Investing in real estate is a wonderful way to generate cash-flow. No investment comes without risk, but real estate can deliver generous returns. On top of that, investing in real estate teaches your kids several important lessons that they do not learn in school. Let’s find out more.
1. The benefits of not following the herd
It’s so important for kids to understand that it’s not always smart to follow the herd. Especially in finance. If you’re different in school, it’s likely that you’ll become a target for bullies. But if you’ve a contrarian view on investing and managing your finances, you can make a lot of money!
If I taught my kids to handle money the same way as their friends, they will probably spend it all and use debt to finance their lifestyle. They would leave school with massive student loans and credit-card debt. They would spend the next 10 years paying off their student and credit-card debts and they will afterwards replace it with a massive mortgage.
When they are 65 they not only think where did the years go? But also where did my money go?! That’s not what I want for my kids!
I want them to work hard and invest the surplus money they make. The most tangible way to do this is by investing in real estate. Once they’ve set foot on this path, the benefits for their life become obvious.
2. The difference between good and bad debt
The first thing that investing in real estate will teach my kids is that there are two kinds of debt. The good kind and the bad kind.
The bad kind is debt that is used for upping your lifestyle to a level which you cannot really afford or don’t need. It has no underlying asset that holds or appreciates in value. Obvious examples are phones, cars, designer clothes, etc.
The good kind is debt that is used for assets that hold or appreciate in value. A clear example is real estate. Of course, 2008 has shown us that you can have too much of good debt which turns it into bad debt. Then it becomes a problem. Leverage (the benefits and risks) and how to arrange financing is another element that investing in real estate will teach your kids.
3. A perspective on managing a business
You should never invest in real estate as a hobby. When I will invest in real estate, I consider it a business. I want things to run smoothly and effectively. If you don’t take managing a rental property seriously, it will give you a lot of headaches! For example, not screening your tenants properly is one of the biggest mistakes.
Real estate will teach your kids the basic concepts of cash-flow, income, expenses, taxes, dealing with tenants, property management, etc. Because it’s tangible and if you have just one rental property, it’s easy for your kids to get a clear understanding of what it’s like to manage a tiny real estate empire.
These are valuable skills that school won’t teach them.
4. The devil is in the (legal) details
I’ve painfully experienced firsthand the implications of rental contracts or agreements when they’re not airtight. If there is room for different interpretations, whether you’re a landlord or tenant, one day you will be in trouble. Probably not if things go well, but if things turn sour, what’s in writing prevails. What you mean and what’s in writing can be completely different things! Some imporant things to consider can be found here.
In business, it’s good to trust others but, not to do so is much better! That’s an important lesson that investing in real estate will teach your kids.
5. Hard work pays off
I consider real estate as semi-passive. But it’s only that way if you first worked your butt off to buy your first property and to streamline the whole rental process. You first need to sow before you can reap.
Once your kids see the cash-flow that properly managed rental properties produce and the benefits it provides, it motivates them to work hard as well. It gives them a pre-taste of the prize that’s for the taking if they make smart choices.
Once I become financially independent and already now while I’m still on my journey towards this goal, I can share the lessons I’ve learned with my kids. Will they always listen? No. But when you lead them by example and once they see the benefits of smart but not always popular choices, the odds are in your favor that your kids will tag along.