This probably won’t come as a shock to those of you who regularly read my column, but I am a big fan of talk radio. While making the commute to and from work each day I enjoy getting information about what is happening both locally and nationally through this medium.
One morning show host, Del Walmsley, perked my ears recently as he claimed on his show that get rich quick strategies are the only way to attain real wealth, and that the truth is you can’t get rich slow. Obviously, this perspective is not one that I share, but continued to listen to him make his case to see if there was any validity to what he was saying.
For those who don’t know, Del Walmsley is the founder of Lifestyles Unlimited Inc. and claims to be able to teach his followers to retire early using real estate to build wealth and create passive income. Generally, what he and others like him suggest is rather than investing for the long term in retirement accounts that contain a diversified portfolio of equities and bonds that are designed to grow steadily over many decades, you should invest in properties that are then rented out producing a consistent income. He then suggests you use the proceeds of that income to purchase additional income producing properties which you then use to buy more properties and you continue this cycle until the passive income created by these multiple properties is enough to live off of for the rest of your life.
Recently an advisor I work with was counseling a young man to invest in retirement accounts at our firm. The individual however ultimately decided against this recommendation because he believed this strategy of real estate investment would be much more lucrative. Unfortunately, this person, and many others like him, do not fully understand a basic financial concept called “value-at-risk” or VAR. Value-at-risk is a statistical measure of the potential loss of an investment vehicle and the probability that such a loss will occur.
What those preaching the strategy of passive income production through real estate never tell you is the enormous amount of risk a person is taking by leveraging their small investment through debt into large property investments. Yes, hypothetically you can buy a home for $200,000 with only $20,000 out of pocket, resulting in a monthly payment of around $1,000 and the ability to charge double that for rent on the home. In that scenario you could then use the profit to buy the next house and repeat the process again and again that ultimately results in a portfolio of properties that are all paid for and still producing large amounts of income to you the owner.
In a perfect world, your properties would stay occupied with renters who pay, your homes never require unforeseen maintenance, various regulatory bodies would never impact the profits you make on your properties, and the home value never goes down. We do not live in a perfect world however, and unforeseen problems will occur that can greatly reduce your profits, resulting in possible losses on your investment. Potentially even catastrophic losses.
I can understand, particularly for young men why the appeal of these kinds of get-rich-quick schemes are so appealing. After all, who would not like to find themselves rich beyond their wildest dreams doing what they want, when they want before even reaching middle age? But as the old saying goes, if it sounds too good to be true, it probably is.
Proverbs 13:11 says “money that comes easily disappears quickly, but money that is gathered little by little will grow.” in other words money easily gained is money easily lost. Too often in today’s culture of immediate gratification people don’t expect to have to wait for the things they want. Unfortunately, too many con artists prey on those with that mentality. Greed can be a very powerful tool used to convince otherwise reasonable people to do unreasonable things with their money.
If real estate is something you believe strongly in as an investment vehicle, there are plenty of ways to do so reasonably. For example, Real Estate Investment Trusts (REITS) are a great way to pool your money with other investors to buy residential or commercial properties without taking on large amounts of debt risk yourself. These REITS can even be purchased inside of your retirement accounts. Once you have built up enough wealth owning and leasing property can also be a great investment if done correctly.
My kids are still at the age where I will read to them before going to bed. No matter how many times I have read them the story of the Tortoise and the Hare, the hare has yet to win a single time. There is a lesson to be learned from that simple fact.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)