Deconstructing Retirement Goals Using Real Estate

A topic I have always found interesting rental real estate.  Other than my primary home I currently own zero properties, but that is something I would like to change.

I was recently introduced to the Bigger Pockets podcast, a fantastic source of information and inspiration about the real estate business.

To date I have binged-listened to about two dozen episodes of the 200-plus available.

Work Backwards From Your Retirement Goal

One of my favorite episodes so far was an interview with a real estate investor who introduced the audience to the concept of “deconstructing” retirement goals using real estate.

Essentially, he and his wife came up with a number.  This number represented the amount of monthly income required to live comfortably in “retirement.”

For purposes of this discussion “retirement” means quitting your W-2 job, not necessarily when you reach 67.5 years-old.

A Real Life Example

Let’s assume investor “Joe” wants to leave his full-time gig to pursue other goals – travel, volunteering, golf, fishing, all of the above.

Joe and his wife decide for them to comfortably leave their W2 jobs they need to be bringing in about $4,000 a month, or $48,000 per year.

Joe currently owns two rental properties, which according to his real estate investment calculator, are cash flowing $400/month.  The are only clearing $800 per month, $3,200 shy of their goal.

The good news is their primary residence is nearly paid off and is worth about $180,000.  They can use some of that equity to invest in new properties and increase their monthly cash flow.

Over the next five years they do just that.  Joe and his wife now own 7 single-family properties cash flowing $3,150 per moth.  They have no debt on their primary residence and they are close to paying off mortgages on investments one and two.

They will soon be able to “retire” comfortably while earning enough from rental properties to leave their full-time jobs.

To Leverage or Not to Leverage; that is the Question

My biggest fears associated with real estate are centered around the accumulation of debt.  I listened to Dave Ramsey on the radio, and my grandfather in person, rail on about the perils of debt.

I agree with them, for the most part.

However, I also recognize that the ability to borrow money in the 4-5% range to acquire properties which comfortably cash flow is a hard opportunity to pass up.

As a compromise my plan is to save up a sizable down payment for my first deal – at least 20%.  With that amount down I can comfortably cash flow the deal, avoid any mortgage insurance and know that I have some room in the property if things go south and I want out.

Zero-money down deals, like those advertised on late night commercials, do not seem to be the way to go over the long term.

My approach to this process is similar to someone looking to start or acquire a business.  I will treat the management of each property as a business, analyze property reports and perform due diligence for each deal.

Of course, I will post more about picking up my first property in the near future.

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