Guide
The other day I had the pleasure of being a guest on a podcast and the host asked me: “Axel, are you worried about this crazy increase in real estate prices, and rent increases, and just overall that we are going to see a tremendous crash coming?”
My simple response was; “No, I am not”
Let me tell you why that answer was so easy for me.
The approach that I have selected many years ago for me, my family as well as all the clients who contact us for coaching, mentoring and referrals, follows a rational purpose. That purpose is to put our money, together with money from lenders (banks) into residential real estate to generate passive income. One of the most important aspects of this approach is to find a deal where the performance is good.
Good performance means that we get a good ratio of rent to purchase price from day one. We want to buy houses that cost $100K and pay $1000/month in rent. Or Houses that cost $125K and pay $1250/month in rent.
When you buy these houses, you will end up with anywhere between $150 — $300 per month in passive income.
That’s the amount of money you have to spend after everything else has been paid — including the mortgage, the insurance, property taxes, savings for reserves, savings for possible maintenance bills, and savings for replacing a tenant.
You might say: “well, $150/month or even $300/month is nice but that’s not really enough to live off.
You are totally right and if we only wanted to buy one house it might not be worth it.
That’s where purpose comes in. The purpose of buying houses to get between $150 — $300/month from each property is to reach a certain number over time.
I call that the “Time Freedom Number.”
If you imagine you want to get $2700/month in passive income, you also know that you would need to get 9 houses each paying you $300/month to get to that number. If you only get $200/month for each house you would need 13 or so.
In reality, it is actually fewer houses because we don’t buy them all at the same time and the income you make increases over the years, but that’s just a nice side-effect.
The focal point is the purpose in the first place. We want to get to our time freedom number. That’s why we are saving each month, buy houses as soon as we can and get the number of houses required to reach our number.
Do you notice what’s missing in this picture?
The change in the price of the houses is not really relevant.
If we found a house in 2019 for $90K and collected $900/month — meeting our performance goal, and now we find a similar house for $110k and collect $1100/month in rent, the system still works.
Yes, the house this year costs more but it also pays more – meaning it performs well, and that’s all we need.
Back to the question of the podcast host. What happens when the market crashes because houses have gotten so expensive? Why am I not afraid of that?
- The price of a house would really only matter if I wanted to sell one of my houses. I don’t want to do that because the purpose of owning the houses is to collect the passive income each month and get to my time freedom number.
- In a strange way, a crash would actually help to get to my time freedom number faster (just to be clear — I don’t want a crash or advocate for it, but it would help more than it would hurt). If you look at the situation when a crash occurs and what the consequences are, here is what will happen:
- The houses on the market will be cheaper than they are right before the crash, making it easier to purchase more houses. That means we can generate more passive income to reach our time freedom number.
- There will more people who want to rent because they could not afford to buy a house. That will increase rents for all rental properties which is good for our passive income.
- The fact that the price for the houses we already own may have gone down in a crash does not matter because we don’t want to sell anyway. It’s just a theoretical loss. Our rent will not change — and if anything — rather go up as more people are looking to rent (at least up to the crash itself)
All together we don’t need to worry about a crash because the purpose of our investments is to find well-performing properties that pay the right ratio of purchase to monthly rent and give us the passive income we are looking for.
If you think it is likely a crash will happen soon (in the next 6 months), I recommend getting prepared by getting your financing lined up and your credit score as high as possible, so you can pick up some of the post-crash properties.
If you ask me if we at Ideal Wealth Grower do that I can tell you that we are not. We have stopped trying to predict what the market will do. All we focus on is finding properties that perform as described above and purchase them as soon as we have sufficient funds.
That has worked well for us and our clients in the past and it will keep working well going forward.
The purpose is the generation of passive income on the path to our time freedom number. That’s all that counts.
If you like it, feel free to join us.