Is retiring on $500k in rental properties realistic?

Question

I've been thinking of buying rental property for a long time but am just now getting into it more seriously. I've read that 8% is a realistic and fairly conservative cap rate, so it would seem that someone could retire owning $500k in rental property free and clear and live off the income as long as they need (approximately $40,000 per year, while rents could then be adjusted upward for inflation as time goes by). Is this a realistic plan for retirement, and are there any important issues or concerns that I might be missing? I know that there will be repairs needed from time to time of course, and it would seem that a very expensive repair could put a large dent in your income for the year.

Personally, I'm thinking of starting with one apartment building, around $250k, then buying a second at a similar price a year or two after, and have them both professionally managed. I currently have approximately $280k in savings, and if I'm able to keep saving as I have been, I should have $500k in about 3 more years. I don't hate my job, though I would like to retire from it as soon as I am financially able.

Thanks, Dave

David Beard · Answer

Other possibilities:

1.  10% return - For secure cash flow, you can lend your funds to real estate investment companies for 9-11% for 5-year terms, with 65% LTV.  This is a more secure investment (noteholder gets paid off before the equity holder if anything goes wrong.)  The checks just arrive in the mailbox.  Not exciting, but not sure of your appetite to take on the risk and activity level of real estate investing.

Especially if cap rates are low in your area, and you need to look in other markets for yield, this is much safer than trying to own and manage property from a distance.

2.  20% return - Invest as a private/hard money lender with trustworthy and established rehabber/flippers that you can find right here on BP.  (I'm not one -- a flipper that is, I am trustworthy, at least my dog thinks so:).

One good thing about investment income is that it doesn't incur payroll taxes of 7.65%, as wages do, and may be excluded by your local or municipal taxing authority.

Also, if you do buy property, you will get a depreciation benefit that will give you a larger pre-tax equivalent amount of income, compared to wages, and could possibly drop you into a lower tax bracket.  So $500k of property would give you a tax deduction of about $20k per year (an approximation considering that some of the price will be for personal property and depreciate on a 5/7/15 year timeline, rather than 27.5 years).  So that would be worth $4-8k of extra after-tax income per year, depending on state tax rates, and your overall marginal federal rate.

Obviously, the point is to do your calc's on an after-tax basis when you start thinking about replacing your job income.

David Beard · Answer

Joel, I asked my atty about that.  He said that a pre-executed QCD was ill advised (too easy for lender to exercise in a way not intended), but some sort of deed in lieu of foreclosure agreement on the front end of the loan would work.  So there was definitely a way to give your lender assurance that they could painlessly take possession of the property without foreclosing.  Also an assignment of rents can be used, both of these triggered if 30 days delinquent.

So there are numerous techniques to reduce the risk for the private lender.

Rich Weese · Answer

Hi David and Dave, where can you find these established rehabbers that are willing to pay 20% for their money? Rich

Joel Owens · Answer

Dave where would you retire to?

The cost of living varies greatly by state and the small cities and counties themselves.

40,000 in New York is nothing to spend per year. I have a family member In Boston that makes 56,000 a year and barely squeaks by and doesn't spend much on anything.

Now in Georgia you could afford a decent house and live okay on 40,000.In New York I am just not seeing it though.Now if you have a significant other you are pooling expenses with that is different but then you are getting their income as well and not just  the  40,000.If you have a significant other and want to live off of 40k and they have no income or savings then I think that would be almost impossible where you live.

Now you could increase your cap and potential by investing in other states that have higher cash flows versus money invested.Especially value add deals could give you a bunch of equity and growth.

Bryan Hancock · Answer

That seems like a perfectly reasonable plan to me.  Your income requirement for retirement sounds quite low to me given what I assume to be your high income today.  Will $40k annually really be all that you need if you drain all of your cash to purchase $500k in property?

Account Closed · Answer

Re: retirement, my plan would be to retire in about 3 years - so my expectation is that I would be very comfortable living on $40k/year in the near future, while I can afterwards increase rents every year based on inflation.

Account Closed · Answer

>>1. 10% return - For secure cash flow, you can lend your funds to real estate investment companies for 9-11% for 5-year terms, with 65% LTV. This is a more secure investment (noteholder gets paid off before the equity holder if anything goes wrong.) The checks just arrive in the mailbox. Not exciting, but not sure of your appetite to take on the risk and activity level of real estate investing.

This sounds interesting - would these basically be mortgage-backed bonds?

>>2. 20% return - Invest as a private/hard money lender with trustworthy and established rehabber/flippers that you can find right here on BP. (I'm not one -- a flipper that is, I am trustworthy, at least my dog thinks so:).

20% returns are phenomenal, though even doing this via trusted and established persons, I'd think that you must be taking on much more risk to achieve returns this large. My own tolerance for risk is low, I'd prefer security over possible large gains.

Account Closed · Answer

Re: retirement, I haven't made any definite plans at this early stage, though I'd probably be happy living in most areas of the US and have also thought about parts of Europe or possibly other areas. Even in NY my living expenses are quite low so based on how I live, I wouldn't anticipate being restricted much based on the projected $40k/year.

Even after owning $500k in rental property free and clear, I would plan on working for some additional time just to build up a safety net of cash. And even if $40k/year doesn't seem like enough, going back to work to put together some more savings for additional property should be easy to manage.

Account Closed · Answer

Thanks for the responses so far. Re: the retirement income, currently my income has been good, though I am a frugal person by nature and really don't spend much. I haven't kept close track of my spending but $2,000/month would really cover a typical month barring any unforeseen expenses, so I would expect to be very comfortable on $40k/year.

Joel: What states did you have in mind regarding higher cap rates? I'm curious though I would like to stay conservative in terms of risk.

Bryan Hancock · Answer

If you invest in notes the money will not be active in deals at all times and thus 20%+ per annum is not all-but-certain.

Is retiring on $500k in rental properties realistic?

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