Create A Plan for Wealth

Peter Moulton recently spoke to a group of REALTORS® at a WCR event. Here, he shares his simple strategy to building wealth that will last beyond your years as a broker. The economic downturn of 2008 brutally shocked everyone’s system, particularly those of us in real estate, and many of us are still rebuilding. Since 2008, I’ve learned quite a few lessons through personal experience, both good and bad. A few of things you should know about my philosophy:

• Financial wealth is about your legacy, the ability to try new things and expand your world.
• Financial security is about having plans and policies in place that create savings for retirement and protect you from expected & unexpected life events.
• Lastly, health is true wealth. Let’s all live a great long life.

Real estate brokers are most commonly independent contractors; they are small (or not-so-small) business owners, as well, often living and dying for the transaction rather than taking the long view of caring for themselves. You can only work within the reality of your current financial situation, so let’s consider best practices for allocating percentages of your gross income. Whatever you make, you can apply these basic principles; it may not be sexy, but you can do it!

• 10% to marketing and growing your business (much of which is tax deductible)
• 20% put aside for taxes
• 10% into savings, investing and planning
• 10% for creating wealth in real estate
• 50% to living your life (mortgage, groceries, gas, etc.)

What’s that you say — 50% to live on? This guy is nuts! While it is true that I am a little, these numbers are solid. Three three-flats Here is where it gets fun. Real estate is a truly unique asset because you can finance a property while making a minimum down payment. Then, you can have a tenant that pays the cost of the financing of the asset, while the government allows for many tax deductions on mortgage interest, improving the property, etc. Take this hypothetical situation: a real estate broker is perusing the MLS and comes across a decent three-flat with decent income potential. It is well cared for and would easily capture fair market rent for the area — not sexy, but nice. If your credit is decent, you can likely procure a mortgage to purchase this three-flat as your primary residence for 3.5 percent to 5 percent down on an FHA loan. This also stipulates that you must occupy the property as your personal primary residence for a period of twelve months.

Pro tip: some brokerages will allow their brokers to retain most or all of the commissions when purchasing a primary residence. This information can be obtained through your independent contractor agreement or by consulting your managing broker.

By receiving a higher commission split with your managing broker, your down payment has just decreased. Remember this as well: the rate of return on real estate is not based on the value of the asset, but the value of the cash investment. So, let’s say your property appreciates from $333,000 to $350,000 in a couple of years. You should figure your appreciation not on the $333,000 number, but the down payment, PITI, etc. Call it a $3,333 down payment and an additional $4,000 in fees, etc. Then, you have to pay $400 per month to cover the cost of mortgage, utilities, etc. (assuming both units are rented). That’s a total cash investment of $16,933 over 24 months, and that’s a 100.4% rate of return over 24 months. Try to get that in the stock market! Paying one extra mortgage payment per year, you will shorten the amortization by approximately seven years. You could potentially own the properties outright in 23 years and retain the monthly rental income that will almost certainly rise with the cost of inflation. Pretty simple, huh? Use what you know and understand to create wealth for yourself. As with anything, the devil is in the doing. Peter Moulton President of Agent Services, Dream Town

• Three-Flat Rental Property Cash Flow Worksheet