Early Retirement with Real Estate

6 Replies

I'm looking for resources on calculating/planning for early retirement that add equity in real estate into the calculations. Our monthly cash flow from the real estate is not significant, but we have a great deal of equity in a few homes, and I haven't found a way to include these in any existing calculators. So far I only see retirement/brokerage accounts as a source of savings to input. 

Would you simply add your real estate equity into the retirement accounts section? It feels messy because the projected growth rate won't be the same. I imagine that we would slowly sell off the properties and use the profits to supplement our monthly income until we hit typical  retirement age (when our 401ks and social security would kick in).

Would appreciate any resources or advice on this!

@Christine Walthall , Or do cash-out refinances to fund your retirement because when you sell you pay taxes! Or 1031 exchange into more properties that give greater cash-flow.

If you have owned these properties a long while you have depreciated them on your taxes and they have appreciated in value meaning you will end up paying capital gains on MOST of the sale price when you sell. However, if you keep them until you die your heirs inherit them (under current laws) at a stepped up basis (the value at that time) and do not have to pay tax on that gain. 

Traditional retirement calculators don't work very well when you have real estate.  I would build a financial model in excel so you can model as you see fit.

There are ways you can develop more passive real estate cash flow for retirement without totally divesting your real estate holdings.  As Kevin mentioned you will have significant tax hit if you sell due to depreciation recapture and appreciation.  I am applying some of these techniques right now to develop passive cash flow for early retirement

1) cash refinance your properties and invest the cash in syndication or larger multifamily where you can use property management. choose based on how involved you want to be.

2) 1031 into more passive investments like DST, commercial or larger multi family

3) 1031 into properties you might want to vacation in and do VRBO or Airbnb

These techniques can accomplishes a few things, they can be more tax efficient and will keep you much more diversified than selling and investing everything in the stock market. Also, real estate is a good hedge for inflation. 

Just to add to what Randy said about DSTs as an option, if you're an accredited investor. It stands for Delaware Statutory Trust and is a trust / pass through entity in which a sponsor (think big real estate investment corporation) buys institutional property (apartments, self storage, commercial, medical office, etc) and then sells interest in the Trust/Property to investors. DSTs are 1031 eligible and can work great for people looking to avoid tax on their sale and just want hands off real estate plus the potential income.

Can read more about it on my blog here at BP


@Christine Walthall  

Theres no hard and fast rule.  I have created a few calculators for myself which are helpful, but the gist of it is as follows:

1. Add up you total annual or monthly expenses you want to cover.

2. Subtract out your dividends or amount you would like to periodically withdraw from you stocks/brokerage account.

3. Subtract out you "Cash-Flow" from real estate used to cover your expenses.

4. The difference or delta that left is the amount you need to cover to achieve your goals of retirement.

Equity in a home may contribute to your net worth, but is not doing anything to help with cash flow needs.

Hope this helps.

Hi @Christine Walthall . Congrats on your success! Your finances are none of my business of course, but I would recommend refinancing those properties and using the so-called lazy equity to multiply your wealth even further. Low rates right now make this a historic opportunity especially in the face of rising inflation. Happy Investing! 

@Christine Walthall

Are you talking equity from a loan paydown perspective or a appreciation standpoint?

Loan paydown can be calculated if you factor in a net worth statement.
Your asset price 'stays' the same while your outstanding debt goes down.

It is a little harder to factor in appreciation because it is hard to predict if your property value goes up or down on a month to month basis.