What are the three things that cause the most financial stress for every family or aspiring family? I postulate they are:
- Healthcare costs
- College tuition costs
- Living costs (rent or saving up to own a home)
Solving rising healthcare costs comes with a couple of conundrums. To get subsidized healthcare, you’ll probably have to work for an employer. If you like your job, this is OK. But if you are like most people who are disengaged from their jobs, you’ll eventually come to feel like you’re trapped in golden handcuffs.
If you’re an early retiree, one solution to combat your rising healthcare costs is to make less than 400% of the Federal Poverty Limit and receive subsidized healthcare from the government. Otherwise, you’ll have to pay full price as we do, no matter how healthy you are. But do you really want to live near abject poverty just so you can get subsidized healthcare? Probably not.
Solving college tuition costs is comparatively simple. Go to a community college for two years and then transfer to a 4-year state school. Or be smart enough to receive grants. Or skip college altogether and go to a trade school. Unless you are already rich, paying private college tuition is one of the best wealth transfers from the middle class to the rich. We’ve all heard the cacophony of complaints about crushing student loan debt and bad jobs after college graduation.
This post focuses on the living cost problem for your children. We know that renting forever is not a good idea due to inflation and the lack of discipline by the average person to save and invest the difference.
The Real Estate Goal Every Family Should Consider
Once you have your living costs under control, life gets much easier, especially when you’re young, healthy, full of energy and less encumbered.
Due to expensive living costs, some young adults end up living with their parents for years after high school or college. Although this may be a good idea for a little while, after several years, young adults may fail to launch because they’ve become too dependent on their parents.
Some young adults end up struggling to find job stability because they’re always getting forced out of their rental property for some reason. For example, one of our preschool teachers is being asked to move because he is an unauthorized sublessee. I hope we don’t lose him.
Some adults who really want to start a family can’t because their income is already being spent paying rent, saving for a home downpayment, and/or paying off student loans. The last thing they want to do is take on the financial responsibility of having children. But if they wait too long, children may never come due to biology.
Due to the financial struggles that often accompany rising living costs, the real estate goal every family or family-to-be should consider is this: own one mortgage-free property for each child.
If you have one child, then at least own your primary residence and a rental property that can one day be inhabited or managed by your child.
If you have two children, then at least own your primary residence and two rental properties that can be inhabited or managed by each child and so forth.
The Perfect Real Estate Goal
Why is owning one mortgage-free property for each child the perfect real estate investor goal? Here are some reasons why:
1) Helps you build wealth. Make no mistake, the main goal for owning one mortgage-free property for each child is for you to build wealth, not to baby your children once they become adults. The only way you can truly build wealth through real estate is if you own more than one property. Otherwise, you’re either simply neutral real estate owning your primary residence or short real estate by renting. You wouldn’t short the S&P 500 over the long-term. Therefore, why would you want to short real estate over the long-term?
2) Good timing. A typical child will need 18 years to grow up and finish high school. If he or she chooses to attend college, that time frame extends to typically 22 years. In 18-22 years, if you focus, you will likely pay off your mortgage by the time they start working full-time. Further, your property will likely appreciate in value during this time frame as well. The combination of property price appreciation and debt paydown is powerful.
3) Creates an insurance policy. As a parent or a parent-to-be, one of your main goals is to equip your children with the tools and knowledge necessary to survive on their own. Just in case you fail to be a good parent or your children fail to launch on their own, a paid-off property for each child ensures that they at least won’t starve. If they choose not to live in the property, they can at least make some income by being its property manager.
4) Decreases your chance of becoming a burden. One of the greatest gifts you can give your children is to be financially independent enough to retire comfortably. You can help them avoid becoming the meat in a salami sandwich, trying to provide for their kids and for you in your old age. If your children do become independent adults, you can keep earning rental income to pay for your retirement and medical expenses.
5) Gives you a sense of purpose. The reason why the saying, have children and the money will come, is true is because children give you tremendous purpose to get your life in order. You can use your children as motivation to build a real estate empire. Or you can use your children as motivation to build a tremendous stock and bond portfolio. My children have given me the motivation to maintain a lifestyle business that provides us with flexibility. Once you find your purpose, life becomes more rewarding.
The easiest real estate investing strategy for the average person is buying a place to live, renting it out in a few years, and then buying another place. Do this responsibly over a 20-30-year period and you’re going to build a healthy amount of passive income.
I have spoken to all my wealthy friends about this idea and they are all following this real estate goal. Once you have a meaningful reason for achieving a financial goal, the goal gets much easier to achieve.
Blame Or Don’t Blame Your Parents
I’m sure every one of us wishes our parents and grandparents had bought more real estate and more stocks 30, 40, 50, 60+ years ago. Just imagine how much easier your life would be if your parents and grandparents were savvy enough to make those investments way back when.
I already regret not buying a two bedroom, two bathroom, double balcony, 1,250 square feet condo on 22nd and Madison Avenue in New York City back in 2000 for $795,000. That place is worth at least $2,500,000 today and would be paid off.
One of the keys to investing, despite elevated valuations, is to think about prices far into the future. Ask yourself, “What will I regret not buying today, 20 years from now?“
For me, I know I will regret not buying more panoramic ocean view properties in San Francisco. I had the same feeling in 2003 when I walked into a 2/2 condo facing a park for sale at $580,000. It was a steal then and it is still a steal now at $1,300,000 because park-view properties are prime.
I don’t blame my parents for not amassing a real estate empire over the past 50 years. I’m just grateful they gave me the opportunity to learn about investing, which is one of the reasons why I’m able to share so many thoughts with you.
I just don’t want my children, when they are adults, to look at me funny and ask why I didn’t take advantage of buying property back in 2020.
I can hear my son now, “Wait, you could have bought a 4-bedroom, 3.5-bathroom, panoramic ocean view home in San Francisco for only how much? I love you dad, but you should have jumped all over that! Duh!“
It’s never too late to start investing because the population is always growing, land is becoming more scarce, and economic growth will generally trend up and to the right. However, some times are better than others.
The Downside To This Real Estate Goal
Now, of course, there is a potential massive downside to buying property for your children. They might end up completely unmotivated to do anything meaningful in life because one of their basic needs has been met.
I see plenty of adult male children washing their cars and walking their dogs in the middle of a weekday in my neighborhood because they aren’t motivated to work. They’re either living at home with their parents or living in a home their parents bought them.
To prevent creating lazy adult children, the key is to go stealth with your real estate plans. Never tell your children about your real estate portfolio. If they some how find out, make it clear that your real estate portfolio is for your retirement needs only. Also, try and not raise your children in a house that costs much greater than 150% of your city’s median-home price. Growing up in a mansion can be debilitating.
If you discover you have good children, then consider educating your children about the benefits of real estate investing. Discuss ways in which you can improve the property to boost its value. Talk about how to properly screen tenants by analyzing their income, balance sheet, and credit report. Teach them about cap rates and the real estate cycle.
Perhaps through your guidance, they will be more appreciative of the property once they finally move in or own the property. They might even take a liking to real estate investing.
Smartly Provide & Get Rich
I was afraid of introducing this goal of owning a paid-off property for each child. However, after observing so many people get financial help from their parents as an adult, it seems to me that this has become the norm. Unlike in the past, nobody bats an eye if they find out you’re still living at home after college either.
When you can live in a property that appreciates in value, build a rental property portfolio to fund your retirement, and provide shelter for your children if needed, you’ve created a trifecta of wins.
If you don’t plan to follow this real estate goal, then definitely invest your money in other assets that have the potential to appreciate in value. I don’t want you coming back to this post 20 years from now angry at me or other parents for diligently investing for their children’s and their own future.
Other Wealth-Building Suggestions For Kids
If you don’t want to shoot to own a paid-off property for each child, you can create a Roth IRA account for them instead. With the Roth IRA, you can teach them the value of money by making them work for their money. Up to $12,000 of income a year is tax-free due to the standard deduction. If they earn $12,000 a year from age 8-18, they will likely graduate high school with over $100,000. During this time, you can discuss your reasoning for investing in various equity and fixed income securities.
If you want to teach them the intricacies of real estate without investing too much money, platforms like CrowdStreet and Fundrise have a tremendous amount of information about each deal and sponsor. You can teach your kids about the various benefits and risks of debt and equity investments. You can discuss key drivers of real estate price appreciation and question various assumptions of each offering. The learning opportunities are immense because the material is all there. Both platforms are free to sign up and explore.
Readers, anybody else have a goal of buying an investment property for each of your children? What are some other positives and negatives I haven’t discussed about this real estate strategy?