BiggerPockets

I've been thinking of buying rental property for a long time but am just now getting into it more seriously. I've read that 8% is a realistic and fairly conservative cap rate, so it would seem that someone could retire owning $500k in rental property free and clear and live off the income as long as they need (approximately $40,000 per year, while rents could then be adjusted upward for inflation as time goes by). Is this a realistic plan for retirement, and are there any important issues or concerns that I might be missing? I know that there will be repairs needed from time to time of course, and it would seem that a very expensive repair could put a large dent in your income for the year.

Personally, I'm thinking of starting with one apartment building, around $250k, then buying a second at a similar price a year or two after, and have them both professionally managed. I currently have approximately $280k in savings, and if I'm able to keep saving as I have been, I should have $500k in about 3 more years. I don't hate my job, though I would like to retire from it as soon as I am financially able.

Thanks, Dave

Dave where would you retire to?

The cost of living varies greatly by state and the small cities and counties themselves.

40,000 in New York is nothing to spend per year. I have a family member In Boston that makes 56,000 a year and barely squeaks by and doesn't spend much on anything.

Now in Georgia you could afford a decent house and live okay on 40,000.In New York I am just not seeing it though.Now if you have a significant other you are pooling expenses with that is different but then you are getting their income as well and not just the 40,000.If you have a significant other and want to live off of 40k and they have no income or savings then I think that would be almost impossible where you live.

Now you could increase your cap and potential by investing in other states that have higher cash flows versus money invested.Especially value add deals could give you a bunch of equity and growth.

Some of your expenses will go up if you retire though. Will you still have medical insurance if you quit you job? Indemnifying big losses will be paramount if you retire and you won't want to be really illiquid....or at least I wouldn't want to be.

Make sure think everything through and do the requisite research.

Re: retirement, I haven't made any definite plans at this early stage, though I'd probably be happy living in most areas of the US and have also thought about parts of Europe or possibly other areas. Even in NY my living expenses are quite low so based on how I live, I wouldn't anticipate being restricted much based on the projected $40k/year.

Even after owning $500k in rental property free and clear, I would plan on working for some additional time just to build up a safety net of cash. And even if $40k/year doesn't seem like enough, going back to work to put together some more savings for additional property should be easy to manage.

>>1. 10% return - For secure cash flow, you can lend your funds to real estate investment companies for 9-11% for 5-year terms, with 65% LTV. This is a more secure investment (noteholder gets paid off before the equity holder if anything goes wrong.) The checks just arrive in the mailbox. Not exciting, but not sure of your appetite to take on the risk and activity level of real estate investing.

This sounds interesting - would these basically be mortgage-backed bonds?

>>2. 20% return - Invest as a private/hard money lender with trustworthy and established rehabber/flippers that you can find right here on BP. (I'm not one -- a flipper that is, I am trustworthy, at least my dog thinks so:).

20% returns are phenomenal, though even doing this via trusted and established persons, I'd think that you must be taking on much more risk to achieve returns this large. My own tolerance for risk is low, I'd prefer security over possible large gains.

I remember reading somewhere on here you could have the buyer sign a quit claim deed in advance that upon default the title is automatically transferred over to the mortgage holder in luie of foreclosure.

I can't remember where the post is. No legal advice.

Alot of people seem to do just fine in my area.

Granted this is very area dependent, as I can get up to about 20% on apartments & SFDs in my area.

Not around here.

Hi Rich -- hard money rates are commonly 12% + 4 pts. Thus, two 6-mth transactions per year equals 20% per annum, which is what I meant to say, not a 20% interest rate on the note. Sorry about any confusion.

Perhaps a friendly loan with a colleague would not get quite these rates.

If you invest in notes the money will not be active in deals at all times and thus 20%+ per annum is not all-but-certain.