Sustainable Withdrawal Rates For Active Real Estate Investors To Achieve Financial Independence

2 Replies

I ran across this study by some professors from Trinity University in San Antonio yesterday:

Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable

How much is enough is a popular topic on BP since many people are looking to make their money work for them to achieve financial independence.  The article above is a great read if this is your goal.

The trouble with the article is that it assumes an asset allocation strictly made up of stocks and bonds and analyzes that over various periods with varying mixes.  Based on this study Table 3 shows a withdrawal rate of 4% seems to be pretty solid over all stated withdrawal periods with at least a 50% allocation to stocks.  

Things get sketchier with higher withdrawal rates and longer payout periods.  Table IV shows that withdrawal rates north of 4% have an incidence of 0 minimums with longer withdrawal periods; those on the order of 25 or 30 years.  This is probably what most people on BP have in mind if their goal is financial freedom.  

I was wondering what people's thoughts are about how this applies to active real estate investors that presumably can achieve higher yields than the blended yields from stocks and bonds that are used to compile the tables in the study.  

A 4% withdrawal rate means you need 25X spending to achieve independence.  That translates to roughly $3M if your goal is to have $10k/month in current dollars purchasing power, which seems to be a pretty common number cited in the financial independence threads.  At 5% withdrawal the number dips to $2.4M and at 6% it is even lower at $2M.  

Any thoughts on what the proper number should be for real estate investors?  Keep in mind that one could semi-retire and choose to work fewer hours doing something else.  Achieving higher yield should have a pretty profound impact on this analysis though.  Investing passively in crowdfunding deals or via your local hard money lender should probably get you at least 10% on your money.  Do you think a 6% or higher withdrawal rate is warranted if this is possible?  

Medium realstarter2Bryan Hancock MBA, RealStarter | [email protected] | (512) 827‑9638 | https://www.realstarter.co/Home/BH

It really depends on what kind of yield you can safely and consistently produce.    My goal in retirement is not to withdraw, but to live off the distributions from my apartment investments and private lending interest.    Rents and interest rates will rise, causing investment earnings to rise as well, and the apartments will gain value over time, enabling principal growth even at a 10% withdrawal rate.  Assuming I'm invested in mostly yield and hybrid plays at the time of retirement, I'll feel comfortable w/ a 10% withdrawal rate.

Of course, this assumes market conditions as good as or better than today when I retire, and it's too early to determine that.

Getting 10% completely passively with hard money loans seems to be a pretty easy play for real estate investors.  From what I have read 7.5% yields were more common in the studies depending on the asset allocation.  This kind of makes sense because 3-4% inflation with a 4% SWR would keep the principal level.  

If you could pull down 10% from hard money loans that would imply you could have a SWR of more like 6-7%, which would put the assets needed at around $1.7M - $2M with a $10k/month goal.  

With a quasi-passive (semi retired) portfolio of 50% hard money loans and 50% flips or development projects I think the yield could probably be pushed up to AT LEAST 15%, which would put the SWR at around 11% - 12%.  This would put the assets needed at around $1M - $1.1M.

The question is what yields are tolerable in all economic climates.  15% may be pretty ambitious with a large recession like what we had 7 years ago.  For an apples-to-apples with the larger securities markets a 4% SWR is probably too low, but 11 - 12% sounds high.  

What say you?  

Medium realstarter2Bryan Hancock MBA, RealStarter | [email protected] | (512) 827‑9638 | https://www.realstarter.co/Home/BH