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Robert Brown
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Q: How to plan for retirement with rentals / comparable 'rule' to the 4% rule

Robert Brown
Posted Jan 29 2023, 16:53

it's something I've been looking for for a while,  and it doesn't seem to be talked about much (at least where i'm looking)
- the recent BP: Money ep #377 with " Mr. Money Mustache"  prompted me to write

For my specific scenario:
I'm "House Rich" ( or house  poor.. i guess) and the plan is to continue buying more RE as investment rentals vs investing otherwise, for now.
I Have 7* doors, and am actively looking for another duplex/tri.
(* i live in one unit, free. and profit from the remaining 6.)
currently my net rent is  more than I budget to live off of,  but not with  any sort of excess , yet,  to  allow me to retire.  Perhaps at 10 doors I can slow down a bit work-wise

The 4% rule of course would allow a i.e. $40K yearly draw of $1M in investments, but there is a lot of stability build in with an index fund vs rentals/

I'm looking for "rules of thumb"/resources/thoughts.. on how many  doors  I may need to retire.. and yes i know that  there isn't a one-size-fits-all answer, but  other's guidance would be helpful.

in S.E. Wisconsin, I'm Netting ( before repairs/vacancy/CapEx) ~ $20K/yr with 6 rented doors. with about $100K spent ( down payments) or arguably less, as i do roll over my profits into new down payments.


Outside of simply calculating/assuming what I'd need to retire, then ensuring that my ( actual, bottom-line) NOI covers that. What are other factors i need to consider?

- do rent increases  generally outpace inflation?
- do property values  generally outpace inflation?

as the properties are paid off,  I could of course sell/refi in my later years if required.

What items am i missing to think about?

Much thanks!
Robert

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Ash Hegde
  • Lender
  • Fort Lauderdale, FL (Lending in FL CT MI PA)
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Ash Hegde
  • Lender
  • Fort Lauderdale, FL (Lending in FL CT MI PA)
Replied Jan 29 2023, 17:08

Honestly I would simplify it by trying to get cash flow (include something monthly for future maintenance) to be higher than monthly expenses. There are so many options with real estate - paying a loan off, refinancing, selling and exchanging for other properties - that it is difficult to factor all possibilities in. I guess with my simple approach I would be assuming that rents keep up with inflation, which may or may not be true depending on the market you invest in. 

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Bjorn Ahlblad
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#5 Multi-Family and Apartment Investing Contributor
  • Investor
  • Shelton, WA
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Bjorn Ahlblad
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#5 Multi-Family and Apartment Investing Contributor
  • Investor
  • Shelton, WA
Replied Jan 29 2023, 19:41

@Robert Brown I have been retired for a few years with income from properties. Once you no longer have a W2 job you can become an REI professional; your income tax rate will become crazy low. My wife and I make well over 100k from net operating income and Social Security on top of that. All our properties are paid off. As long as we continue to screen really well life can be great. Our properties are max one hour away. Works for us; all the best!

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Marcus Auerbach#3 Starting Out Contributor
  • Investor and Real Estate Agent
  • Milwaukee - Mequon, WI
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Marcus Auerbach#3 Starting Out Contributor
  • Investor and Real Estate Agent
  • Milwaukee - Mequon, WI
Replied Jan 30 2023, 05:58

@Robert BrownYou are on the right track, but you still have a bit to go. There are three components to this:

1.) Property Condition

2.) Equity

3.) Cash flow

On the day your retire from W2 for good your properties should be in great condition relative to future capex. You should be looking at mostly new roofs, kitchens, furnaces, windows, driveways etc. I list this first, because it is the most overlooked aspect! You also want to have a long range capex plan, allocating enough funds over the next 30 years!

Equity is your insurance policy against Capex. If your properties need improvements, you should use equity to do so, NOT cash flow! Because that is what puts food on your table. In todays money a full rehab will cost about 50k every 30 years. Plan for that.

Cash flow is the last piece. $200/door net is a pretty normal average for Milwaukee. That numbers should jump significantly when you retire. I believe you are at $277 before repairs and vacancy, so inflation and the resulting rent increases will help you to increase that number. 

However, I am not a big fan of unleveraged properties, you are too big of a target. I think a great goal is to own all properties free and clear when you retire. Then refi them moderately, maybe 60% leveraged (keep capex in mind!) and take that money and put it in a dividend fund or index fund. The dividend you draw is now retirement income, without using principal.

And then you can add it up: cash flow + dividend income + remaining equity

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Ke Nan Wang
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  • St. Augustine, FL
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Ke Nan Wang
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  • St. Augustine, FL
Replied Jan 30 2023, 06:49

Just another factor to consider if retirement is your plan. 

Imagine what cashflow you could have if you have all the houses paid off. 

There are generally two strategies I have seen people do.

1. Just ride it out the usual 30 year mortgage based on a positive cashflow model. The properties pay for themselves and 30 years later you are done. This require you to start investing early in your life. 

2. Be extremely frugal for about 10-15 years. Continue working your W-2 jobs, contribute all cashflow from the properties and your surplus income into paying off the mortgage. This requires high discipline and you can get to the end goal much faster. 

The above two strategies were for retirement plans. I have a friend who's dad did the plan 2 on a premium 500-unit storage site, didn't take a paycheck from it for 15 years and now he live off roughly $70000 a month income from the building with almost no headache and very little Capex.

Obviously if the goal is to build generational wealth and grow a portfolio, the strategy would be more aggressive. 
 

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Steve Vaughan#1 Personal Finance Contributor
  • Rental Property Investor
  • East Wenatchee, WA
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Steve Vaughan#1 Personal Finance Contributor
  • Rental Property Investor
  • East Wenatchee, WA
Replied Jan 30 2023, 07:48

I think you can safely use a 6% 'withdrawal rate' with RE.   That was my ROE target with a PM. 

I was cruising along like you when I looked up and realized values were seriously out of whack.   Cap rates fell below safe investment rates, so I accelerated my 'retirement plans' by 90% exiting my commercial MF with seller contracts and moved more into depressed equity issues and sectors. 

CF can be pretty unreliable, getting clawed back with a bad eviction / turnover, etc.   Focus on your ROE and don't be afraid to exit and rebalance when things look out of whack.  

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Chris Davidson
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Chris Davidson
  • Real Estate Agent
  • Boise, ID
Replied Jan 30 2023, 11:20

@Robert Brown a lot of great advice here in the forum. I would look at portfolio management, and by that I mean really dig deep into the assets and how they are performing. A cashcow can look great on paper but if you have unrealistic capex expenditures it can eat up the equity or cashflow real quick. As you get closer to retirement I would work on moving into assets that are newer and/or more stable systems have all been updated. This reduces risk while usually reducing returns in the short run. 

You also have to plan an exit. Are you wanting to pass down the RE or do you want to wind down the portfolio and live it out. If you are looking to pass down properties I would focus on getting easy to manage properties. If you aren't concerned about passing it down you might want to transition into the bank and carry notes instead of properties. You will lose the tax benefits, but also shed the management and risk exposure. Since RE has many ways to produce value it also has many ways to extract value and when working into retirement that is something you should start focusing on.

But do what is best for you. Some folks like leverage and the benefits it has while others like the Dave Ramsey approach, or you can blend it and maintain low leverage. Only you will be able to answer that question for yourself and remember it doesn't have to be permeant. If you go for no or low leverage then want to scale up you can do it.

Keep crushing it!