At some point, we all look forward to that time we can spend on the beach, in a hammock, or even working until you drop over dead.
Most people want to get to a comfortable retirement plan, and be able to do what they want to do, with no one telling them when to go to work or what to do.
You can retire earlier, and live a better lifestyle with Real Estate, if you are planning ahead.
In order to retire comfortably, you will want to have at least $40K in annual income, and no house payment. And many people will want or need much more than that, or may have to move to a lower cost area.
Social Security will give you some, if you have been paying into the fund. You still need some investment income to help you live in a more comfortable lifestyle. Sure you can get by with less, but washing plastic silverware and using a piece of tin foil multiple times to save money is not my idea of an ideal retirement.
Your Real Estate Goal
At some point, you need to have a goal that all your real estate selling, buying, investing, managing, and maintenance will give you.
There are a lot of real estate investors out there that keep chasing one-time deals. They buy, sell, list, appraise, manage, develop, and trade anything to do with RE that they can, just to make a buck.
Some people give up sure income and the permanent cash flow of a rental, in hopes of getting another ‘deal’ on a flip. They will acquire a rental when they have enough cash.
Property flipping is a great way to make money. But if it is lifelong income you are looking for, flipping only works if you can save enough money to give yourself some investment income.
Property flips are great ways to get some cash quickly, especially if you can get in with minimal down. You can do zero down deals, and when you time it right, you can sell a property that you technically do not even own.
Two closings on the same day, one to buy a property in the morning, and another to sell that same property in the afternoon is a sweet deal. But you cannot keep flipping forever. With property flips, you have to be there. You generally cannot do it remotely.
Selling homes to buyer clients is a transactional game. Once the transaction is over, the cash flow is over. Sure, you get some residual goodwill, for a possible next listing or sale, but the next deal is dependent on you being not only there, but having the physical and mental abilities to do the task.
Why Listing Homes Doesn’t Work
Driving buyers around looking at properties is a time consuming process, and a sure way to have an income stream that stops as soon as you do; it is not lifetime income.
Listing homes is definitely a decent path to lifelong income, but your listing income stream will dry up after a few years, even with the most solid client base, unless you actively work at it.
Once a property is listed, it can be on auto-pilot, and you can collect your commission from Tahiti, but what about the next listing, or the listing ten years from now?
Property development can be great. Take a piece of property, subdivide it, and sell the lots. Maybe even coordinate with a builder and get some homes built on the lots, and get even a larger piece of the pie.
There are some hoops that need to be jumped through, and some initial investment, but selling a no-maintenance lot once a year can generate some solid income – that is until the land runs out. Unless you saved a large chunk of the earnings in an investment account, you still need to get the next deal.
The Importance of Saving Money
In all the above cases, unless you have been diligent in saving your money, you still need to complete more deals to generate lifetime income. If you want to slow down, you need a sizeable amount of money in a retirement account that you can draw from.
Assuming the 4% rule, if you want to have $4,000 per month or $48,000 per year, you need about $1,200,000 in your accounts to generate that much income. That is a large chunk of change, and some people would say an impossible amount. In reality it is very realistic amount, and can be done, but there are easier ways. And $48,000 a year is not a lot of money.
Long term real estate investors purchase rental property, and rental income is generally forever, or at least as long as you want it. If you want your rental properties to generate $48,000 in income, you need to invest considerably less than $1.2M.
If have purchased correctly, you may be getting a 15% cash-on-cash return. That is, you only need $320,000 invested to get the same amount of annual income.
In addition to the cash flow of a rental, some people manage their own property, and save every last dime. Some do their own maintenance on their rentals, either out of a sense of satisfaction, or a way to save additional money.
They do this to build up their equity, and establish a separate passive income stream faster. They can use this extra money to get their next rental.
Managing and maintenance jobs can be done by anyone, but it’s your property, and you can hire yourself to do many of the tasks if you want. You do not need to work at Target for $8 an hour; you can hire yourself for $50 an hour.
What Saving Can Do for You
This should be extra income, on top of your 15% cash-on-cash return, and not the way you make money on your rental.
You need to be able to leave those jobs too, if you want to. With enough passive income, you can hire an employee, or hire a company. It’s your choice.
If you are using rental income for retirement, be sure to allocate at least 45% to 50% of your rents for expenses, not including your mortgage payment. In this 50% amount, assume at least 10% of your rents will be allocated for maintenance. If you do not spend it on the rental, put it in a reserve account.
Many investors mistake deferred maintenance for profit. At some point, this comes back to haunt them; and it opens up a new opportunity to a different investor. If you have an older building, it is not unusual to spend 20% of your rents refurbishing your property until it is back in solid condition.
Once you have a solid passive income going, you can then relax. There is no need to continually chase deals, but if deals come your way, you can grab them. You can retire early, or keep going. You can spend it all, or leave a legacy. You can do whatever work you want, or not do any work. But if you never set your end goals, you will never achieve them.
What is your end goal in the Real Estate game?
Be sure to leave your comments below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.