50 Years Old – Impressive Assets – Potential Retirement Income Anything But Impressive

by | BiggerPockets.com

It’s been happening more frequently lately. Seems more ‘n more folks are seeing the writing on their retirement wall. It says their retirement income is gonna be distressingly less than their plan initially indicated. Imagine being 52, having available cash, and/or cash convertible assets in the range of $500,000. Then picture the exact moment they envision the 13 years ’til retirement, and what must happen to even allow that retirement to become reality. That’s about when they began crunching numbers like an accountant on their second pot of coffee. Turns out they’ll need at least twice what they have now, and must make that happen in 13 short years.

Or else. It’s the ‘or else’ that sometimes makes my phone or inbox ring.

Here’s the outline of a Purposeful Plan for our 52 year old.

First thing is to turn any liquid assets into cash, and don’t take the slow bus doin’ it. He had around $300,000 and some stocks ‘n bonds. Our guy, let’s call him Josh, now has $500,000 in cash and the next 13 years at his disposal. Let’s take a look at what’s possible.

Before continuing, it’s important to understand that Josh has just over $90,000 in cash reserves. Sorry, you can take me outa the Old School, but ya can’t take the OldSchool outa me.

Let’s say he divides his capital into a couple baskets — one for income property — one for notes secured by real estate, bought at an attractive discount. We’ll split it up 60/40 respectively. That is, $300,000 for income property, and $200,000 for notes.

The use of Strategic Synergism will be used here. The following are some, probably not all of the strategies which will be put in play.

BawldGuy Domino Strategy — Yeah, I know, cornpone to the max. The essence is the systematic payoff of debt. The ‘dominoes’ are the properties in your portfolio. What most investors do, a mistake in my experience, is to attack all loans simultaneously. By attacking one loan at a time, using the combination of the cash flow of the entire portfolio + plus any other investment income + plus any available cash from the monthly family budget, will render the entire portfolio debt free sooner than attacking all the loans simultaneously. In this ‘case study’ it comes out to around 20 months sooner. In this case that means the investor will have 20 more months of a completely debt free real estate portfolio.

Multiple Income Stream Strategy — Whenever possible, I think it’s very important to establish a source of retirement income generated from more than one vehicle. If Josh was younger than his 52 years, I’d probably have incorporated the use of an EIUL, a topic about which I’ve written here often. With Josh though, I lean heavily towards note income, secured by real estate. There are a few reasons this makes sense, both as a significant enhancement of the process, and for the end game — retirement income.

Aside from the reality of Josh’s age, the EIUL will cost him money better allocated to his relatively narrow time window. Let’s face it, time ain’t Josh’s friend. Though the EIUL’s ultimate income stream will be tax free by definition, it’ll take more time than Josh can afford. Furthermore, it does more damage by sucking up the investment capital that will perform in the allotted time. In this case, the EIUL just isn’t the way to go.

The note(s) income will add meaningful velocity to the elimination of the income properties’ loans. In fact, I’ll go a bit farther. The income, and built-in profits of the discounted notes will allow Josh to possibly retire sooner than his 13 year deadline — and with more after tax income than opting for the EIUL approach. Going the EIUL route would literally add many years to Josh’s desired retirement date.

Josh’s family budget allows him to designate $1,000 a month to the cause. He’s comfortable with that amount, though he can afford more. Again, Comfort Zone trumps all. The immediate benefit of using $200,000 to acquire notes is the monthly income. Duh. Buying multiple notes totaling around $300,000 will get the job done. The notes will bring with ’em a 10% interest rate. Even if the note terms allow for interest only monthly payments, that’s $2,500 a month.

Acquisition of the income property.

Josh’ll be investing in four duplexes, with 25% down payments. His GSI (gross scheduled income) will total $127,200/yr. His NOI (net operating income) will approximate $76,320. However, for this case study, I’m invoking the so-called ‘50%’ rule. That is, instead of predicting cash flow based upon boots on the ground research, we’ll surrender to Murphy in advance. Since these properties are brand new, resorting to simply dividing the GSI by 2, allows a far more conservative approach. The loan interest rate used for these acquisitions is 4.625%, a number I confirmed hours before writing this.

The combined NOI (net operating income) for Josh’s real estate, having capitulated to Murphy, is $63,660/yr. Annual debt service will be $50,437. That results in yearly cash flow of a tad over $13,200.

Debt payoff

The monthly cash flow of $1,100 + $1,000/mo from family budget + $2,500/mo from notes = $4,600. Applied to one of the duplexes for just 40 months, and the first domino hits the dust . . . debt free. Of course, this increases the monthly amount available to retire the next ‘domino’s’ loan. The second loan is paid of far more quickly than the first. Rinse, repeat, etc.

This strategically applied procedure will render all four duplexes free ‘n clear in 120 months. The subsequent cash flow will either be $63,660/yr or $76,320/yr. The deciding factor will be if Murphy’s 50% rule is applied, or the spreadsheet’s numbers prevail in real life. Make note of the fact that I’ve not allowed for any increase whatsoever for Josh’s NOI, even though a decade will have passed. For the most part, I think baking increases into NOIs or appreciation to value is irresponsible at best, and potentially ruinous at worst. Again, OldSchool.

Let’s circle back around to the notes. But first, a word on purchasing notes secured by real estate.

BawldGuy Axiom: When analyzing a note as you consider its acquisition, consider this. If you’re not excited at the prospect of a potential default in the future, don’t buy the note. If merely the thought of having to foreclose on the note makes you financially nervous, don’t buy the note. Most of the time foreclosing on a discounted note should result in making as much if not more profit than if the note had simply played itself out re: it’s terms.

My personal and professional experience with notes tells me Josh will probably be able to pay his duplexes off sooner than 10 years. Here’s why.

1. It’s far more likely than not that his entire initial note portfolio will be paid off in full, per the note terms, sold off for a handsome profit, or paid off early by the payor.

2. Every time one of Josh’s notes is paid off, he makes the difference between the face amount on the note, and what he actually paid for it. That assumes the note’s payments are interest only. If they’re not, it means he has more each month to apply to debt elimination.

3. Every time a note pays off, he then buys another note. However, each newly acquired note will be bigger than the last, including its monthly income.

You can see how the note approach works out. Josh will start on Day 1 buying about $300,000 in notes which will in turn generate about $2,500/month income. Over a 10 year period it’s highly likely every single one of those notes will pay off, most of ’em in full, some for a profitable discount. The subsequently increased income would allow Josh to apply more and more to his loans each month. This will clearly result in his ability to pay off the duplex loans faster than 10 years — possibly WAY faster.

But wait! There’s more!

Remembering Josh’s plan to retire in 13 years, he has a new page of options on his menu the day after he pays off the last duplex. Even though I know in my bones he’ll retire those four duplex loans in eight to nine years, not 10, I’ll hold myself to 10. By then he’ll own at least, literally ‘no less than’, about $500,000 in notes. They’ll be generating, give or take, roughly $50,000 yearly.

NOTE: It’s important to be mindful of the reality of the taxes Josh will be paying, both on the note income and the profits as they’re paid in full. Josh understands this, and has accounted for the cost of the tax on interest each year as an expense. He can afford it, as it never comes to all that much. The taxes on the larger payoff amounts are obviously funded by the payoffs themselves. OK, back to Josh.

In the three years, (more likely four or five, but I digress) Josh will benefit from both the duplexes’ cash flow and all his notes. Each year, before taxes, and invoking Murphy, this will total around $113,600. Arbitrarily subtract a third of that for taxes, and over three years he’s accumulated roughly $225,000 — after tax.

If Josh uses that cash to buy more notes, probably 2-4 times annually, for the 3-5 years he has that income, he’ll have acquired an additional $325,000 in notes, give or take. (Much more if he gets the four or five years of income I suspect he will.) In other words, the few years between rendering the duplexes debt free, and retirement, he’ll have built a note portfolio of at least $800,000. Even at an 8% payment rate, that’s an annual note income of $64,000 — over $5,000 monthly. Add that to his real estate cash flow of $5,200-6,300 monthly, and you can see how Josh will be doing a lot better than his initial status quo indicated. Furthermore, that note portfolio will only grow, even into retirement. Each time a note pays off, Josh buys a bigger one, immediately increasing his month retirement income. And the beat goes on.

The question most of those in Josh’s shoes must ask themselves:

Given the investment capital I now have, or can make available, do I have the skill set to produce a five figure monthly income in the years between now and retirement?

Go ahead, take your time. No rush.

Tick tock.

About Author

Jeff Brown

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


  1. Ziv Magen

    Brilliant post, and I must say eye opening and expertly written. I’ll have some questions to ask once I get in front of a pc and do some spreadsheets later, but in the meantime I gotta ask- does josh know you’ve been messing with his accounts and publicly airing his financials while he was looking the other way? 😉

  2. Jeff Brown

    Very much appreciated, Ziv. I never write anything about anyone without getting permission enough times for them to tell me to stop asking. 🙂 Also, I change some things that aren’t relevant to the topic.

  3. “The loan interest rate used for these acquisitions is 4.625%, a number I confirmed hours before writing this.”

    — I am very interested to hear where you are getting this number from. I own several investment properties that are near resetting and I don’t think I have heard any number like this when I looked. Are you using commercial loans? I wouldn’t expect you to assume an owner occupied rate.

    • Jeff Brown

      Hey B.Rob — You’re correct, I wouldn’t use an owner occupied rate. Nor, am I using a commercial rate. You should probably give Chad Emerson a call, as he’s the guy who does all my clients’ residential investment loans for 1-4 units. His number is 210 557-6320. I’m kinda hopin’ even that rate is going down, given the how the owner occupied rate dropped today. 🙂

      If you call Chad, tell him you came from me, via BiggerPockets.

  4. Ziv Magen

    Ok, now that I’m in front of my spreadsheets –

    Supposing we play it safe, using no finance whatsoever, but simply purchase good cashflow properties, putting the profit back into expanding the portfolio (considering Josh still has a job and income, and doesn’t need to use this money for anything except securing his retirement, which if I understand correctly is the same assumption you made).

    I used a 10% post-tax p/a mark, considering the fact that my properties normally generate 13-15% pre-tax, but wanted to be conservative, and found that, without needing to finance a single cent, Josh will still end up, after 13 years, with $14,384.46 in monthly income.

    “Aha,” you may say, “but how can you guarantee 10% income post-tax?” – well, outside of the USA that’s quite achievable, but even IN the USA, and even assuming the market is on a stable up trend and no such opportunities are available as they are today, there are companies who will let you invest in notes for properties that they own (you’re their bank, so to speak), guarantee 9% pre-tax return, AND give you half of the equity profit upon sale – if you don’t go this way, but stick to “my way”, you still will most likely have at least some capital appreciation at some point, which will probably allow you to sell a property once in a while (whenever you hit your threshold, which is totally up to you) and expand your portfolio a bit further than those 10% allow for.

    But to pacify you in advance, I’ve lowered the afore-mentioned 10% to 8%, which is assuming zero capital gain on all your properties, increased taxes etc, and also allows for further vacancies, renos/rehabs etc. Like you, I prefer to err on the side of caution (and of course, several dozen books can and have been written about the possible ways to minimize these out of pockets, depending on which country and types of property one invests in).

    Now, hoping that all of these assumptions are still fair enough to go by (and please correct me if they’re not), I’ve reached a bottom line of $9065.41 monthly income after 13 years, WITHOUT taking any kind of capital gain into account (and if there’s capital loss you don’t give a stuff, because you don’t owe anything to anyone, and can also deduct some of your taxes against this loss in value, I’m guessing) – AND without borrowing a single cent.

    Yes, it’s (a bit) less than your potential $11-13K or so, but, as I see it, with zero risk attached (asides from all the normal realty-related risks, that is, I mean let’s face it, this isn’t a fixed term savings deposit ;)), and far less of an accounting headache. You’ll still need to pick your deals well, but you’ll need to pick your notes and deals well in your case as well, so no difference there.

    For me, that would be a no-brainer, considering the fact that, once I enter the world of finance, leverage and virtual money land, I always have the risk of foreclosure or loss in the background, if and when something goes wrong. True, your way guarantees great hedging and backup solutions to this problem, due to the much larger size and diversity of the portfolio, and the fact that you very quickly pay off your loans compared to more “standard” financing schemes, but any such case will reduce the income stream, so calculations will also differ, and when viewed in contrast to the “no favours from the banks” approach will always seem to contain some element of risk…

    Now, I’ve got zero accounting background and far less experience, I’m guessing, so it’s very likely that I’m missing something here – just not sure what it is? Could you help me out by pointing out the holes in my theory?

  5. Jeff Brown

    Thanks Ziv — This is a huge fix for me. 🙂

    I think both approaches will get the job done. However, I do see a a few points I can make for my model.

    1. The trust deeds in the post, though yielding 10% via the payment (cash on cash), yield much, much more when paid off. Most of ’em will yield a minimum of 15-18%. Over time, in this case 13 years AND continuing through his retirement, he has the same security, possibly better, while growing both his capital and his income in the process. His first profitable hit will be $100K on his initial $200K TD purchase. That will be his smallest ‘hit’. Each time will be larger.

    2. He’ll also enjoy far more control over his TDs in my scenario. He can negotiate new terms, sell when he chooses/if he chooses for a profit, early, or simply offer the payor the chance to pay the note off with a smallish but attractive discount. This control, compared to the group approach usually results in superior performance. Think of yourself in charge vs a group. You’d slaughter ’em over the long run, and easily. 🙂

    3. The usual problem with buying rentals for cash at large discounts is this: They’re discounted deeply, for the most part, cuz nobody would pay any higher. I know, duh. But the underlying reason is almost always the location quality — or should I say lack thereof. For the record Ziv, I’m not talking about non-USA props, as I’ve got zero, zip, nada knowledge/experience with foreign real estate. I’ll leave that to you. But here? There are literally thousands of investors who wish they’d opted for superior quality location, and paid a bit more. For every investor who’s bought for cash and done well, there are a whole buncha folks who, um, haven’t. The passage of time, as a rule, at least in my personal experience, doesn’t increase a location’s quality.

    So yeah, your way produces $10K+ monthly income. And that works for me, for sure. I just don’t trust the security over the long haul of the real estate investments’ location quality. A mistake made there and it pretty much goes downhill.

    The use of borrowed money is an issue for sure. I advocate buying free ‘n clear for a minority of my clients, dependent upon circumstances. It’s important to note that ‘prudent’ is the key here. Roughly 1/3 of my clients put less than 25-50% down on any property. Also, since I insist on imputing 0% appreciation in any analysis, the pay down of the debt, at the highest velocity safely possible is preferred. From my viewpoint, it becomes imperative to mow debt down like grass on a sunny Saturday morning. 🙂

    If you can execute your model buying props sporting the same location quality mine do, our results are more or less in the same range. Still, you’d hafta make up for the higher profits and therefore higher monthly income of my TD approach. You and I both know, however, that once someone achieves a five figure monthly retirement income, especially in just 13 years or less, starting with just $500K, they’ll be happy whatever approach they used, right? 🙂

    I wonder what those with a couple million in bonds/treasuries are thinkin’ about now? 🙂

  6. How realistic is it to acquire performing notes at a discount that yield 10% cash on cash? Are you hoping they will default to achieve a higher rate of return? Thanks!

  7. Jeff Brown

    Hey Tyler — Not just a good question, but a timely one. What sometimes flies under the radar in bad times are the consequences of the headlines. For example, how many hundreds of thousands of families either lost their homes through foreclosure, or went the short sale route? The vast majority of them can’t get a ‘traditional’ type home loan for about three years, sometimes longer, depending upon other credit factors. Yet plenty of those same families have enough for a solid down payment, especially in markets with relatively low median prices. They’re often buying from flippers, who may’ve bought for cash. The flippers carry the note for 10%. This won’t last any longer than the short sale/foreclosure pipeline lasts — + about three years.

    Back in the late 70s/early 80s (in San Diego) we bought ‘n sold notes yielding 18% (overall, NOT cash on cash) routinely. Granted, they were almost always in second position, but the equity was there. Furthermore, the tsunami of migration into our county had already been trending for a few years. (Try 45-65,000 annually, year after year.) This bred well founded confidence that when the recession of that time ran its course, prices would resume their march upward. History shows how accurate that belief was. 🙂

    Also, back then traditional bank rates were almost triple what they are now, which tended to set the bar for rate. For instance, by 1981, FHA had risen to 16.5%! It wasn’t uncommon for a seller/exchanger to carry a second TD at 10-15% interest. The ‘yield bar’ back then amazingly, BEGAN at 18%.

    Today? The carry back rates differ from market to market, as they always have. But it is realistic to find high cash on cash notes for a discount. I’d be remiss if I didn’t also strongly aver that having a strong, experienced note specialist by your side, will make a monster difference in your results. Though I have many years experience in all aspects of the note market, used to teach it back in the day, I still won’t buy one myself or guide a client into one (many) without the direct assistance of a specialist. Period. No exceptions. I simply don’t have the time.

    Make sense, Tyler?

  8. Abosultely thanks. I am trying to wrap my head around the note buying process as it seemss like a good addtion to my sfr rentals and maybe a little more passive.

  9. jeffrey gordon on

    So Jeff, I have been contemplating the concept of paying down the mortgage one property at a time vs 4 at the same time. Maybe it is Sunday night after a long week of ranching/boat building
    new biz planning, but I am drawing a blank on why that would be so–hopefully it is not so frigging obvious that I will forthwith be considered a dunce on BP! :O

    You going to make me test that theory in Excel or do you have something already built that proves it? Reminds me of flying a glider and being told to go faster in sinking air so as to minimize the altitude loss vs going slower and losing more altitude.


    • As usual, Jeff, you’re crackin’ me up. Generally speaking, if all is equal, both methods would take about the same time. A sometime exception is when you have several loans, but half of ’em are X-LTV, while the other half are 5-10% less than X-LTV. But then the question beggin’ to be asked is, “Then why favor one way over the other?” So glad you asked. 🙂

      If we take four small properties at random, with loans around $204K each, at 4.625% fixed, and NOI of roughly $18-19K/yr., the first year’s combined cash flow (spreadsheet) would allow the investor to add about $2K/mo to the monthly payment of one of the loans. This would pay off the first prop in just over six years (78 months). That’s a free ‘n clear prop that immediately opens up the options menu. Those options wouldn’t be available if you’d been paying all four of ’em off simultaneously. What if in those 78 months a killer cool opportunity became available? You could either refi for the cash, in this case roughly $200K, tax free — OR — you could sell and/or exchange just that one prop. You wouldn’t be forced to decide to pass on the opportunity, or mess with all four props to make it happen. That’s just one of the benefits, as their are several more, depending upon the specific investor’s Plan.

      Make sense?

  10. Jeff, this is great stuff. Although my eyes are now crossed and my head is spinning, enough sunk in to appreciate that you’re right. I’m going to share your article with my husband, who is a seriously geeky bean counter–I say this with the utmost love and affection. He eats this stuff up.

    It’s always been our goal to have as many of our rentals free-and-clear (and half of them are, thankfully). But funds are running low to acquire the next properties, and we’re thinking of funding them. Your article reminded me that, while funding is fine, having a clear goal of getting rid of the financing is pure gold.

    It’s also reminded me that I need to get my butt in gear and learn about note buying. I’d love some suggestions on how to get started on that education.

    Thank you also for the recommendation of Chad Emerson. I’m definitely giving him a call this week.

    I always love your articles. Keep ’em comin’!

  11. jeffrey gordon on

    Thanks Jeff, I am so glad I don’t have to create that spreadsheet right now! It makes so much sense to pay off one of them at a time with the idea you can then have created all those options without having to deal with 4 properties to touch the equity you have built up!! Thanks, my bean counter head missed that completely!

    So any wisdom on which one you start with, beyond the one with the lowest loan balance? I am thinking you might pick the worst neighborhood, the oldest building and the lowest value, but I know you are going probably drop another diamond in my lap!

    Thanks so much for your hard earned wisdom, in this arena!


    • There’s not one answer that works every time. Sometimes it’s the one you’ve picked to execute a ‘tax free capital gain’ strategy. It might’ve been chosen due to it’s potential for relatively high investor demand, making it an easier future sale. Or, it might carry with it a particularly irritating adjusted basis, a hangover from a previous 1031.

      It could be the ‘runt’ of the portfolio, so an obvious choice to sacrifice at the altar of the aforementioned strategy. You kill two birds with one stone: 1) Obtain tax free cash for whatever strategy you’re synergistically employing, while 2) Simultaneously gettin’ rid of the runt.

      Another reason could be the value of the prop. If everything you own requires you to sell two props in order to execute a particular strategy, selling the one prop with twice the value of average might make sense to use.

      There’s a buncha reasons why one or another property might be chosen to be among the first to be paid off. Still, most of the time (80/20?) the logical move is the lowest balance loan, all else being more or less equal. As always, doing the analysis, and NEVER relying on what you ‘know’ is the right pick, is essential. Can’t tell ya the number of times an analysis’s conclusion has caught be completely surprised.

  12. Jeff– These answers are classic. To quote you, “That’s a free ‘n clear prop that immediately opens up the options menu. Those options wouldn’t be available if you’d been paying all four of ‘em off simultaneously. What if in those 78 months a killer cool opportunity became available? You could either refi for the cash, in this case roughly $200K, tax free — OR — you could sell and/or exchange just that one prop. You wouldn’t be forced to decide to pass on the opportunity, or mess with all four props to make it happen” That is such a fantastic explaination to a question that many investors wouldn’t even think to ask. I’m sure you’ve enlightened many.

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