HOW YOU CAN USE REAL ESTATE TO MAKE YOUR CHILD A MILLIONAIRE
Doesn’t it seem that every once in a while you hear some fantastic idea that has the ability to drastically change your life. Well, I want to share one of the ideas that I have been working on that has changed my life and hopefully my families as well. For most parents they want to provide a better life for their children than they have had. Today it seems that most financial planners recommend that you should be focused on saving for your retirement, rather than investing to help your child with college, or for your child’s retirement for that matter. The financial advisors tell you to make sure your savings are on track before saving for someone else.
One of my goals when I became a father was to try to make sure that my daughter was financially independent. As I learned and studied various ideas, I started to try different techniques. I finally formulated an idea that just blew me away. The best part about this idea is that you can help your children and yourself at the same time. With this one idea, you could improve your retirement and ensure that your child becomes financially independent.
The underlying concept of this idea is to get money invested into an IRA today for your child’s retirement in the future. Using the compounding benefits overtime, your child would become a millionaire without much effort. Many of our clients understand that we like to set up automatic systems to build wealth. When I say automatic, I mean that it doesn’t take much effort to maintain the system once its in place. Or another way to look at it is to work once and get paid over and over again from your efforts.
Compare the homebuilder to the writer. The homebuilder has to build a house to get paid. The only way the homebuilder gets paid again is by building another house. This process must continue for the homebuilder to earn money. The writer, on the other hand, writes one book and gets paid again and again for his or her efforts as the book sells over time.
Many people try to save the hard way. They go to work and when they get their paycheck they try to put some money aside for savings or investments. The only way they get more money into their savings is to go to work again to earn another paycheck and save a portion of this new paycheck. However, in today’s economy it is very hard to build your savings this way. Just when you get some money put aside, something happens and you need to dip into your savings for whatever reason. The end result is that you have to start back from scratch saving money from your paycheck.
Instead focus on setting up a system that saves for you. This concept is extremely important. When you have a system save for you, you don’t have to struggle by setting aside money from your paycheck every month. You still can and probably should set aside money from your paycheck, but if you don’t save this month from your paycheck, your system is still saving for your goals automatically.
Try using this approach to setup an automatic savings program for your child’s retirement fund. Buy one single-family rental property that has a cashflow of at least $150 per month. When I refer to cashflow, I mean that your monthly rental income is greater than all of monthly expenses by $150. Your monthly expenses include mortgage, interest, insurance and taxes. At the end of every month, your bank account will have an extra $150 in it from your one rental property. This is where many investors make a big mistake. They live off of this extra money. I recommend that you invest this extra money towards your child’s retirement. Because your child is so far away from retiring, this money will compound substantially overtime without much effort on your part.
To make this idea even better, when you buy your single-family rental home, use a flyer to handout to prospective tenants when you show the home. In this flyer, drop in a picture of your child or grandchild. Put a cute little slogan underneath like “please rent this home from my dad/mom”. I know what you’re thinking, this sounds real tacky. Here is why you should consider having your child model in your flyers: You can pay them for the services rendered. What this means to you is that you can pay your child for their modeling services. This payment to your child is a tax deduction for you. So you have now invested in your child’s retirement and received a tax deduction for your efforts. This is like getting your cake and eating it too. Your child will now have taxable income from the money earned. However, can you think of a way to offset your child’s income? How about an IRA. Your child can contribute their income into their own IRA. Depending on the type of IRA selected, your child’s IRA contribution may offset the taxable income that they received for their modeling services. The only two requirements someone needs to have an IRA are:
1) Have Earned Income
2) Have a Social Security Number
Many young children don’t have earned income, so they aren’t eligible for an IRA account. With this strategy, your child now has earned income and can contribute to an IRA. Your baby’s picture could be included in your rental property marketing efforts. If you could start using this strategy very early in your child’s life the results would be astronomical.
So let’s take a step back for a second and analyze what we have done. What you have done is received a tax deduction for investing money into your child’s IRA. I don’t know about you, but this really makes a lot of sense to me.
I have now laid down a challenge for myself. My challenge is to ensure that my daughter would become a millionaire without having to give money to her out of my own pocket. This is what I started with: I bought one single-family rental property and I included her picture in the flyer and advertising of this home. For her modeling services, I will pay her $150 a month. She will invest that money into her own IRA. We started this arrangement when she turned one. She is now three and has about $2,600 in her IRA. Assuming that I continue to use her modeling services and pay her $150 a month for the next five years, she will have accumulated $14,400 in her IRA. Now remember, she will be 8 years old at this time. For discussion purposes, lets assume no other contributions will be made after age 8 into her IRA. If this $14,400 was invested at 12% per year, when she is 50 years old, her IRA will be worth $1,680,813. What are my odds of meeting my challenge of guaranteeing that she becomes financially independent? For me, the best part is that I get to keep the home for additional income in my retirement and she gets to become a millionaire, not a bad deal, huh. After she turns 8, I can use the $150 a month for my own savings program.
Do you see how the savings program was automatic? Not one penny of the monthly investment of $150 was paid out of my pocket. It was paid from the rental income that my property earned. Compare this to saving $150 each month from a regular paycheck.
We had a meeting in our office recently and I posed the following question to my team. I asked them, is it easier to make money or create money? Many people are so busy making money at their jobs that they don’t learn ways to create money. I have obviously used some assumptions in my planning, such as the 12% return from age 8 to age 50. What happens if I fall short? What happens if her IRA only earns 10% per year? If I fall short, she still wins. What if I am only able to create $850,000 of money? Who looses? Remember that you don’t have to invest a penny of your own money into this account. You created this money through one of your investments. If you fall short, your child will have $850,000 at retirement without having to save a penny of their own money. If they did the same thing for their kids, you would be leaving a legacy to your family.
The big question to consider is “Can you set up a system to create money that would help your child become financially independent?” Well, here is my big challenge to you, “Can you make your child a millionaire?” What would your life be like today, if your parents had followed a similar approach when you were a child?
I have been asking myself another question lately. Is it more important to save for your child’s college education or for their retirement/financial independence? I don’t think I have ever heard of anyone recommend that you should save for your child’s retirement. My thought is that my child’s financial independence is more important than having college paid for in advance. The way I see it, my child can get student loans to pay for college and I can take care of the financial independence part. To me it doesn’t really matter what my child does for a career, or what school they should go to, as long as she is happy. If she knows she will be financially independent, she can make drastically different decisions throughout her life. She won’t feel forced to take a job she won’t enjoy because of financial need. She will have the ability to follow her dreams rather than a paycheck. My focus has shifted from saving for her college to saving for her financial independence.
If this sounds like a good idea to you, I recommend that you get started right now. Don’t wait, because starting a year from now can cost thousands to your child at age 50. As always, discuss these strategies with your tax and legal counsel to be sure they are appropriate for your situation. If you have any questions, or would like help setting up your automatic savings program, please feel free to give me a call.
Sincerely,
Rob Minton
Founder - Income for Life
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