Some of the conversations I’ve had recently with those nearing or already retired, have been eye openers for some very surprised folk. The reason? They learned the income derived from their free and clear income properties was anywhere from half to a quarter of what they very easily coulda — actually, shoulda been. The cool thing was that the status quo wasn’t all that difficult to improve.
An example close to home
A local SoCal couple, who’ve lived and invested in San Diego County, California since forever, had retired almost two years ago. Their main sources of income are the three free and clear homes and one debt free condo they’ve owned for a very long time. The total gross rent combined is currently around $7,750 monthly, about $93,000 a year. Their typical Net Operating Income was running around $56,000 yearly — sometimes a bit more or less. If they sold on today’s market, they’d net somewhere between $1.35-1.45 Mil.
Someone turned them on to some posts I’d written awhile back, and it peaked their interest, so they called. Here’s what I told them was, and always had been on their menu.
Get the heck outa Dodge!
Really! That’s a lotta trouble to go through AFTER you’ve been retired a couple years, isn’t it? No doubt about it. Using my no-exception policy for making real estate investment moves, it appeared it would be easily worth it. The policy?
If the proposed change in the status quo isn’t an obvious no-brainer — DO NOT DO IT.
Here’s what the analysis showed the tax deferred exchange into 5 small Texas income properties would do for them.
1. Move them from pretty good neighborhood locations to very good to excellent locations — in Texas.
2. Instantaneously transform their portfolio’s average age from over 40 to Brand New. What do ya think will happen to their operating expenses as a result of this one change?
3. Their annual Net Operating Income would almost immediately rise from $56,000 to about $92,000 — a 64.3% increase. In monthly terms, their income would zoom from just under $4,700 to just under $7,700.
Unless you don’t believe increasing your retirement income by just short of 2/3 would have a seriously positive impact on your retirement lifestyle, this is the essence of a no-brainer. Remember, they also improved the location quality of their portfolio in the process.
Does this sound like you?
In talks given at various conferences and seminars over the years, I’ve literally met tons of folks living this basic scenario. The huge majority had no idea whatsoever that this alternative was even available to them as an option.
If your local real estate market is higher than the country’s median, then you are certainly a candidate to at least explore this course of action.
On the other hand, if you’re one of those who’ve ‘collected’ a buncha free ‘n clear rentals with values in the range of $50-200,000 apiece, this strategy would work like a charm for you as well. It’s all about reliable, safe, retirement income. It’s almost never about flashy. It’s also about ending your denial about your portfolio’s general location quality. But that’s another post altogether.
Either you’re improving your income significantly or you’re not.
You’re maintaining or improving the quality of your properties’ location or you’re not.
The bonus for so many is twofold, and comes with the strategy whether or not you ask for it. First, the 80/20 rules usually applies to the ‘youth movement’ this strategy produces as far as the chronological age of your overall portfolio is concerned. Second, cuz you’ve moved your equity to another state, management is now truly not ‘down the street’. You’re free! This has proven true even when the local properties had been managed by professional firms. There’s something about distance that bodes well for the retiree.
For those inexplicably bound by the siren song of their local zip codes, ask yourself this question:
Is keeping the source of your retirement income local worth giving up a 64% ‘retirement pay raise’?
And the bonus question . . .
How would your life change with that much extra cash in your bank account every month?
Local Smocal. It’s about results.