Today people are living longer so preparing for retirement is more important than it has ever been before. On one end of the spectrum people feel financially unprepared for retirement and fear they may have to work late into their golden years. These people would be happy to retire on time. On the other end of the spectrum a new breed of retirees is trying to figure out how to retire early, long before their golden years. This new breed of retirees are members of the Financial Independence Retire Early (FIRE) movement. Passive income from investing in multifamily apartment syndications can help them both.
How much money do you actually need for retirement?
The common way of preparing for retirement is to save up all the money you think you will need during your retired years. But how much money do you actually need to retire? FIRE advocates are familiar with the rule of 25. Multiply your annual expenses by 25 and the number you get is how much money you need to have saved up at the time of your retirement. For simplicity, let’s assume your annual expenses are $50,000. This means you will need $1,250,000 saved up to retire. How long do you think it would take you to save that much?
How long does it take to prepare for retirement?
Researchers at the Stanford Center on Longevity projected that if we save 10-17% of our annual income starting at age 25 we would be able to retire by age 65. That’s 40 years. For a FIRE advocate that is not fast enough. For someone starting retirement planning late in their 30’s or 40’s the chances of retiring on time don’t look promising either. Fortunately, one initial investment in a multifamily apartment syndication can help both groups meet their goals in 20 years or less. That’s almost half the time! Syndications are profitable partnership/ team-based investments. If you have never considered them, let’s look at how much of a difference one investment can make.
Start with One Investment
While investing in multifamily apartment syndications offers great returns, it is no get rich quick scheme. However, compounding the profits and returns from one initial investment can shave years off your timeline to retirement. Multifamily investors often see preferred returns of 6-8%+ annually with equity multiplies of 1.8 -2.0+ over the course of a 3-5year investment and sometimes sooner. The minimum investment amount for these types of investments is usually $50,000. Let’s see how one investment of $50,000 in a multifamily syndication can cut your time to retirement in half.
Imagine, you’ve done your research, vetted your partners, set aside your $50,000 seed capital and you’re ready to do your first deal. You decide to focus on deals with 7%+ annual returns, 3 year holds and 2.0 equity multiples. *A few caveats: while all investing carries risk we are assuming that each investment successfully meets the minimum of a 1.5 equity multiple, reinvestment of all profits, 3 year holds and maximizing tax advantages by investing with a Roth IRA. 1031 exchange is an alternate strategy to [maximizing tax advantages].
Reinvest your profits
3 years after your first successful investment your $50,000 has become $75,000. You roll this into another investment and 3 years later you have $112,500. Without lifting a finger, you have doubled your money in 6 years. All you had to do was invest an initial $50,000 and reinvest your profits. Let’s see how that would play out over the next 20 years if you keep doing this.
Time to Retire
Over 21 years, your $50,000 has turned into $854,296. If you had made that investment when your child was born that would be more than enough to send them to college but is it enough to retire? Before, we said your living expenses are $50,000 annually and the rule of 25 suggests you need $1,250,000 saved up to retire. Have we fallen short? Let’s look a bit closer.
Over 21 years you likely have also saved up some money and you could have invested that as well. One additional investment of $50,000 would put you far over the $1.25m goal. Too easy? Ok, let’s assume you didn’t invest anything besides the initial $50,000 and the profits you made from it.
The beauty of investing in multifamily apartment syndications is you get cash-flow. That’s money that you can use now. Real estate syndications typically see double digit annual returns. But even if you reinvest your $854,296 and only got 6% annually in cash flow you would have $51,257 in cash you can use now. Definitely enough to cover your $50,000 annual expenses. Congratulations! You have enough passive income to cover your living expenses. Time to retire!
Have Your Cake and Eat It Too
When you’re done celebrating, take a second to imagine how much you would have to retire on if you made a second $50,000 investment either simultaneously or a few years later. This could mean additional earnings of as much as another $854,296 or a total of $1,708,592 combined - just from two $50,000 investments. This additional investment would be more than enough to offset inflation of your living expenses. If your annual living expenses are greater than $50,000, you would have to make a bigger initial investment or wait longer than the 20 years so it can grow sufficiently.
Here is the icing on the cake! The best part is that spending your cash-flow doesn’t deplete your principle. You can continue reinvesting that $854,296 all throughout retirement and live off your cash-flow. You can have your cake and eat it too!
Make time your friend again. The sooner you start the more your seed capital can grow. If you have not considered investing in multifamily apartment syndications as part of your retirement strategy or financial planning, it may be time to reconsider. It can not only help you retire on time but maybe even early.
Interested in learning more about investing in multifamily apartments? Give us a call or check out some of the other free resources we have available at Investupmultifamily.com.
This article was originally produced for our educational platform InvestUp! and is being reproduced here for the benefit of our readers on this website.