How to Be a Completely Broke Millionaire
By Vena Jones-Cox
Many of us have “wealth goals”—a figure that we want to “ be worth” in real estate. For most people, it’s in the millions of dollars. But most people don’t understand that having a million dollars in cash, or in stocks, or in gold or some other liquid asset is a whole lot different than owning a million dollars worth of real estate,
In fact, it’s entirely possible—even COMMON--to be a multi-millionaire on paper, but completely broke in real life.
I should have figured this one out years ago, when my high school friends were wearing Guess Jeans and eating steak, and I was wearing ToughSkins and eating tongue.
Yes, that’s right, tongue. We were so poor that, (at least until I figured out what it was and became a vegetarian on Tuesday nights), I spent a decent portion of my life eating out of a cow’s mouth—and all this despite the fact that my father was well into his second million dollars in equity.
How can you own that much real estate and still be reduced to feeding your family offal? Easy:
Let’s imagine that you own 20 $100,000 rental houses that gross $995/month each, or $19,900 in monthly rents. You’ve owned these babies for awhile (or bought them REALLY right, so you owe just $1 million in loans on this $2 million in property. Thus—on paper, at least,—you’re an official millionaire.
Let’s say that the debt service on your $1 million in mortgages is $6,650, (30 year loans at 7.5%) leaving you with $12,950 in monthly income. In reality, it would probably be more than that, because if you bought the properties at 70% of value you’re actually making the same payments you did when you owed $700,000 (your payments don’t go down as you pay off the loan—they just consist of more principal and less interest).
The taxes and insurance will cost another $6,000 a month or so.
The other expenses will generally run about 20% of the gross rents, or $3,980.
This leaves you with a little under $3,000 a month in income for your personal expenses, such as home mortgage, car, groceries, clothes, college tuition, and so on—not what most of us are striving for, but enough to squeeze by on, UNTIL.
UNTIL is the inevitability that one month, 5 of your 20 tenants will move all at one for no reason at all. Or that the boiler in one house will need to be replaced at a cost of $5,000. Or that the roof on your best tenant’s house will finally give up the ghost.
That’s the month when you suddenly wish you had a wholesale deal in the pipeline. Or a job. Or an empty credit card.
Most investors weather this by borrowing money from home equity lines or credit cards, or by robbing Peter to pay Paul. And most don’t talk about it, because it’s too totally embarrassing to admit that you’re a hyper-successful real estate investor who’s robbing the penny jar to pay for groceries.
But don’t worry—this only goes on until your mortgages are paid off. At that point, you add $6,650 a month to your income—making it nearly $10,000 a month, which is enough for most of us to live on very comfortably.
But did I mention that, under normal circumstances, this point is THIRTY YEARS AWAY???
Yeah, Ok, I exaggerate a little.
Rents will increase as the years go by, and while a lot of your expenses will increase with them, your mortgage payment won’t be one of them. Things will loosen up before the entire 3 decades has passed—by the time I was in high school, my family actually ate steaks once a week. Of course, my mother had to go to the butcher and buy a whole side of beef in order to get the big discount she needed to justify the purchase to my dad, but steak is steak, even when it’s a little freezer burned.
And maybe you’ll be smart and plan ahead to pay off your mortgages early with your wholesaling/retailing profits, or maybe at year 10 you’ll sell ½ your houses and pay off the other half. But if you don’t, be prepared for a lot of conversations with your significant other that go, “How can we own a million dollars worth of property, but we can still only go on vacation where we have family?”
On the bright side, one of the real advantages of equity is that it’s hard to spend. It builds up tax free, and it’s hard to grab for an impulse purchase. Plus, there’s no rule that says you can’t rent properties AND do lease/options, or retail, or wholesale, or any of the other strategies that will earn you the cash you want to FEEL rich as well as BE rich.
Reprinted with permission of Vena Jones-Cox. To get more free articles and tips, subscribe at www.TheRealEstateGoddess.com