Starting Now is Good, But Starting Young is Great: How Time Affects Investing
by Jered Strum
Time — the constant, universal element that holds more power than any other factor in investing. The most underrated, under-discussed asset ever is our time. As investors, we often declare the mantra, “Cash is king.” If cash is of royalty, I would argue time is of godliness.
We all have a finite amount of time to be alive. Unfortunately, many of us trade so much of that time for cash. We know this isn’t right, we know it doesn’t feel good, and yet so many continue to trade time for money. There is a better way — a way to combine the power of time and money to take control of your most precious asset.
In this article, I will outline the power time has on our investments, specifically real estate, and why people of all ages should be using whatever amount of time they have. I’ll also show the younger generation that because of the time they have, they are the wealthiest generation — they just don’t know it. I believe wealth is measured in time, not money. However, our time can be preserved with money, and our money can grow easier with more time. Let me explain.
Exponential Growth: The Story of Bailey
The reason time is the most valuable asset is due to the extraordinary power of exponential growth. Some may refer to it as compounding interest. No matter what you call it, the largest factor in an exponential equation is time. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pays it.” And Albert Bartlett emphasizes the importance of exponential growth with his quote, “The greatest shortcoming of the human race is our inability to understand the exponential function.”
The power of exponential growth can work for you rather than you trading hour after hour to earn money to live the lifestyle you want. As exponential growth continues to work, the growth becomes more rapid and your path to financial freedom accelerates. This is why starting on this path now rather than later is so important and why starting young can be so powerful.
Let’s put these concepts into an example to help wrap our heads around it better. There are a lot of numbers and moving parts in the example. Stick with me on it, and we’ll break it down after.
Meet Bailey. Bailey is your everyday woman. She graduated from a normal college at the age of 23 and got a 9-5 job with a starting salary of $45k a year. After 2 years of working at her 9-5 and saving what she budgeted, Bailey is able to put away $20k worth of savings. She is now 25 years old and decides to start thinking about investing her money. Deciding to put that money to use in a real estate investment, Bailey buys a $100k investment house by getting a 20-year mortgage and putting a $20k down payment on a single family that cash flows $3k a year. Not bad — a cash on cash return of 15%.
But Bailey is smart. She decides to begin saving the cash flow in addition to her annual savings of $10k a year from her job. Just about a year and a half after Bailey buys her first house, she has another $20k saved up, thanks to her $15k in job savings and her $4.5k in cash flow from her rental. She decides to buy another house exactly the same as the first one. Now Bailey is cash flowing $6k a year from her rentals and continues to save $10k a year from her job.
After 15 months, she has enough money saved and buys another single family house. Now cash flowing $9k a year from her rentals and saving $10k from her job, she is able to buy another house just about 12 months later. This same pattern continues, and by the time Bailey is 35 years old, she owns 14 rental properties that produce a monthly cash flow of $3,500. Some of her properties have gone up in value through appreciation, making her total portfolio worth $1.5 million. She has been paying down her 20-year mortgages this whole time, and because of that, at age 35, her portfolio has $535k in equity.
Bailey now sees the power of exponential growth and the power it has in real estate. She decides to do a cash-out refinance on the equity in her portfolio. The bank allows a 75% loan to value, so she is able to pull $160k out after paying off the existing debt. She then takes the $160k and uses it to put a down payment on a $800k apartment complex. This complex produces the same 15% cash on cash return and therefore produces an additional $24k cash flow annually, or $2k a month, for Bailey.
In this example, Bailey initially invested $20k and an additional $10k a year from her job for 10 years. All the other money came from the cash flow the properties produced. Because of that, Bailey now cash flows $5,500 a month and owns $2.2 million in real estate. Bailey decides to enjoy her mid-30s and quits her day job. She is content with the property she has and doesn’t want to buy more. She lives on the $5,500 a month and pays zero income taxes due to depreciation.
After 20 years of owning all her properties, Bailey is 55 years old, her portfolio is 100% paid off, and it has appreciated to being worth $3 million. Although her portfolio has treated her well, she is ready for something easier. She sells the portfolio for $3 million in a 1031 exchange and buys a $12 million A-class commercial building that CVS rents under an NNN lease, where her involvement is hardly required. That property produces a 5% cash-on-cash return, which is a nice check of $12,500 a month that Bailey gets to live off for the rest of her life while trading hardly any of her own time.
Bailey dies at the age of 85, leaving her heirs with a free and clear commercial property now worth $15 million. Her family will have the wonderful luxury of financial freedom because of the initial $20k investment bailey made when she was 25 years old.
This example has a lot of moving parts, so let’s break down some of the many benefits and actions Bailey was able to achieve by starting young and using the most valuable asset of time to her advantage…
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