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Can Buy & Hold Real Estate Fund a Comfortable Retirement? Check Out the Numbers!

Nathan Brooks
4 min read
Can Buy & Hold Real Estate Fund a Comfortable Retirement? Check Out the Numbers!

I LOVE spreadsheets—lots of information, details flying around everywhere, on everything from expenses to profits. I love detail. The more, the better. We as investors spend a ton of time pouring over P/L sheets and rent rolls for our current and future deals, and we have to.

However, I had an interesting conversation with a real estate broker a few weeks back over lunch, and while chatting about a potential real estate deal, he said something very interesting. After we spent some time dissecting a few different scenarios on a couple of different deals, such as the locations, the neighborhoods, and our plans with the units, etc., he asked us, “How long do you plan to keep the units?” There are lots of specific questions in understanding the in-depth numbers and the specifics on cap rate, etc., if you really want to grasp the whole deal and know what you’re getting into.

The next thing out of his mouth caught my attention.

He said something to the effect of, “I know guys who can say they’ve owned the building for 20 years—they’re the ones making money.” I sat back in my chair—and it really made me ponder.

On the day to day it’s easy to get tied up with the little things, like service calls and repairs, or an over-texting tenant, and it’s easy to lose sight of what the end goal is—and for us, that is holding properties for long term cash flow, which then equates to long term wealth.

An Example

Let’s say you buy a single family rental for $100k and put your $20k down, and you own in a traditional type of financing scenario. You get a long term mortgage note on it for 30 years at 4%, and the property rents for $1,100.

  • Mortgage: $381
  • Expenses (taxes, insurance, repairs, cap ex—45% of rent): $495
  • Cash Flow: $224

This is obviously very general, but for simplicity’s sake, you have $224 cash flow after expenses. Not to mention you are now depreciating your property, and the tenants are paying down your principal balance. You’re off to a great start.

Related: Buy & Hold Real Estate is the Ideal Investment: Here Are the Numbers to Prove It

Now, if you look at the 5, 10, 15, and 20-year marks for this property, what would you still owe on it?

  • September 2020: $72,217.27
  • September 2025: $62,855.33
  • September 2030: $51,424.42
  • September 2035: $37,467.33

So the tenants have beaten up the house a number of times, and you probably put a new water heater in at some point, along with some windows and maybe even a roof. You cleaned it every few years, or maybe you got lucky with some amazing tenants who stayed for years with little vacancy. Either way, looking at the 20-year mark with this mortgage payment and amortization, you have a house that you bought for $100k, renting for $1,100 (which, who knows what it would be in 20 years, but presumably more), and you now owe less than half of what the property is worth.

The $100k house is now worth, say, $125k.

– $20k you originally put down

– $37,467.33 (remaining mortgage balance)

= $67,532.67 in equity

That’s pretty awesome, right? Not to mention all the cash flow you have earned over the years—if you made your $224 monthly, that’s:

$224 x 12 months x 20 years = $53,760 in net cash flow

Can you say AWESOME? #winningwithcashflow

Yeah, I think so. With an asset you now own with less than 30% loan to value, you can now do a few different things.

1. Sell & Take Your Gains

You will need to work out with your accountant what kind of tax burden you have and whether or not you want to 1031 exchange, but either way, you sell for the $125k the property is worth.

Sales Price: $125k

Mortgage Balance: $37,467.33

Realtor Fees (6%): $7,500

Closing Costs (1.5%): $1,875

Net: $78,157.67

2. Do Nothing, Keep Paying, & Keep Renting

Why change what isn’t broken? Then just keep rolling. Another few years, you are all paid off and now a cash flow king.

3. Cash Out Refinance

This is my favorite. Keep the asset. Take some cash. Let’s say you refinance the property now, taking out up to 65% of the LTV of $125k because you still want to pay it off, but you want to get some cash out.

$125k x 65% = $81,250

$81,250 – mortgage balance of $37,467.33 = $43,782.67

We can’t wave a magic wand and know what the interest rates will be in 20 years from now, but for the matter of example, you are right around the same loan balance you started with, except now you have:

$20k initially invested (down payment)

Rents were $224 x 12 months (x 20 years) = $53,760 in net cash flow

Cash out refinance was: $43,782.67

And now you have your $20k (which had been paid back a long time ago with your cash flow) and an additional $77,542.67


What if You Bought 10 Properties?

I love chatting with people interested in investing, and I often hear guys who want to own 5-10 properties and let them pay for part or all of their retirement.

Related: The Beginner’s Guide to Buy & Hold Real Estate Investing

Imagine for a minute that you take this financial example, and you buy the 10 properties over the course of a few years. And as you near retirement, you have waited the 20 years I used in this example, and you cash out refinance and continue using the properties for cash flow:

10 properties x $43,782.67 (from cash out refi) = $437,826.70

And you are still making your $224 or so at that point in monthly cash flow, so that equals $2,240.

The power is in the TIME—the time you have allowed for the asset get paid off, for it to cash flow, and for it to be paid for by someone else living in it.

What About 100 Properties?

What if you had the big goal of at least 100 properties? In this example, your cash out refinance at that 20-year mark would be:

100 properties x $43,782.67 = $4.37 MILLION dollars and

Monthly cash flow of: $22,400

That will work for me!

Let the 20-year idea get you fired up. I know it does for me—for paying for my kids’ education, paying for a lifestyle I want, taking my wife out for a nice dinner or a nice vacation. Playing the long game with rental properties might be a real pain sometimes, and it might not be the sexiest option versus wholesaling or flipping houses, but let me know who couldn’t have a nice living with $22k monthly in cash flow and the $4.37 million check at closing at your refinance.

Pretty sure retirement would be looking sweet after that closing.

Are you using the long-term buy & hold real estate strategy to build wealth?

Let me know with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.