Just the other days I was meeting with a CPA in my area reviewing our planning process. It’s inevitable that when I review our planning process called Simplicitree we get into investment strategies. The CPA was very intrigued by our planning process and was all ears on what investment strategies we use for our clients. For some reason I decided to share one of our investment strategies in the form of an analogy, but as it turned out it breaks it down in an easy-to-understand manner that I think almost anyone can understand. I call it – renters and squatters.
I want you to think of each investment you make as a rental property. I am not recommending you buy rental properties, but rather I just want you to think of each of your investments as rental properties. Just as you may have invested in a mutual fund or ETF, I want you to think about each of your investments as little rental properties.
There are only two types of tenants that can occupy your rental properties. Do you know what those two types of tenants are? Those who pay rent and those who don’t! It doesn’t get more basic than that. You have individuals who want what you have and will pay you for it and there are other people our there that want what you have and would love nothing more than to get it without having to pay for it. I consider these two types of tenants as renters and squatters.
Let’s dive a little deeper into renters and squatters.
Squatters
The first tenant I want to go over is the squatter. As you already know, the squatter does not pay to occupy your rental. You may be thinking that you would never let a squatter in your space to begin with so way read any further in this section, but you may want to stick around as almost 85 percent of all investors have squatters in their portfolios. It’s a shame actually, but most investors blindly and happily open their rental spaces wide for squatters, believing they are going to make huge returns on their investment. The truth of the matter is that they have no idea that they are allowing a squatter in to occupy their space. They are just happy to have a rental, thinking they bought it at a great price, not realizing they bought a property with a squatter as a tenant. Squatters are hard to spot, they cover up the fact that they have no intention of paying a dime to stay in your property. From the very beginning you believe that you are going to get someone into your property that is not only going to take care of your property, but that they are going to help you make some money. But that’s not what happens.
Can you think of an investment that is like a squatter? This type of investment only makes profit if you sell it for more than you buy it. Just like the rental with the squatter in it. The only way you can make a profit is if you sell the rental property for more than you paid for it. Do you know why the most fundamental theory of investing is “buy low and sell high”? That’s because the vast major it of investments that Wall Street has to offer are squatters! Let me give you two of the biggest squatters on Wall Street – Mutual Funds and ETFs.
If you have either of those types of investments in your portfolio, then you have squatters occupying your rental properties. Yep, they are not paying you a dime. Horrible. They are taking up your valuable space that should be producing rental income and you aren’t getting squat! Not a dime of annual or quarterly or monthly income. Nothing to show for your investment. That is unless you are fortunate to sell your investment for more than you paid for it. Why would anyone spend their hard earned money on a rental property and purposely allow a squatter to live in it? No one right, yet that is exactly what is happening when an investor is investing their hard-earned money into a mutual fund or ETF. The only potential profits the can make is “IF” they sell it for more than they paid for it.
This is the single biggest reason why so many investors are fearing they are going to run out of money before they die. They are not receiving any income on the vast majority of investments they have made. They are all being occupied by squatters!
Renters
The second type of tenant is the renter. These are the tenants that you want, but unlike the squatters they actually pay to stay in your property. They are proven payers, not tenants that you believe are going to pay. They are tenants that have the rental payments you want and have a history of paying rental income. Why are only 15 percent of investors not allowing this type of tenant into their property? That’s because they are so focused on seeing their properties appreciate and are not paying attention to whether or not their tenants are paying rent! Priorities are important to us, they drive us to make decisions. We have been doped into believing that our number one priority is to amass as large a nest egg as possible, so we can to retire happily. Lost in this priority is the attention to detail, the attention for investors to care about rental income.
What are investments that pay rent?
A few examples are CDs, Bonds and dividend paying stocks. Let me focus on dividend paying stocks for a moment. I want you to think of each dividend paying stock company as your rental property and the dividend as your rental payment. You have both a property that can depreciate or appreciate in value and receive rental income. The challenge is to pick the right rental property. You want to pick a company that has been proven to be a rental payer for a long time. Better yet, you want to pick a company that has been depreciated in value that has been a proven rental income payer! My main office is located in Charlotte NC, so I am going to use Duke Energy as an example. They have been paying their dividend for over 100 consecutive years. They have not missed a single rental payment for the past century! That’s a proven payer. Their stock price has been all over the board, but their dividends have been predictable and consistent and typically increases over time. Now think about “professional” investors of rental properties. Do you really think they would buy properties that don’t have paying renters? No, they find deals they can rent and that’s exactly the type of thinking that will help you find the retirement income you need to be successful.
Having proven payers in your portfolio is how you can find consistent, reliable income in an inconsistent unreliable market place.
The Bottom Line
Why would you want to invest in something that only gives you the opportunity to make money if you sell what you bought for more than you paid for it? Why not set yourself up to get paid whether or not you are fortunate enough to sell for greater than you paid. Don’t focus only on the appreciation, but rather pay more attention to rental income.
The S&P 500 is the gold standard of Wall Street, since its beginning it has averaged over 10 percent annually. It’s made up of 500 of the largest companies here in America. If you take away all of the dividend income from the stocks that make up the S&P 500, you lose more than 50 percent of its total return! Rental income or in this case, dividend income is incredible important and should never be overlooked.