The Old Normal – A Case Study – No Appreciation Allowed

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As I’d predicted, if only to myself, many of the calls I receive these days are from folks in their 40’s and 50’s, some older, for whom the retirement income bell has been loudly tolling. Yet the road is now not nearly as straight or smooth due to the likelihood of very little appreciation, short to mid term. As I’ve discussed in previous posts, a change must be made in the real estate investor’s strategy if they wish to get to their Point B before it’s too late.

The following is true, and ongoing, though I’ve changed a few facts to maintain the couple’s anonymity — all with their permission.

Most recently, the Hamden’s contacted me, wondering if I could construct a Purposeful Plan for their retirement. They wanted to pull the trigger in less than 10 years, preferably sooner, if possible. They’re turning 50 later this year — at least he is. πŸ™‚

Their income is around $110,000 a year. They have no debt other than their home which sports a loan roughly 50% of current value. They live a relatively frugal lifestyle on the west coast, which includes a couple children. They have roughly $700,000, a tad more if required, to get them to their Point B. They save four figures monthly, and that’s after contributing to job plans.

Their Primary Goal: Retire in less than 10 years with as close to $100,000 a year in income as possible — a significant portion of which will be tax sheltered. They’d also like to have a non-real estate basket of income that can, at their option, kick in a few years after they pull the trigger.

As most solid Plans, this one is as simple as can be — no false complexity. They will acquire five properties, two of which will be debt free. Here’s how it will work.

Note: It’s important to realize that none of the results rely on any increase in either income or appreciation in property value. This is, as I’ve written before, ‘The Old Normal’.

Total cash outlay: $718,000 +/-

1. The after tax cash flow from the free ‘n clear props will generate approximately $30,000 a year after tax.

2. The three leveraged properties will generate an annual after tax cash flow of roughly $17,500 +/-.

3. The after tax cash flows will be combined to make monthly principal reductions on the three leveraged props.

4. This will result in the elimination of the three loans in roughly 7.75 years — 93 months. This easily beats the 10 year deadline. If they choose to retire sooner, say, in seven years, a one time payment of about $54,000 will do the trick. That will be easy for them.

5. This results in an income of around $87,000-100,000 a year, close to half of which (40-45%) will be tax sheltered for another 20 years or so.

Along with the wife’s approximate $20-25,000 pension, they’ll be sitting in the position for which they planned. Then there’s the hope for Social Security, which because they’re thinkin’ type folks, have assumed won’t be there when they’re 67.

Furthermore, by taking an additional $100,000 to acquire an EIUL, beginning at around 60 years old they’ll have the option of adding tax free income to the mix — not tax sheltered — tax free. And the longer they delay taking that income, the larger that income will be.

10 years ago this plan would’ve almost been silly, considering the appreciation that was available short-mid term. I would’ve opted instead for the purchase of far more property, with probably only one free ‘n clear purchase — if that. The capital growth rate would’ve been such that a trade from capital growth type props to those more suited to cash flow would’ve made more sense — and more likely than not, generated more income.

Also, their unused depreciation, which would’ve been fairly impressive using that strategy, could then be used to enhance future annual depreciation, providing a larger long term umbrella for the newly acquired retirement income.

But those days, for the most part, have been relegated to fond memories. We’re back to the Old Normal now. Some would say we’re back to the Old Math. πŸ™‚

From where I stand, it really means we’ve been forced back to relying upon the fundamentals that were always in place — and, to too many investors’ regret, still working.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.

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