The Challenge of Saving for Retirement
Retirement is an important life milestone that many people look forward to. After decades of working, retirement offers the freedom to relax and enjoy life on your own terms. However, being able to afford retiring comfortably requires diligently saving and investing throughout your working years.
According to a 2022 study, around 64% of Americans are worried about running out of money in retirement. The average American only has about $50,000 saved for retirement by age 50. With rising costs of living, increased lifespans, and shrinking pensions, actually having enough savings to retire is becoming increasingly difficult.
Building a nest egg large enough to retire usually requires consistent investing over decades. But with the right investment strategies, it may be possible to accelerate your progress and retire sooner.
The Appeal of Stocks and Bonds
For most people, investing for retirement involves putting money into traditional assets like stocks and bonds. These are seen as lower-risk, steady appreciating assets that form the basis of a retirement portfolio.
Stocks allow you to gain equity ownership in companies and benefit from their growth over time through stock price and dividend appreciation. Investing in bonds provides set interest payments along with return of principal upon maturity.
Balancing stocks for higher growth and bonds for stability is a common retirement investing approach. But this traditional 60/40 portfolio allocation may not provide high enough returns to build your nest egg quickly.
Average annual returns for stocks have historically been around 7-10%. Long-term bond returns only yield 3-4% on average. While these assets can grow your money safely over decades, they may not enable an early retirement.
The Power of Real Estate Investing
Real estate stands out as an alternative asset class that can potentially accelerate your retirement timeline. Property has unique advantages that can greatly boost your investment returns when utilized strategically.
For starters, real estate provides passive income through rents along with the potential for appreciation. Combining current cash flow and price growth can deliver higher total returns than stocks and bonds historically.
Real estate also utilizes leverage to multiply returns. For example, a 20% down payment can control a property worth much more. Appreciation from the full property value accrues to your equity. This beneficial leverage is not typically available with stocks and bonds.
Tax advantages provide another boost to real estate returns. Expenses can be deducted reducing taxable rental income. Depreciation deductions shelter a portion of gains from taxes upon sale.
Overall, real estate’s multiple return drivers enable average annual returns in the 10-15% range for active rental properties, higher for value-add deals. Passive real estate investments through funds can generate 10-25%+ averaged returns.
Founder of NT Capital Group, Taylor Loht joined Jim Pfeifer on the Passive Investing from Left Field podcast. During his journey to passive real estate investment, he recounted his thought process: “Once I learned again about cash flow through reading Rich Dad Poor Dad and then learning more about real estate investing more broadly, different strategies, how you can build cash flow, use leverage, and invest for the long-term while getting benefits in the short-term, that made a lot of sense to me. That helped me understand how people are able to retire in a shorter time frame through real estate investing than through stock and bond investing.
Real Estate Investing Options
There are various ways to invest in real estate beyond direct homeownership:
- Rental Properties – Buying and managing rental properties generates monthly cash flow along with long-term price appreciation. However, being a landlord requires hands-on work.
- REITs – Real estate investment trusts allow you to invest in portfolios of properties as a shareholder. This is more passive but limits control and upside.
- Crowdfunding – Platforms like Fundrise pool money from individual investors to buy real estate assets. These have higher fees but are more passive.
- Syndications – Partner with experienced sponsors to invest in large commercial properties as a limited partner. These are very passive with a high return potential.
Real Estate Syndications for Passive Investing
One smart real estate investing strategy is participating in syndications as a passive limited partner. Here’s how it works:
- A sponsor sources, acquires, and manages a sizable commercial property like an apartment complex.
- You pool your money with other investors to provide the equity to purchase the asset.
- Ownership is structured as an LLC where you hold shares proportionate to your investment.
- The sponsor handles all operations as the general partner while you earn passive income.
- Typical investments are held 5-10 years before selling for a profit.
This allows everyday investors to benefit from ownership of institutional-grade assets. The sponsor’s expertise unlocks opportunities and returns otherwise inaccessible to individuals.
As a limited partner, you sit back and receive your pro rata share of profits with little day-to-day involvement. Syndications provide consistent cash flow, growing equity, and long-term appreciation without having to personally deal with tenants or toilets.
Wealth Acceleration with Syndications
Intelligently investing in commercial real estate syndications can significantly accelerate building your retirement nest egg compared to traditional assets. Here’s why:
- Higher Returns – Syndications aim to achieve average annual returns of 15% or more thanks to rental income, appreciation, and debt paydown. Typical stock and bond returns are significantly lower.
- Cash Flow – Profit distributions provide regular tax-advantaged income. This supplements your salary while your investment principal continues growing.
- Appreciation – Commercial properties often gain value over the hold period. Upon sale, you realize your share of appreciation gains.
- Leverage – A 20-30% down payment controls a much larger asset. Your returns are amplified by this leveraged exposure.
- Diversification – Each syndication represents just a portion of your overall portfolio. You can spread money across different deals to reduce risk.
- Wealth Compounding – Reinvesting ongoing cash flow distributions accelerates your capital accumulation exponentially.
- Tax Advantages – Depreciation deductions offset taxes on rental income. Taxes on appreciation gains are also deferred and reduced.
The power of compounding is huge. If you earned an average of say 18% per year on your investments, you could turn $50,000 into over $1 million in 20 years. That much capital appreciation may be challenging to achieve with a traditional stock and bond portfolio.
As Taylor Loht reflected in the podcast, “‘Stock market investing’ isn’t going to do anything for me in the shorter-term or before I’m in my 60s. It’s not providing me any benefit. I’m stocking it away when I’m old. I need to find another way to get passive income coming in and get my money working for itself.”
Case Study: Investing for a $3 Million Retirement Portfolio
Let’s compare how investing in real estate syndications could potentially accelerate building a retirement nest egg versus traditional stocks and bonds.
For example, say your goal is to accumulate $3 million in 20 years for a comfortable retirement. Assuming you start with $50,000 saved already, here is one scenario of how investing in syndications could potentially get you to your goal faster:
- Starting Capital: $50,000
- Additional Savings: $25,000 per year
- Return Goal: 18% average annual return
- Investment Horizon: 20 years
By investing your current capital along with consistent future savings into syndication deals averaging 18% annual returns, your portfolio could potentially grow to over $3 million in 20 years:
- Year 1: $50,000 initial capital plus $25,000 savings equals $75,000 total invested. At 18% return per year, this grows to $88,500.
- Year 2: The $88,500 compounds at 18% return to $104,530. Add $25,000 savings to equal $129,530 total capital.
- Each year, returns compound while additional savings continue to be invested.
- In 20 years, the portfolio could potentially grow to $3.1 million.
Contrast this to projecting similar growth rates for stocks and bonds:
- Bonds at 4% annual return only grow to around $850,000 in 20 years.
- Stocks at 8% only accumulate around $1.6 million in the same timeframe.
The power of leveraged real estate returns could potentially generate nearly double the wealth over 20 years compared to stocks and significantly more than bonds.
This illustrates how strategic real estate investing, if executed prudently, could greatly accelerate your retirement timeline compared to more traditional passive investing in stocks and bonds. While past performance is no guarantee of future results, the wealth compounding potential of commercial real estate syndications is compelling. To read about one person’s experience in building wealth passive investing, check out this article from Passive Investing from Left Field.
Keys to Success with Syndications
Intelligently investing in passive syndicated real estate deals requires following some best practices:
- Evaluate Sponsors Diligently – Do thorough due diligence on the experience, expertise and track record of sponsors. Their capabilities are crucial.
- Analyze Deals In-Depth – Understand the business plan, financial projections, risks, and assumptions made. Get comfortable with the anticipated returns.
- Diversify Investments – Deploy capital across multiple properties in different markets with varying strategies to mitigate risk.
- Educate Yourself – Continuously learn about real estate markets, asset classes, and dynamics impacting your investments. Stay informed.
- Reinvest Diligently – Re-deploy proceeds from refinancing and property sales into new opportunities. Continuously recycle your capital.
- Take a Long-Term View – Be patient and persist even through market fluctuations. The power of compounding works over decades.
- Work With Experts – Platforms like NT Capital Group provide institutional-grade access to commercial real estate previously unavailable to individuals. Leverage experienced sponsors.
- Join Communities – Groups like Left Field Investors provide education, resources and opportunities to enhance your investing competency.
With the right approach, passive real estate syndications can potentially supercharge your retirement investing returns. But you need education and discipline to execute prudently. Utilizing platforms that provide access to thoroughly vetted sponsors can give added confidence.
