As we continue talkin’ about what many have learned as more or less the “commandments” of real estate investing for retirement, this one has caused more than its fair share of regret. Though its premise looks great on paper, more often than not, its execution fails to deliver. What’s worse is that since the results it delivers come at retirement, dodging most of the damage is easier said than done. Let’s take a look. Let’s first examine what results the investor expects from this approach. The generation of impressive retirement cash flow. The growth of an exceptionally large net worth due to random cycles of value increases. The ability to refi once or even two or three times over the years for the purpose of increasing the portfolio. I’ve heard proponents detail many more benefits, both real and hoped for, but those are the big three. Generating Impressive Retirement Cash Flow Having worked exclusively in San Diego’s investment market from late 1976 through mid-2003, I found countless enthusiasts employing this investment strategy. They often talked about it as if had been found on the third tablet Moses dropped on the way down the mountain. 🙂 The last chapter of that book falls sorely short of what could’ve very easily been a retirement cash flow and net worth 50-200% larger. I’ve seen it firsthand the last 40 years. Here’s the thing about real life — it’s, you know, real and stuff. Let’s take a 30-year-old married couple who starts investing in real estate for retirement. They plan to retire at 65 with 15 free ‘n clear rental homes. We’re gonna have ’em buy these homes in average areas, as most investors base most of their decisions on price. They compromise on location, quality of construction, and age at purchase (another post altogether). They began in 1980 with a small home inherited from his grandfather and retired last year as planned. How’d they end up? Is their retirement income impressive? What’s their portfolio like on a day-to-day basis? Remember, their strategy is to buy, hold forever, and retire with 15 debt-free homes. They’ll all be in San Diego, as they’re never leaving. (Who would, right?) The homes have an average monthly rent of about $2,500. Let’s use the 50% rule, which I abhor, but for comparison purposes it’ll serve us well here. That’s $18,750 a month in retirement income, certainly nothing to scoff at. But (There Seems to Always Be a “But”…) In retirement the average age of their 15 rentals is around 50 with many over 60-80 years old. This doesn’t bode well for little things like, say, operating expenses. But that’s merely the tip of the iceberg. Then there’s all the functional obsolescence built into their rentals. Floor plans reminiscent of Grandma’s house. Wall heaters in some units. Small living rooms and bedrooms. Related: Why Your “Realistic” Retirement Goals May End Up Woefully Inadequate The homes bought from 1976 through 1995 are either totally without any remaining tax shelter (depreciation) at retirement or with precious few years left. Even then, the sparse annual depreciation left on the most recently acquired rentals won’t shelter much more than a third of that income — and then only for a few short years. Beginning around the fifth to the seventh year of retirement, every dime of cash from from their 15 rentals will be naked to the tax man every year. Since they bought based upon price mostly, nearly always compromising location quality, they’re now in many neighborhoods once populated by hard working blue collar families, but now attracting, um, less desirable tenants. I can name several San Diego County locations fitting this bill. This happens all over the country. Can’t tell ya how many investors call me with portfolios in neighborhoods in which they bought due to low price who now regret the choice. What if They Did This Instead? In a parallel universe, another investor couple began on the same day with the same agenda — retirement income. However, they took advantage of upward market moves to improve their portfolio. They took the first home, inherited free ‘n clear, and worth around $90,000, and held it. The after tax cash flow allowed them to bank around $20,000 by the time 1984 rolled around. Between historically high interest rates and the devastating 1981 recession, that choice was easy. They then decided it was time to trade up and ended up with a fourplex, closing in the first quarter of ’84. What they didn’t realize was that the next five years were gonna put real estate values through the roof. In late spring of 1986, they traded up again. Their net equity was able to get them three fourplexes. Prices didn’t stop rampin’ up at all. Over a few months in 1989, they traded up again. This time, they ended up with seven four-plexes and a 2 on 1 (2 homes on 1 lot). This was a pattern back then for many. In the ’80s, I had several clients who literally traded up three times in a little over six years. Such was the power of market appreciation back then. At this point, it’s almost 1990, 15 years before the scheduled retirement. Taking the cash flow from all the properties each month, plus the monthly savings they'd normally used to accumulate investment capital, they put the BawldGuy Domino Strategy into play. Beginning with the smallest loan, the 2 on 1, they began eliminating loans, one by one. Once that one was done, they went after the lowest balance fourplex loan. For the most part, each loan was paid off in roughly equal time â or more likely more quickly than the last one. This process finished off the last remaining loan in the spring of 2015, just in time to retire in August. Their Retirement Income From Income Property Gross scheduled rents add up to $61,000 a month. Invoking the 50% rule brings that to a net operating income of $30,500 monthly. $30,500 – $18,750 = $11,750 Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free So that’s $11,750 a month more than the first couple who simply bought and held. Our second couple generated around 63% more income by doing a few simple tax deferred exchanges along the way. Nothing fancy, just took advantage when opportunities presented themselves. For the record, I purposefully played the second couple’s scenario very conservatively. Bottom line is they will get around $140,000 a year more in retirement income, before taxes. The Takeaway Both couples will share one negative aspect of their success: little if any tax shelter at retirement and older properties with all the downsides that comes with them. I haven’t used this approach for quite some time, as there are other strategies available to the investor that can and will yield far better results than even my second couple experienced. I’ll go much farther. This approach is antiquated, even the second couple’s approach. Related: Don’t Count on Social Security: Why It’s Crucial to Take Control of Your Retirement NOW Don’t do it. Yeah, my way totally eclipsed the “accepted” wisdom of buy, keep, never sell, pay off, retire. What I really wanted the reader to see is that just buying a bunch of houses over the years, then payin’ ’em off AIN’T the best way to go, not even close. In fact, it’s like buying a car with a carburetor instead of fuel injection. Unless you’re collecting old cars, it makes no sense whatsoever. In other words, my old car slaughtered their old car. 🙂 Let’s Compare Net Worth in Retirement Our couple with the 15 homes will have roughly $7,500,00 in net worth, which is certainly impressive. Our second couple has roughly the same, even with seven fewer properties, around $7,000,000 for the fourplexes, and $500,000 or so for the 2 on 1. Yet look at the gaping difference between portfolio NOI at retirement! Furthermore, if the second couple came to me now, they’d easily end up with well over $50,000 a month in retirement income at the very least. They’d add notes and be doing fun things with there Roth accounts and the like. Here’s some food for positive thought. It’s been my experience, say, over half the time that mosts folks with whom I talk are far better off than they believe. They can generate far more retirement income than they projected. Best of all? Over half the time, they’re able to retire 5-15 years earlier than they believed. And the process to get there isn’t rocket science, which I suspect is the best news. 🙂 Have a plan. Execute it on purpose. Be flexible. Do the happy dance. Investors: What do YOU think? What’s your retirement strategy of choice? Leave your comments below!