Wise investing, coupled with qualified advisors, can significantly reduce taxes. Inflation becomes a friend. When gas goes from $2.80 to $2.94, it’s a 5% increase. If I’m fortunate enough to own a $100,000 property, it is likely to go up 5% also. That’s a $5,000 increase. I’m happy to pay the increase at the pump because I know inflation is also working on the hundreds of thousands of dollars of real estate that I own. When we master spending habits and procrastination we are on the path to wealth accumulation.

My investing career began in 1975 when I met a young man, Mike Weese, in real estate school. I invited him to lunch and he invited me to partner up with him when we both passed our brokers exam. Mike was my mentor and I was a willing student.

Albert Einstein was asked to name the greatest discovery of the 20th century. His answer was “compound interest.” Mike understood compound interest and the time value of money and used it to go from being a janitor to being a multi-millionaire.

He has taught a concept for many years that most of us can achieve and it is called, “Once a Year for 20 Years.” Now don’t say, “I don’t have 20 years.” We all have whatever years are left. To do nothing is procrastination.

The following examples need some constants. In real life the numbers will vary but the principals will remain true. I am going to use a home value of $100,000. I will also use an annual inflation rate of 4% over the 20-year period.

After buying our first rental property and owning it for twelve months at 4% inflation it will be worth $104,000. The chart shows the value of this home with an annual inflation or appreciation rate of 4% each year for 20 years. Notice the value at the end of 20 years is $219,112.31.

Twenty Year Ownership Increase
(with 4% inflation)
Year Value
1 $100,000.00
2 $104,000.00
3 $108,160.00
4 $112,486.40
5 $116,959.86
6 $121,665.29
7 $126,531.90
8 $131,593.18
9 $136,856.91
10 $142,331.18
11 $148,024.43
12 $153,945.41
13 $160,103.22
14 $166,507.35
15 $173,167.64
16 $180,094.35
17 $187,298.12
18 $194,790.05
19 $202,581.65
20 $210,684.92
21 $219,112.31
22 $227,876.81
41 $480,102.06
41 $480,102.06

At the end of 12 months we recognize many benefits of owning this home. We have increased our assets and our net worth on our financial statements. We have a depreciable asset which reduces our taxes. We decide to buy a second rental property. After 20 years it is worth $227,876.81.

At the beginning of the third year we purchase another rental property at $108,160, assuming the same inflation rate and rental increases over the 20-year period. We continue to purchase one a year for 20 years.

Now let us go back to our first property. When we purchased it, let’s assume a monthly rental of $800 which just covered all of our expenses. In year two we increase the rent by 4% or $32 to keep pace with inflation. Now we have a positive cash flow of $32. This chart shows how rents would increase with 4% inflation annually for 20 years.

Twenty Year Rental Increase
(with 4% inflation)
Year Value
1 $800.00
2 $832.00
3 $865.28
4 $899.89
5 $935.89
6 $973.32
7 $1,012.26
8 $1,052.75
9 $1,094.86
10 $1,138.65
11 $1,184.20
12 $1,231.56
13 $1,280.83
14 $1,332.06
15 $1,385.34
16 $1,440.75
17 $1,498.39
18 $1,558.35
19 $1,620.65
20 $1,685.48

Now enters discipline in spending habits. We don’t spend the $32 cash flow every month on frivolous things. We make additional principal reductions on our loan. For this example let’s assume that our loan on the first house will be paid off in 20 years. Because we’ve been good, we reward ourselves by getting a new 80% loan at 7.5% for 30 years on our free and clear house. Let’s do the math: $219,112.32 X 80% = $175,289.86. That is tax-free money (as long as we own the house) because it is proceeds from a loan. For us to get $175,289.86 in after-tax dollars we would have to earn about $250,000 gross! It feels like hitting the lottery! Our loan payment is $1,225.65. The rent payments are $1685.48.

In year 22, house number 2 is free and clear. We go to the bank, do the same thing and pull out $182,301.45. In year 23 we refinance house number 3 and do the same thing through year 41.

Finally let’s address procrastination. It is an insidious, sleazy thing that keeps so many of us from obtaining our goals. One of my daily affirmations is, “I will act now. Success will not wait. This is the time. This is the place. I am the man.”

So just do it! Do it now!

Dick Pexton is Broker/Owner of Richard N. Pexton Real Estate in Lehi, Utah. He has also been a broker/owner of offices in California and Colorado with a primary interest in residential income properties.