Investing for Income – A Lesson from Grandpa

Dividend Geek • February 5, 2013 • 0 Comments

Dad, Grandpa, Sis & Me (Little Geek)

Grandpa got it right. He figured out the correct way to invest. He and Grandma started with nothing and retired as millionaires. Here’s how they did it. You might say my Grandpa Watkins had building in his blood coming from a long line of builders in his family dating back to his Grandfather who was an Architect for Queen Victoria. However, during the great depression very little building was going on so he tried his hand at farming and even some mining, but couldn’t make ends meet. In 1930 he and Grandma decided to move to California in search of better opportunities. They were not the only ones with this great idea. People from all over the country were moving to California for a better life. Competition for jobs there was tough and getting more competitive all the time.

It took several days for them and their two young boys to travel to Southern California in their beat up jalopy. When they finally arrived they stayed with family until they could find a small one bedroom apartment of their own. Fortunately Grandpa went to a trade school in Utah (now Utah State) where he learned to be an electrician, so he was able to quickly get a job at the Firestone Company as an electrical trouble-shooter. They saved up their money to buy a home, but instead of buying a home Grandpa convinced Grandma that it would be better for them to forego buying a nice home now and instead buy a lot and build a small duplex. (He promised to build Grandma a dream home of her choosing later on). Grandma agreed and that was the small start of something really big. During the day Grandpa would build the duplex then work the swing shift in the evening at the Firestone plant. To keep their debt low he only bought building materials when they had enough money left over from his salary job, so it took awhile to finish the duplex. When it was finished they moved into one side of the duplex and rented out the other side.

The duplex had one more bedroom than the apartment so the boys now had their own room. This was a small step up where Grandma was concerned. Financially it was a big step up, because now they owned an asset that generated monthly rental income. Also, the rent they paid for the one-bedroom apartment was enough to cover the small mortgage they had on the lot. The lot was very deep and had an alley behind it. Grandpa was able to secure a permit to build a fourplex on the back of the lot. With the increase in rental income from the other side of the duplex they were able to buy building materials faster for the fourplex. Once the fourplex was finished they immediately rented them out and again increased their monthly income stream on the outright ownership of the new units.

Using the income from 5 apartment units Grandpa bought a larger lot close by and built a 10 unit apartment complex. He continued this pattern to reinvest the rental income into buying new land and building larger apartment complexes. During this time his sons were growing up and able to help their Father build the apartments after school and on Saturday’s. At their Fathers side they learned every trade involved in building from excavating the land to installing the carpet.

In reality what Grandpa was doing in his spare time was not working for money but rather investing! He never sold any of his properties. Why? Because he was investing for income and his investments were consistently generating a monthly income stream; why would you sell an asset that is spinning off income every month? Well he didn’t because he figured out that it was better to have money (assets) work for him instead of him having to work for money!

Grandpa also figured out the power of compounding. He reinvested the rental income back into more assets which then in turn generated more income. This allowed him to buy and build even bigger assets! That reminds me of my Grandpas dry humor. One day when I was visiting my Grandparents I was about 14 years old at the time I found Grandpa working in his garage I noticed a half dozen old toilet seats hanging on the wall. I looked up at them in bewilderment and Grandpa seeing the expression on my face said: “oh those are my ASSets.” Then he laughed in that little boy snicker laugh that he had.

During this time Grandpa did continued to work the swing shift at the Firestone plant, in fact he worked there for 15 years. I remember Grandma joking that Grandpa would have done a lot better if he quit his job years earlier. Grandpa agreed but I think he hung onto that job because of the fear of not being able to get a job having lived through the depression.

Grandpa, Dad, & Sisters building family cabin near Lake Arrowhead CA

The point here is that Grandpa quit is salary job when he was 45. In reality he had achieved financial freedom at a very early age and was retired! The income generated from his apartment complexes easily met his families living expenses and much more. He could have traveled, played golf and not worked another day in his life if he wanted to. But he liked to build things so he helped his sons build homes for their families. Oh yes but before that he built Grandma her beautiful large two story dream home in the hills of Burbank California complete with a large formal dining room, craft room, swimming pool and playground swings for the grand children to play on. My Grandparents also enjoyed traveling the world and met many fascinating people from Europe, Hawaii, Japan, Thailand, Hong Kong and Israel.

I realize that not everyone is a builder and could reproduce what my Grandfather did. The purpose of my sharing the story of my Grandfather’s success is to illustrate the principle of investing for income and reinvesting the income into more income generating assets. This is where Grandpa got it right.

Key Points for Investing for Income

Invest for Income – Buy assets that consistently generate passive or near passive income
Rarely sell – Only if there is a problem with income stream
Use the power of Compounding – Reinvest income into more income producing assets
Start early – The longer you allow your investments to compound the better