How to Use Real Estate to Retire Better Than Your Neighbor…

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There’s an almost universal misperception that the every day American family simply can’t arrive at retirement with more money than they ever made on the job. I’m here to tell you that is a fallacy, at least in my experience. Don’t get me wrong, the lower the income the longer it takes and the lower the ultimate income in retirement. Still, though most folks give impressive lip service to what can be done with solid self discipline, a solid plan, a real purpose, and the flexibility to adjust when necessary, they generally aren’t walkin’ their talk. In other words, they don’t really believe what they want to believe.

Let me sprint to the bottom line here. If you have long enough, and you have enough capital, which doesn’t hafta get within shoutin’ distance of being impressive, you can indeed retire with more after tax income than you made in your best year on the job.

Jim is a young (30) engineer makin’ roughly $60,000. His wife, Melisa, (29) is in retail sales, makin’ roughly $35,000. They don’t have kids yet, but that’s likely to change in the very near future. They don’t live super cheaply, but are relatively wise with their money, saving while still enjoying life. Let’s lay out a short outline of what’s possible for ’em. We’ll assume they retire sometime in their 60s, 30-35 years from now.

A Broad Brush Look at What’s Possible

An EIUL policy with an inflation based monthly premium of about $500 will, in 30 years produce a tax free income of roughly $4,000. That’s a rough estimate, but done by a pro in the industry. Then there’s Melisa’s income, which doesn’t come with a company sponsored 401k plan. She and Jim decide to start Roth IRAs, one for each of ’em. Jim long ago eschewed any participation in his employer’s 401k plan. In fact, years ago while still in college, he followed my advice to gut his small 401k with the big box store employing him, and paid off all his outstanding debt.

Now, before too many years go by they’ve accumulated enough to each buy one modest discounted note, secured by real estate. We’ll say this began when Jim was about 35 or so. By the time they’re both 60 they’ll have grown their note portfolios to the point of a combined potential tax free monthly income exceeding $10,000. For you Doubting Thomas types out there, they’d get about half that much if they NEVER bought a note for 30 years, just each contributed the annual allowed amount each year for that long, THEN bought notes. However, doin’ it for 30 years or more, allowing the payments to build up, reinvesting them too, plus reinvesting paid off notes, adds up hugely over what would then have been approximately half their lifetimes.

So far, Jim and Melisa have arranged to generate somewhere around $150,000 a year at retirement, all of which is defined by the Internal Revenue Code as TAX FREE. Even if we’re gonna be cartoonish about what that amount represents BEFORE tax, it’d certainly not be less than about $200,000 yearly.

Related: Tax Free Income From Your Real Estate Investment Success

But What About Real Estate Investing, You Ask…

They bought their first home back in the summer of 2012, and it’s risen in value. They’ll likely live there for many years to come, as both the home and its neighborhood are exceptionally family friendly. They used FHA financing so their equity position is almost completely a result of the recent increase in values.

The next several years, aside from their modest EIUL policy payments, and their equally humble Roth IRAs, they’ll simply be saving money, living life, growing a family — and gettin’ older. So the question remains: When will they ever invest in real estate? The real life answer is likely to be not for a decade or so, as the required (and wise) down payment these days is quite a sum, usually 20-30%. Their options could show up in many forms. Jim could rise quickly in his company/industry, resulting in handsome pay raises. On the other hand, Melisa might decide to either cut her hours significantly after their first kid arrives, or quit work altogether. Who knows, right?

Based upon my experience, the odds-on likelihood is that at the very least their expenses will rise as their family grows. Duh, right? If Melisa embraces the 24/7 job of stay-at-home mom, their income will simultaneously take a dive. They can afford that without pain. However, it would definitely tend to put the brakes on any plans for real estate investing, at least in the near future. If she goes back to work, they’ll still find it difficult to save enough for the down payment in less than 8-10 years. An option for them could very well be a group investment, which would at least get their foot in the door.

Remaining broad brush here, that’d necessarily mean that at retirement in their 60s, they’d probably own just one to three or four properties. How many would completely depend upon how the economy behaved in general, not to mention prices, interest rates, and the rest of the circus we call real life.

Investing in real estate would happen with the foundational assumption that upon retirement all properties would either be free ‘n clear of all debt, or that they’d have the wherewithal to make that happen within a week of makin’ the decision to do so. Remember, having cash flow is wise, but makin’ it the be all, end all from Day 1 isn’t the best way to go, at least in my professional experience. The #1 goal is to arrive at retirement with as much AFTER TAX INCOME as humanly possible — WITHOUT seein’ how close to the cliff’s edge you can be. 🙂 The best way to develop that income, is to take the looooong term outlook, and be very happy when the process is pretty much boring all along the way. Some positive excitement is welcome for sure, but when folks begin to be in a hurry, excitement tends to come in relatively unwelcome forms, if you get my drift.

Related: Capital Growth,Cash Flow, Taxes And Timing: Planning for Your Retirement the Smart Way

In The End…

Jim and Melisa will slog their way through life’s ups and downs, financially speaking. They’ll do like most of us, raising their family and doin’ what they have to. Their investment real estate will most probably end up being another source of income, of course. However, given the plentiful tax free income they will have created, that cash flow will be walkin’ around money. 🙂 It will, though, play a far more important part in their retirement than merely providing more retirement income. Whatever debt free investment property arrives with ’em at retirement will, in essence become the ‘bank’ of Jim and Melissa. Let’s say they have two small properties. If they’re worth a total of around $350-500,000 or so, refinancing at a 50-70% loan to value amount would net them roughly $175-$350,000. Furthermore, it wouldn’t even be a taxable event. That’s what I mean by their own bank. They wouldn’t be forced to touch their other income sources, if the need arose, regardless of whether the need was for an opportunity or an emergency.

Or, and this is an option many simply don’t see, at retirement they could just decide to take out a couple hundred grand and buy more notes. That’d immediately result in, give or take, $25-30,000 in income, but completely taxable. Compared to their real estate cash flow, it would be vastly superior. That decision should be heavily weighted on how much other income they have, after tax, from the other sources vs their retirement lifestyle spending. Unless it’s really necessary, I’m a fan of keepin’ the real estate debt free. Now, if that extra income is important, the discussion comes to an end, right? Right.

Jim and Melisa are regular folks, just like you ‘n me. But if they follow this path with discipline, they’ll find themselves with a pretty tidy retirement income — AFTER tax. None of this is rocket science. Regular folk can make it happen. It’s a matter of makin’ the decision, and executing effectively over time.


Photo Credit: Keoni Cabral

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. ok, I have a question, would any bank even consider refinancing any property to two retired individuals in their 60s with the only income from their cash flow. Lenders are aware that people die in their 70s. To me it seems even more risk than getting a live insurance in 60s- it cost a fortune.

    • Jeff Brown

      Great question, Galya. It depends upon the retirement income they’re receiving. Those retired well wouldn’t have much of a problem. The retirees who wouldn’t qualify would likely stand pat, or go to a non-recourse lender, who wouldn’t care much about their income. In the case outlined in the post, the couple would have a verifiable income of six figures, AFTER tax.

  2. Great post as usual @Jeff Brown.
    Small question referencing “each buy one modest discounted note, secured by real estate”. How modest are we talking here? Would $25-30K suffice for a start? If that’s possible then I’m thinking we would then be talking 2nd or higher position?

  3. Hi Jeff.

    Nice article! You’ve convinced me to buy more notes, LOL!
    Just a few twists. I like to continue borrowing out the equity to invest in notes and then utilize insurance to give my heirs the option of paying off, vs. selling off my rental portfolio. I also like building up cash value in an insurance policy, borrowing it out (tax free) at a lower rate and investing the $$ in a cash flowing note, paying a higher yield, oftentimes, giving me enough revenue to pay back the loan plus the insurance premium, thus getting free insurance. Your article really got me thinking, is it better to have more notes than RE in retirement?? Will that lend to a better lifestyle?

    Dave Van Horn

    • Jeff Brown

      Great questions as usual, Dave. Glad you’re now onboard with notes. 🙂 The real estate vs notes question has as many answers as there are investors. Are the notes in a tax free envelop? Do the payments at retirement come out tax free too? I love the whole life insurance strategy, as if provides the combination of strategies, producing real life synergy, and empirically measurable results. On the other hand, the investor must always keep in mind that for ever dollar of note income treated as tax free, taxable income from notes must be 25-50% higher in order to net the same spendable cash.

      Real estate can be paid off and refinanced over and over for the purchase of notes, I’m with ya there for sure. I like the idea, however, of having most if not all income property debt free at retirement, with some very cool exceptions. The reason is that the large equity can then be tapped for both opportunities or emergencies without messin’ with cash on hand or other sources (notes) of income. It’s exceptionally rare for me to advise a client to merely ‘cash out’ of their real estate portfolio in a straight sale.

      For the record, the EIUL policy allows the same borrowing, and generally speaking, provides a consistently higher return while inside the policy.

      PS: You may get a call from a Daniel. Please take it. 🙂

      • Hi Jeff,
        I had a similar question to this one above. Just trying to ascertain what a reasonable entry point is, dollar-wise, for non accredited folks who would still like to take advantage of ‘time’.

  4. At the risk of sounding like a complete newbie, I have never heard of ‘notes’ prior to your posts. This is a remarkable and quite viable option for achieving medium and long term financial goals. Take me to your leader….(smile). It seems though, that one would have to possess a lot of cash to get their feet wet in this arena. Can you give an example of the return one can expect with a lower dollar amount, say $20-35k?

  5. Jeff Brown

    To those who’re not ‘accredited investors’, you can indeed still buy discounted notes from note funds like mine. You merely become what they call a registered note buyer, or investor. But, yes, you’ll be able to buy discounted notes.

    It’s a matter of random luck as to what might be the lowest amount needed to acquire a first position note, secured by real estate. That depends wholly upon whether or not the fund is able to find smaller notes to buy from the lenders. Again, that’s also a matter of random occurrence. I’ve seen notes selling in the low 30k range. They could even be lower occasionally.

  6. Great advice. I am actually considering buying a note, my own investment property note. That way, I would have a guaranteed 5.5% return, with 100% principal returned after 25 years, my property.

    Is there an advantage to buying a note, vs. paying off a mortgage?

  7. Dmitriy Fomichenko

    Jeff, once again a great piece of advice. The key here is that Jim & Melissa will have over three decades of compounding growth, price appreciation, and cash flow. If they re-invest the monthly income to buying more notes, that would help them surpass even these estimates.

    • Jeff Brown

      Dmitriy — Any one dollar can only be utilized one way at a time. Buying notes with the cash flow as you suggest is certainly one option. However, depending upon the particular investor’s unique circumstances the question must be addressed: At what cost?

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