My buddy Ari was a self-made millionaire by his early 30s. But he didn’t earn his nest egg the way you might expect.
He didn’t create a popular app or viral YouTube video.
He made his money in a surprisingly old-fashioned manner: building an empire of mini-storage units, strip malls and other steady income-producing properties.
Ari is my go-to “real estate guy,” the person who can reliably give me a boots-on-the-ground account of what’s happening in the property market.
So I asked him the other day about the health of the Dallas apartment market. Everywhere you turn, there are cranes and construction crews throwing up towers full of luxury apartments.
“It’s a joke,” Ari deadpanned. “Most barely break even. They’re just looking to sell to a private equity fund and take the money and run.”
House of Cards
That might sound like a flippant answer, but Ari was just getting started.
“This property market is a house of cards, bro. Look at the trend of micro-apartments. Do you think anyone actually wants to live in one of those? They do it because they can’t afford anything bigger.”
In case you’re not familiar with them, “micro-apartments” are tiny one-room apartments of 50 to 350 square feet. Your toilet doubles as living room chair. They’re that small.
Micro-apartments are billed as a great option for the young and trendy. They are tiny and thus eco-friendly. You’re not cooling or heating a lot of unused space.
They tend to be located in urban areas close to public transportation and close to bars and other entertainment options.
In my opinion, much of what is viewed as eclectic Millennial behavior – micro-apartments, not owning a car, the “sharing economy,” no immediate plans to marry or start families, etc. – is because they’re struggling financially.
Since 2000, the Case-Shiller 20-City Composite Home Price Index is up 111%, and this includes the major collapse in home prices starting in 2006. In most markets, home prices are at new all-time highs.
Average wages, in contrast, have risen a little over 50% in that same period (neither data series is indexed for inflation).
You don’t have to be a math whiz to see that it’s a real problem when housing prices have more than doubled while wages of the would-be buyers of those houses have risen by barely half.
Given this, it’s not surprising that something as ridiculous as a 50-square-foot apartment is now fairly common.
Most of our readers tend to be professionals that are well advanced into their careers, so if you’re reading this it’s pretty unlikely that you’re living in a micro-apartment and taking the bus to work.
But, in my opinion,if you also want to save your children and grandchildren from that fate, teach them to save and invest early. I believe that regular, disciplined investment into a portfolio yielding 6% to 10% will grow a nest egg quickly, at any age, really.
Investing just $200 per month will grow to a nest egg of well over $30,000 in 10 years if invested at 6%. That number jumps to nearly $40,000 if invested at a 10% annual return, according to my calculations.
In my view, if you can convince your child or grandchild to start saving like that at age 20, they’ll have plenty of cash on hand to make a nice down payment on a proper house.
A slightly different version of this post originally appeared on The Rich Investor.