Last week, we spent a lot of time and 2,000 words going through a detailed plan on how to achieve $8k a month in passive income — and 8 paid-off properties! Sounds awesome, right? Check that post out here.
There were a lot of great comments, conversations, and questions that came out of that post. The one I kept hearing over and over and the one I want to address here is:
If I am in retirement or nearing retirement, can I still achieve a rental portfolio that is giving me passive income?
Great question. You can. Here is how.
Save like crazy. And start buying NOW.
In the last article (mentioned and linked to above), I detailed how to buy a property every three years and take that investment, paying each property off early, and over roughly 25 years, you have 8 free and clear houses and $8k in passive income.
But what if you don’t have 25 years to wait? You start saving and acquiring like crazy. Now. Let’s assume for simplicity here you are 50 years old and you have done some saving and have $20k cash in the bank. Let’s also say you have $200k in investments/401k/Roth IRA.
The goal is to acquire as safely, quickly, and easily as possible 10 properties over 10 years. We will do one property a year, each year, for 10 years. Decide if you want most cash flow now (30-year mortgage) or to pay off as quickly as possible and have the most income in 15-20 years (10 or 15-year mortgage).
I personally want to have my rentals paid off when I am of “retirement” age. So, to me, I prefer the 15-year mortgage in this example.
Acquisition Plan Style
Option 1: Do it Yourself-er Model
Work with an agent who is an investor. Make sure they actually own properties. Make sure they really know what the heck they are doing. And begin buying one property at a time that is under market value, needs work, and on which you do everything. This is not necessarily my first choice for you — I do like turnkey properties better for most people (and full disclosure, I do SELL these so I am not totally unbiased) because of the ease of entry, and as long as you work with a great provider, you have many fewer lessons to learn. You just need to know if you trust the provider and whether they have a product and return you can be happy with.
Anyway, find a property, buy it, rehab it, place a tenant, and then refinance it.
In this scenario, you could buy with:
- Cash (your own). Buy it, fix it up, lease it, and then refinance and pull your dollars back out. In this scenario, you want to be as close to the 80% line as possible. Do a 15-year mortgage as long as it will cash flow or will be close to neutral (and you must have reserves set aside to handle).
- Cash/private/hard money (someone else’s). Buy with some (or none) of your own money (but have some reserves, people!). Buy, fix, lease it, and refinance. In this scenario, the holding costs will cost you some money from financing it, but it may be much easier to get into these. If you aren’t sure how to do this, hire a coach or mentor. This is a great way to learn, have a guide, and not really screw something up.
- Costs you $5-$10k for a coach.
- $100k house, got into it for 80% of value — just made you $20k in equity, you got a cash flowing property, and you didn’t screw the pooch on a bad property or problem renovation issues; you definitely came out ahead.
- Most importantly, get good management in place unless you are really committed to understanding this part. Most people think they want to make more money here, but most people don’t really want to answer the phone and fix the toilet. Have an honest conversation with yourself, and have a plan.
Option 2: Let Someone Else Swing the Hammer (Retail or Turnkey)
In this example, you should either buy retail properties that are high quality that have actually been renovated and then select a property management company you have vetted, OR my choice by far (again, I know, we sell them, just so it’s clear) is to buy turnkey.
Turnkey properties will offer the best opportunity for a turnkey experience. You literally put it under contract and get an awesome provider who will already have a great management company in place or who will personally manage themselves in-house. I like the latter better because I believe this makes an opportunity for a win/win situation and most closely aligns interests for both parties.
- Buy retail. Get an awesome agent who actually OWNS and has rentals, and review properties. Make sure the finishes are nice. Make sure you have accounted for any mechanicals, roof, windows, etc. that would need to be replaced.
- Select property management company before close
- Set up and have reserves ready to go for the property
- Buy turnkey. Have an awesome turnkey provider for your partner, and make sure you understand how they renovate, what they do for management, and any coverage or repairs they do for you after you purchased.
- Management, in-house or outside company
- Set up and have reserves ready to go for the property
There are a few interesting ways you could buy these. With the example I laid out here, you have $20k in cash, which you could use for the down payment, and you’d need to save up the $20k each year for each purchase. Or you could also access your IRA and transfer $100k of your $200k into a self directed IRA and own the rental through your IRA. You can even use leverage in this way; just make sure you are not in violation of your IRA or the types of loans you can use with these funds. Rent payments would go back to your IRA, but you are saving for retirement income, so that doesn’t matter. You aren’t taking income now.
Use an self-directed IRA firm used to doing real estate transactions, and make sure you understand costs to set up, transfer funds, buy houses, etc.
If you used IRA, you could now go after 4-5 properties with the $100k at $20k per door. The loan would be to ______ IRA, YOUR NAME Trustee (or something like that).
Option 1: Numbers and Cash Flow
So, if you used example #1, you would acquire 10 properties, one per year, OR you could do more properties and front load the first. If you can do this, you would just need to have more cash up front to invest or more ability on the acquisition plan and contractors/hard money if you are the do-it-yourself-er.
If you are 50 and you just bought your first house (year one) and did a 15-year note on it, you would would have the first house paid off by the time you’re 65.
That means by the time you are 75, all the properties are paid for. And let’s say (in line with my last post) they are averaging $1k per month and 50% expenses (for maintenance, CapEx, management, etc). You are making $5k a month in passive income and have 10 properties paid off worth $1M. You could also consider then selling a few of these, divesting, and then putting the money in a few more leveraged properties making a higher cash on cash return. I like to be paid off in retirement years (if you can) because even with an uptick or downturn, you will still have a paid off house, and even if rents go down or it takes a little longer to rent because of market conditions, you will be able to easily weather the storm.
Option 2: Numbers and Cash Flow
You put $100k of your funds from your regular IRA in your self-directed IRA (SD IRA), and you buy 4-5 houses over the course of 12-24 months. You do a 15-year note on them.
Age 50, you buy 2.
(Use $40k for 2 properties, $20k down each, and have $60k left.)
- Let’s say you make an average of $150 after expenses/CapEx, etc. So $150 x 12 x 2 properties = add $3,600 conservatively to the balance
- $60k remaining in the IRA, plus $3.6k in rental income = $63.6k remaining
- Paid off (assuming 15-year note) at age 65
Age 51, you buy 2 (total of 4).
(Use $40k for 2 properties, and have $23.6k remaining.)
- Let’s say you again make an average of $150 after expenses/CapEx, etc. (conservatively). So $150 x 12 x 4 properties = $7,200
- $23.6k remaining in the IRA, plus $7.2k in rental income = $30.8k ending balance
- Paid off (assuming 15-year note) at age 66
Age 52, you buy 1 (total of 5).
(Use $20k for 1 property, and have $10.8k remaining.)
- Let’s say you again make an average of $150 after expenses/CapEx, etc. (conservatively). So $150 X 12 x 5 properties = $9k
- $10.8k remaining in the IRA, plus $9k in rental income = $20k ending balance
- Property #5 paid off (assuming 15-year note) at age 67
Let’s say you wait a year.
- Add another $11k in rental income during year/age 53 (after expenses, like we’ve said)
- Add another $11k in rental income during year/age 54 (after expenses)
Age 54, you buy 1 (total of 6).
(Use $25k for 1 property, and have roughly $19k remaining.)
**So it’s clear where the math came from here — I used the $20k balance from the age 52, plus 2 years of rental income for age 53 and 54: $20k balance, plus $11k, plus $11k = $42k. Minus the $25k down leaves you with $17k.
- Let’s say you again make an average of $150 after expenses/CapEx, etc. (conservatively). So $150 x 12 x 6 properties = $10,800 (we will use $11k for simplicity)
- $17k remaining in the IRA, plus $11k in rental income = $28k ending balance
- Property #6 paid off (assuming 15-year note) at age 69
Now, you could continue this and buy another property roughly once a year and end up with 10 acquired at age 58, and all properties (assuming 15-year note) will be paid off at age 73.
Whatever Path You Choose, Take Action Now
Both examples lead to 10 properties in retirement in your early 70s with $5k+ in income (using a conservative 50% of expenses, 10 properties, $1k rent each, and $5k after expenses).
Either way, whatever you are doing, if it is nothing, it will not get you there. If you are taking action, you are making progress. Make smart decisions. Don’t wait. Search out a great team to work with.
You can still have retirement income!
In this scenario, even in your early 70s, you have $5k a month in income, plus whatever you have with your retirement, 401k or pension if you have one, plus whatever you get from social security. You could have a decent income.
The second part here is if you are nearing retirement years, do your best to have your house paid for, cars paid for, and live below your means. Save, invest, and do what you MUST now so you can do what you WANT later!
Any questions about this strategy? Are you buying rentals in retirement?
Let me know your questions and comments below!