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

    @Chris McCune I have a well paying job in the engineering field and had access to a good amount of capital at 24, plus I am frugal so getting to 2x my monthly expenses (based on limited 2-year history of income/expenses) wasn't that hard. Great points about LifEx and the unpredictability of the freedom number. I don't have any kids yet, and while I budgeted for one in my current expenses, there is no way of knowing if that is enough. I can't just sit around the house, so I am sure I will be doing something if I leave the 9-5, but I don't want to factor that unknown income in the decision making process.

    @Jessica S. I agree but I am also having a hard time figuring out how much savings are needed. 5k/door for RE CapEx seems like a good starting point, what other life expenses should be budgeted for?

    @Bill Gulley Your posts always highlight how little I know. Thanks for that dose of humility and constructive pessimism :)

    @Leslie Pappas I don't see myself doing option 2 because of worries about health but I am a huge fan of the 1st option. My thinking was to get to 4x my expenses using B&H RE, leave the 9-5, then put all the extra cash flow  into a more retirement-friendly investment vehicle. I can also leverage equity cash-out refis and put that money into stocks/bonds.   

    @Jim C. Nice to hear from someone living off rental income for so long. Would you have done anything differently? Do you plan to keep managing your properties as you grow older

    @Thomas S. I would also feel pretty good about retiring if I had 2M. How much of a role did RE play in getting to where you are now? Sounds like your IRR from appreciation dominated the cashflow ROI. I am in an area with very limited appreciation.

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  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    the question of what is enough for retirement is very complex, and highly individualistic, as you can see from the varied responses, which all make valid issues to consider. 

    Probably the biggest factor is where and what type of properties you invest in. $100-200 bucks per door in fly over states is a far cry from blue chip real estate in the best Bay Area locations. In my case I buy properties in San Francisco, where not only I can reposition them, I get into gentrifying neighborhoods that shoot up in value after a few years. So I can get real cash flow generated, even if it's a few percent ROI. Which leads to huge equity positions.

    I also choose to live in SF, which is of course expensive. But I brought my place a while ago, now a condo which was part of an investment project. Plus my neighborhood, the Mission District, went through the roof with gentrification. So the fruits of that is that I can live in a $1.5 mil home with a low mortgage payment and property tax bill (thanks again prop 13 :)

    With prime real estate your income flow is much more secure. Still, I'll want to bank at least $200k in savings. Right now I'm still developing/improving my projects, so excess cashflow goes towards optomizing my investments to highest and best use.   If I don't buy any more buildings, which I'm seriously considering, in 2-4 years I'll be done with my existing projects. So outside of property management, I'll be a rentier. (Actually I am already that, as I left w-2 work years ago.)

    My wife and I have set specific financial goals, namely her quitting her job. Then we can travel and live overseas more. Which of course is more expensive than staying put. So outside of buying a second home overseas, I have all that mapped out with out current assets. That along with a solid cash fund I already mentioned for the unexpected, will be the cornerstone of our rentier life of leisure. After that who knows?  Will I get bored?  Will other monetary desires creep in? Or maybe I'll take a liking to something else that is unrelated, and focus on that. (The key is, tailor your plans to your specific circumstances and goals.)  good luck!

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

    My real estate investing make up about 2/3 of my total net worth. Not much is actually from appreciation aside from directly related to increased rents or flips.

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  • Logan Hassinger
    Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes
    10y

    I've been looking at the this question since I started investing 1.5 years ago. Podcasts led me to believe that rental cash flow that meets or exceeds monthly expenses is sufficient to quit a 9-5. For me, I've moved to a more somewhat reasonable rule of leveraged rental cash flow is 2x expenses. IF I hold these long enough to have the debt paid off or pay down early, then the additional cash flow only helps. Additionally, I'm front loading the CapEx reserves and will gradually pull back as I approach a figure that I'm cortfable with given many variables of course.

    @Bill Gulley

    I've never considered a NW figure as it relates to retirement or rental income. That's an excellent point and one that I will incorporate. Each deal I do, the NW impact is always considered in the short term but I've never applied the impact to long term retirement goals and costs associated as we age. 

    The way I see it, passive cash flow from RE is a building block or foundation to provide someone with additional time to focus on other revenue streams. Not sit around and paint with water colors or join your local golf course, but then again, you can if you want. 

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

    Couple issues I have with residential properties being held too long, depreciation and tax benefits decline and rents in mature older neighborhoods may peak and then decline, not to mention the additional maintenance over the long term. 7 to 12 years on a hold and then step up to another property keeping in a better marketable property. 

    I didn't mean to imply cash flow wasn't important or used in planning, but it's not paramount in the longer term, especially if it declines or is stagnant. :)    

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  • Logan Hassinger
    Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes
    10y

    Agreed on the aspects of hold period then transition to more tenant desirable properties, which in turn provides more predictable cash flow. 

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