Retirement Planning with Real Estate

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Retirement Planning with Real Estate

Ahmad H.
Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes

Hi BP!
I've been heavily investing in RE for 2+ years and I often try to extrapolate the future based on my basic experience. The latest of those extrapolations is to calculate how much net rental income is needed to safely retire. By safely retire I mean <1% chance to have to do anything besides manage your property manager.

Many guidelines exist for retiring with a portfolio of stocks and bonds, from safe withdrawal rates based on simulations, to specific bonds/stocks mixes at every age.  Sadly, limited information exists for folks heavy in RE investments.  

Is it safe to retire when your net rental income = expenses (seems very risky to me) or when it is 2x, 4x (seems like a reasonable bet), or 10x your expenses?
How many years of data do you even need to determine the net rental income of a portfolio to base your calculations on? 
It seems to be a function of type of neighborhood (A,B,C or D), CapEx schedule, macro trends, and other things I do not yet know!

I asked a financial planner about this and while she did not deny the importance of real estate in retirement planning, she could not give any useful data or recommendations. 

How are others planning to retire using RE? 

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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y

I don't know anyone who lives strictly off real estate. Some are PMs. Some own businesses. Some play market. Some teach...

I think "retire" is a term that needs explored. Serge doesn't have to work, yet he does. Burke doesn't have to work, yet he does. I don't have to work, yet I do...a lot. Brandon has a baby on the way, and that changes things for him, though he may not know it yet :)

Here's the thing - we all work, but we work on what we prefer, with whom we prefer. That, guys, makes a huge difference indeed!

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  • Bryan O.
    Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    You won't likely find data like that because every single property is different, and every single person's thought on retirement is different. From a high level, figure out what means retiring to you. Is it $40k after tax income? $200k? I don't think using a multiplier for net rental income is worth anything. It's YOUR retirement! Figure out how much you want :)  The great thing about RE is that it works very well with inflation. From the lower level you have to figure out how your properties perform. You neighborhood will reflect your tenants, which will reflect in your maintenance costs. The exact property may be better or worse built than the one next door. You will have to use your own history and tailored projections to determine what your property is doing.

    Good luck with financial planners  ;)   I've only met one that does RE investing, and she can't really help her clients with that.

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  • Ahmad H.
    OP
    Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
    10y

    Thanks @Bryan O. for responding.
    That's the problem. Variability is one of the most dangerous things to retirement planning. That's why I am noticing a pattern of people doing things on the side when they "retire" using RE. Brandon has BP, Ben Leybovich has CFFU, and others just continue doing things within real estate (PM, flipper, broker, realtor, developer, etc..) to reduce the turbulence.
    The concept of retiring quickly using RE has been published in blog posts and mentioned in several podcasts but it is oversimplified for mass media production. Figuring out how much money you spend and then dividing that by the $200/unit to figure out how many units you need ignores the variability associated with the type of property and tenant class. I can project $500/unit on paper buying in a D neighborhood but that doesn't mean it'll help me retire sooner.

    I am hoping to hear from someone who has been solely living off their rental income for 10+ years.

     

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y

    I don't know anyone who lives strictly off real estate. Some are PMs. Some own businesses. Some play market. Some teach...

    I think "retire" is a term that needs explored. Serge doesn't have to work, yet he does. Burke doesn't have to work, yet he does. I don't have to work, yet I do...a lot. Brandon has a baby on the way, and that changes things for him, though he may not know it yet :)

    Here's the thing - we all work, but we work on what we prefer, with whom we prefer. That, guys, makes a huge difference indeed!

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ahmad H.  just like those above stated really depends on your cash needs and lifestyle.

    If you live in Lima Ohio like Ben.. you probably don't need as much as if you live in Bay Area like Brian.. ( don't know were serge lives)... and we all have to work.... at something .

    But those I know that are retired generally own everything free and clear.. and live off of surplus rental income or interest income..

    then we all have the things we like to do.. if its just living in a home somewhere never eating out never travelling hoarding your money that's one thing.

    If you need a budget for travel.. bling for wife... credit card for wife.. school for kids or grandkids.

    etc etc... so it really depends as they say.

    I do see many on BP that have a quasi magic number that they can then quite their day job and that is 10k a month off of positive cash flow.... so for whatever that's worth... So when some might think that's an extraordinary sum others would blow through it week one of the month :)

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  • Josh Hanna
    Investor · Ada, OH · Member since 2016 · 10 posts · 1 vote
    10y

    @Ahmad H. There is quite a bit of that information in podcast 53.  Jason Hull was discussing retiring off of passive income in the next 2-3 years off of his rentals.  He talked about PIRE, passive income retire early.  Some really good stuff in there I would check out.

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  • Ahmad H.
    OP
    Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
    10y

    @Jay Hinrichs Perhaps I should clarify my question. Lets assume I need 2k per month to do whatever I want to do in retirement and my net income from my rentals (based on 2 year history) is also 2k/month. 

    Would you say it is safe to leave my 9-5? 

    I fear the what-ifs in this scenario. I haven't had to replace any roofs, boilers, siding, and other high ticket items yet. I put away 5% of all rents towards CapEx but if all roofs go at the same time, the 5% saved so far will not be enough. How detailed should one be in predicting CapEx(expense side) and neighborhood/local trends (income side)?
    @Ben Leybovich You say that you don't have to work which is great. What is the ratio of your net rental income to your expenses? I am curious to know if the income far surpasses your expenses or you are just very confident about your expenses and can declare yourself retired with a ratio of 1 to 1.

    @Josh Hanna I am on podcast 163 so 53 is a long way back. I might have to revisit that one.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ahmad H.   can't really answer that 4k a month is not something I would remotely consider for retirement and owning rentals with only a 5% capex with properties that are in an area were it snows.

    Desert properties you can get away with low capex... same with Hawaii.. since there is NO heating and you don't need airconditioning.

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  • Ahmad H.
    OP
    Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
    10y

    @Jay Hinrichs Exactly! But that's not what gets preached. I am now at 2x my monthly expenses and I still feel I am vulnerable if I have a major problem. Trying to figure out that safe multiplier for my area and a general rule that works for most.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ahmad H.  for me I am at the twilight of my ownership in rentals only have 5 left out of 350 + houses.

    for cap ex for someone who does not have significant reserves I think this is critical...

    I look at it like 20k or so minimum then maybe 2500 to 5k a door up to a certain amount.

    better to be safe than sorry and its not like the money is spent its in your account and you could do very short term investmetns with it as well.. like short term lending. ( carefully)

    Most investors that run into trouble are simply undercapitalized have too much debt and when they have a bad day they can't get their units up and running and it becomes a cascading effect.

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y
    Originally posted by @Ahmad H.:

    @Jay Hinrichs Perhaps I should clarify my question. Lets assume I need 2k per month to do whatever I want to do in retirement and my net income from my rentals (based on 2 year history) is also 2k/month. 

    Would you say it is safe to leave my 9-5? 

    I fear the what-ifs in this scenario. I haven't had to replace any roofs, boilers, siding, and other high ticket items yet. I put away 5% of all rents towards CapEx but if all roofs go at the same time, the 5% saved so far will not be enough. How detailed should one be in predicting CapEx(expense side) and neighborhood/local trends (income side)?
    @Ben Leybovich You say that you don't have to work which is great. What is the ratio of your net rental income to your expenses? I am curious to know if the income far surpasses your expenses or you are just very confident about your expenses and can declare yourself retired with a ratio of 1 to 1.

    @Josh Hanna I am on podcast 163 so 53 is a long way back. I might have to revisit that one.

     I retired from W2 income 4 years ago. We could live on my RE cash flow, but we could not afford to live the way we want to. My wife retired this year as well, at 36, but that requires additional revenue streams. So, to answer your question - the minimum life-style is covered by cash flow. The additional niceties require additional business income. This may change as I buy more :)

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ben Leybovich  interesting thoughts and discussion.. I sometime wonder about it. 

    move to some little mid west rural burg... many many west coast folks could do this and cash out and retire just on their equity of the personal resi's.

    but then you have to live there.. :)   I the late 90's when CA went through another run up.. IE homes went from 500k on average to 1 mil. ( talking SF peninsula and prime LA) there were many human interest pieces in the sunday papers ( remember those you used to have them delivered to your door and then read them )... about people doing just that cashing in and moving to some little town In Iowa or Ohio or some other very inexpensive place to live and raising their kiddo's etc etc.

    I would think our average dual income family ( that's average earners) probably make 100 to 120k a hear combined... my 36 YO has a salary over 200k at intel plus her hubby... and they live nice but not over the top.. if she could telecommute to some other mid west area that would probably be a nice living and lifestyle.. but its still work .. but their is work in all we do whether its rentals or going to work.  But she digs her job I don't think she would be happier chasing tenants or PMs she likes the high level interaction working with multi billion dollar budgets ( Finance VP at Intel)... etc etc.

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  • Ahmad H.
    OP
    Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
    10y

    @Ben Leybovich & @Jay Hinrichs Thanks for sharing your thoughts and experiences. The west coast equity proposal is interesting indeed. I think that's why turn key marketing is rampant there. They prey on those that want to leverage the equity to get more income from the mid west while enjoying the beauty of the west coast. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ahmad H.  prey is a little strong... but there is no question that CA investors are market makers all through out the mid west and turn key venues. with out them the real estate would not be worth even whats its worth today it would only sell for what a local investor is willing to risk on cash flow basis

    see my famous thread " 2% rule kills Values"  8 pages of thoughts from most of the top players on BP

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  • Robert C.
    Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes
    10y

    @Ahmad H., @Jay Hinrichs, @Ben Leybovich I don't usually preach books, but Tony Robbins' "MONEY: Master the Game: 7 Simple Steps to Financial Freedom" has some interesting sections where he discusses the definition of "financial freedom". Like with many self-help books, it's not rocket science, but it puts the concept into perspective by starting with the question that people often ask, "How much money do I need to retire tomorrow?". The answer gets broken down into several sub-categories, but you basically realize that the number most of us would answer with tends to be much higher than reality. There's a juxtaposition between what we actually need, what we feel like we need, and also what happens when we actually reach what we need. The irony is that most people, when they actually achieve their financial goals, end up feeling even greater financial pressure, thinking "it's still not enough" or "I could lose it all". The latter is an argument as to why people continue to work beyond "retirement".

    The rest of the book doesn't have much to do with real estate - mostly stocks and other investment vehicles, and A LOT of mutual fund bashing!

    Also, to Jay and Ben: 

    I'm new to the forums, and there seems to be a lot of California investor bashing - at least about Californians driving up properties in other states' markets. It sounds very similar to how we (Californians) talk about Chinese and other foreign investors who throw down ridiculous all cash offers in the Bay Area. Anyways, aside from finding it mildly amusing (since I don't invest out of state and am therefore immune), it's my first time reading about it! Do you see there being a major cascading effect if anything bad happens to tech or Silicon Valley economies? Curious to know your thoughts and whether Californians are truly that major/widespread an influencer in other markets. 

    I thought I'd add one more thing, Ahmad. Regarding what kind of cash-flow or ratios you need to retire and your concerns with future CapX, you should also plan ahead to have a reserve in the bank to handle the unexpected stuff. Also, I don't necessarily subscribe to this, but I do know a lot of older MFR investors just keep their rents lower than everyone else and do minimal improvements after they retire. It keeps the units filled and they're satisfied with the retirement income. Beware, though, you could definitely end up having a reputation as a slumlord! But then again, maybe by then you just don't care!

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y

    This is one of the more intellectually honest threads in a while on BP forums, gentlemen...

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Robert C.  there is NO question that Californians lead the nation in out of state investments.

    with the primary driver SoCAL.. there is a reason MI has an office there.. If you watch the threads many of the turnkey brokers are based there.. many west coast radio show host sell mid west.

    so on and so forth. the reality is any where in the nation were cash flow cannot be achieved on a starter investor level or with a SFR that area is prime grounds to sell out of state cash flow.

    the mid west deep south rust belt and to an extent FLA are the areas of the country were you can buy a single home  ( starter investment) with the least amount down  IE 15 to 30k  and have it cash flow.   Cash flow being described as Net cash per month after putting 20% down... With the rule of thumb to make 100 to 300 a month in CASH FLOW.. this is the formula that investors have run on for the last 15 years..

    If you want to talk about CA bashing just come up to the rain forest ( Portland Oregon) there are riders on Real Estate for sale signs that say  NO CALIFORNIANS and that is the truth.. the died in the wool Orygonian thinks that in migration from CA has ruined the state..  ( while myself a proud native Californian) think its the greatest thing to happen to Orygun.. Lots of money comes up from CA.. along with a very good and dependable work force from Mexico via CA.

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  • Chris McCune
    Real Estate Agent · Seattle, WA · Member since 2014 · 8 posts · 4 votes
    10y

    Ahmad, Is real estate currently your only source of income? Unless your picture lies, you don't look old enough to "retire" and I'm wondering if the question is if it's o.k. to quit your day job and become a full-time REI?

    Retiring young is difficult because the "freedom number" is unlikely to stay static.  If you are like most folks, your tastes, wants/needs evolve over time and thus the magic number is a moving target.  Also, there aren't equations to predict unexpected life events and so I would always shoot much higher than you think you need.  Think of them as LifeEx and be putting large sums towards planning for them.

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  • Jessica S.
    Real Estate Agent · Portland, OR · Member since 2013 · 154 posts · 67 votes
    10y
    Originally posted by @Ahmad H.:

    @Jay Hinrichs Exactly! But that's not what gets preached. I am now at 2x my monthly expenses and I still feel I am vulnerable if I have a major problem. Trying to figure out that safe multiplier for my area and a general rule that works for most.

    Determining how much you'll need to cover living expenses is only one aspect of retirement planning.  Deciding how much savings you need is the other key component, and arguably more important Ideally, you'll want to have enough available to cover medical events, long term care etc.. And if you have a spouse and/or children you'll probably  also want to be able to leave them an inheritance.

    When researching other, more traditional retirement models, it might be helpful to view rental income as a type of pension.  It's not really equivalent, but at least it will give you an idea of the financial foundation you need to build in order to retire comfortably.

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  • Jim C.
    Investor · IN · Member since 2012 · 263 posts · 168 votes
    10y

    @Ahmad H. 

    I've been 'retired' from Real Estate for over 10 years now, and my only source of income is indeed from B&H RE. I assumed that 2.5x Cash Flow was enough for me, and so far it has been. But I'm always looking for a killer deal and can buy if one presets itself. Do I need to? No. Do I want to? It's in my blood.

    That being said alot of the "gurus" on here have read the "Millionaire Fastlane" and have realized that they can accumulate wealth faster (and sometimes easier) doing something else as the author says that RE is a Slow Lane process. It's possible, but slower than some other methods. That book was a Great Read!

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  • Robert C.
    Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes
    10y

    @Jay Hinrichs, Wait... are you telling me that Silicon Valley is NOT the center of the universe?!? Either your opinion is suspect, or I need to crawl into a hole for a few weeks to brood about this... ;)

    Now I definitely can't leave the state, and for sure not Oregon. I have this thing where I just really need to be liked!

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Robert C.  well growing up in Cupertino and living in Palo Alto for more than 40 years it sure seemed like the center of the universe to me..

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    10y

    Well folks, if you're basing your retirement off of cash flow, you're in the  wrong frame of mind. 

    Cash flow changes for many reasons, it never just  remains the same or increases at a predictable rate and over time it goes down. Inflation won't push your rents  up with a outdated 40 year old house.

    It's net worth you need to  look at! 

    IMO, you need at least 1MM for every  10 years of retirement, I've been "retired" for 15 years, I have probably 25 more years on the green side. I was also lucky that I was and am in good health, if you retire early like I did, you'll have a chunk and a half for health insurance premiums as you get older! 

    Your $50,000 annual cash flow isn't going to pay for you to be in a nursing home after you get hit by a bus. Can't pay, then the state will force you to sell off assets and use the proceeds for health services until you are busted! Bankrupt!

    At that point, you'll also need a trust or several. Real estate in a trust account is not a good idea because of the management requirements of the Trust Company, it needs to be appraised annually and operational accounting is going to chew up cash reducing your ROI and cash flow. Other assets have published values and are liquid, stocks and bonds or annuities are easier to administer and cost much less to do so. I have one trust company that doesn't accept rental properties!

    Don't work for cash flow, work for net worth, then you'll be working to keep your net worth!

    Sell the dirt, carry the notes, place them in servicing and assign the notes to the trust, the par value is used to determine the note value. Easy to administer.

    Podcasts are full of BS, many are just total trash talk, where is your BS Meter? The internet is not where you should be getting financial advice, see your accountant, attorney and insurance agent, those are the key players for financial planning, you might also visit a few Trust Companies and check on admin expenses before you decide what route is best for you and your goals.

    Good luck !  :)  

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  • Leslie Pappas
    Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    10y

    This is one of the best threads I've ever seen on BP.  It's so true that financial advisory professionals are not typically equipped to help their clients through the issues involved in developing wealth or income using real estate.

    I live in Silicon Valley, and I'm an investment advisor who specializes in real estate.  I can tell you what people here have done to set themselves up for retirement.  There are two types of investors here:

    1. Buy or inherit and hold for a long time, then cash out and redeploy equity into potentially higher cash flowing properties or other investments.

    2. Buy or inherit and hold all their lives while working the properties for income.

    I've seen teachers, firemen, software engineers and all sorts of people utilize both strategies successfully.  One way or another, however, the investors must work to pay down loans, increase rents and decrease expenses wherever possible.  One way or another, they are building their net worth.

    Building net worth is how you may possibly retire with fewer worries.  If your retirement utterly depends on having adequate cash flow from your properties, any downturns will cripple you.  AND you must maintain adequate reserves to take care of the disasters that may happen.

    I agree with all the advice you've been given in this thread, and its a very powerful group of people who have advised you here. Most of my clients fall into the first group above. If you are or become an accredited investor, you can buy into institutional grade $50-125M projects with as little as $100,000 and diversify. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. This is the world of Delaware Statutory Trusts. I wrote a book on this that was released in January called Cashing In Tax Free. 

    So my advice- build your equity.

    Best of luck! Leslie

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  • Jim C.
    Investor · IN · Member since 2012 · 263 posts · 168 votes
    10y

    @Leslie Pappas- As far as any downturns go, when the RE and Markets Plummeted in 2008, I as a B&H investor didn't see any downturns. Sure, I lost a few tenants due to job losses, but I had NO problems during that time refilling my vacants. In fact, most of my tenants stayed put due to the uncertainty of the economy. I think my vacancy rates were actually lower in 2008,2009,2010 than they are right now. It seems when people read or watch the news about the downturn (or perceived downturns) they become more cautious and less willing to 'take a chance and move'. They seem to stay put and wait out to see what's going to happen.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    If you are really talking retirement planning I do not believe you should be counting on rental income in that calculation. Realistically there is no guarantee you will want to or be able to continue holding properties as you age. Being a landlord or responsible for such investments beyond age 70 is unrealistic. As a example Dementia runs in my family and if I suffer from it I will be a vegetable by my mid 70s. My wife will not wish to continue with income property's. 

    What I have done is insure that I can sell all my investments and have 1M for every $50,000 I want to earn as income into retirement. A 5% return is not overly aggressive and assuming I am earning more than I need that number can fluctuate without effecting my standard of living.

    I personally only need a conservative 2M which I already have. I am still working and earning but I know I can sell it all tomorrow and stop. 

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