Attention Cash Buyers With Cheap, Free ‘n Clear Rental Homes


It’s so enticing to be able to buy a home relatively cheap, for cash, isn’t it? Sometimes, though rarely, it’s even better when they’re young and pretty. If there’s little or no fix-up, the high lasts extra long. You’re in that sweet career spot where you’re above the middle point in your career earnings, say 40-55 years old or so. The cash flow literally makes you giddy at times. You’ve got four of ’em now, and are takin’ a breather. Though you paid around $70-80,000 apiece plus closing costs, they’re worth a bit more — you got ’em at a discount. Does the good news ever end?

Well, maybe, and maybe at the worst possible time.

Let’s say you were in your early-mid 40s when you acquired this portfolio for cash. You plan to retire somewhere in the range of 60-65, but sooner is a much better concept than later when you’re pondering that day, right? The assumption here is that those four rental homes were bought to supply you with income when the big paycheck ain’t automatically arrivin’ at your bank account twice a month any more. Good plan — as far as it goes. But allow me to help you find the black fly in your chardonnay.

When you think end game, think retirement income and net worth.

The same time you were happily writing checks for the purchase prices of these nice homes plus the closing costs, others were doin’ something a bit different. They weren’t thinkin’ about the cool cash flow now, though it surely doesn’t hurt their feelings. No, they were thinkin’ in terms of the last guest leaving their retirement party. They saw themselves huggin’ their wives, while realizing they only had a couple days before they had to be at the cruise ship. See, they spent the same original capital on the same number of real estate investment properties, the same time you did. The only difference was they didn’t pay cash. They didn’t sacrifice location quality either. In fact, what they bought cost a bit over triple what yours did.

Remember though, they were thinkin’ way down the road, even as they were closing their acquisitions, knowing that yeah, they’d have loan payments, but would still be enjoying some fairly significant cash flow. Again — they were thinkin’ end game, NOT how cool it felt to buy cheap houses with super sexy price rent ratios.

Fast forward 15-20 years.

The four homes are still renting for a monthly total of around $3,800 or so. This results in an annual cash flow (read: retirement income) of (being kinda sorta generous) $30,000. Your net worth is, well, the same as it was when you bought ’em. Maybe around $400,000 +/-.

Our couple who bought the much higher priced props? They’re also debt free now. Their gross monthly rent is about $10,200. Their properties are just 15-20 years old. Their annual cash flow (again, read: retirement income) is roughly $75,000 +/-. Their net worth from these properties alone is in excess of $1 Million.

I dunno — which properties do you wanna have at retirement?

BawldGuy Axiom: It’s about the cash flow and net worth when you retire, not a decade or two before retiring. If your Plan doesn’t have that as a foundational assumption, the Plan has little if any value when it comes to creating the retirement income you wish to generate. It’s about the end game — key your eye on that ball — or pay the price when it’s too late.

Retirement planning is not a sprint, it’s a marathon. The smart runners do well cuz they realize it’s about the long, slow process. They know the end game of the marathon is about gettin’ to the finish line — not racin’ around the track once or twice. Look at what you’ve been doin’ or at least planning to do.

If it’s all about the end game, pat yourself on the back, you’re doin’ a great job.

For those who already own the cheap ‘n pretty homes? There’s still time for ya. Trade your net equity now into the bigger, better properties. Even the new math tells us that $75,000 a year is a lot mo betta than $30,000.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. Jeff

    Quick Question because it is so close to my actual model. What if the investor who bought the cheap houses for cash and then leverage out 90% of their cash or more and kept rolling the capital into the next cheap house purchased for cash at a significant discount?

    In your travels have you seen investors do this as a defined strategy for as long as the market provides the cheap cash deals?

    Thanks and another great article


    • Jeff Brown

      Actually, I have, Mike. But the key is the 1) Location quality 2) Age of property 3) Ultimate ‘end game’ income.

      If your stuff has (1-10 scale) 8-10 rated locations, under 10 yrs old now, AND you know the area doesn’t have Murphy followin’ it around, you’re probably good to go. Thing is, Mike, when brutally objective, most discover they’re creating problems that won’t ‘blossom’ ’til they’re about to retire.

      Make sense?

  2. Thank you, Mike. Just keep in the back of your mind that it takes three of your homes free ‘n clear to equal one of the TX properties when it comes to retirement income. That’s a huge factor, or at least it could be, when it comes to your long term planning. Good luck!

  3. Well, this has changed my thinking.. I thought I was doing pretty well (as a newbie investor) with 3 pretty cheap free and clear apartments. It’s not a good time to sell them, and I considered myself a buy and hold person… so what do you recommend? Just upping quality the next time I purchase a property? I was planning on using my rental income eventually to pay cash on other properties.
    Thanks for your insight.. I really appreciate your articles.

  4. Hi jeff,

    interesting article. I am one of those who likes the free and clear concept, however, I plan to continue buying free and clear properties until I retire. In fifteen to twenty years I would have acquired much more than your example. If four properties eere enough then I could see your arguement. But I have loftier goals. im just afraid of overleveraging and like to use the c as h flow for other investments rather than waut for many yrs to see results. I may be dead before then.

  5. Hey Mel — It’s all about comfort zone, isn’t it? Thing is, if you’re convinced that we’re within shoutin’ distance of the bottom, and your putting 25-30% down on my kinda properties, here’s how it washes out. You’ll have invested the same capital, give or take. Your net worth at retirement will be double to quadruple in comparison, and your retirement income will easily be double to triple goin’ my way.

    But again, you’re preachin’ to the choir about comfort zone. None of us will do much when we’re out of it, right?

  6. Jeff,

    Great post. I must admit I have a slightly different approach to real estate investing as a retirement strategy. My plan is based on 10 ugly little houses. I plan to spread the risk of vacancy across 10 properties that I acquire/rehab free & clear. The neighborhoods may be more…umm, challenging but I can relate to the area and understand the market. I also have properties in more affluent neighborhoods as well but the cashflow from 10 ugly houses will accelerate my retirement in ways those other houses can’t…that’s just my opinion.

    It is still good to hear other opinions. I appreciate your post. Thanks again!


  7. Everyone I see seems to make big claims how much better it is to be leveraged out and have debt and have 2.5 times the net worth but I disagree. The guy with the 4 of these 70k homes might only have a net worth of 400k but he has very little risk compared with the guy that has 1 million in net worth and has 600k in debt for 15 years. Tell me the guy with no mortgages doesnt sleep a lot easier. Tell me market gyrations dont affect the guy in debt more. Il stay debt free thank you.
    Keep pimping the debt though cause it increases the value of my mortgage free property. It causes people to pay more for property and thus increases my net worth. Yes it might be hard for me to afford sky scrapers without debt but I sleep well at night and never have to apply for a loan manage a financial statement the way investors do that play kissy face to bankers. I tell myself when I decide to buy I never have to kiss a banker or play stupid games with a credit score to get permission to do what I want to do in the real estate game. Without debt your decisions will be far clearer and easier. I am not saying debt should not play a roll in real estate but remember the consequence you take when you apply leverage. Its a double edge sword that everyone act like it will never cut them. Guess what everyone is prone to risk and if you engage in debt for a long enough period of time you will learn the down fall if it.

  8. Jeff Brown

    Hey Donnie — We don’t know each other. I’m gonna give you the benefit of the doubt, assuming you’re not startin’ out by calling names, sayin’ directly or indirectly that I’m a pimp. Cuz if you are, we’ll be having a different conversation the next time you show up here with what could be perceived as an insultingly condescending attitude. Other than that, welcome. 🙂

    The majority of my clients own at least some of their RE inv. property free ‘n clear. When they reach retirement, their Purposeful Plans’ end game ‘Holy Grail’ goal is to own ALL properties sans debt. There’s a huge difference between those who insist on tiny or no down payments, and those who share my views, insisting on 25-50% down with rare exceptions.

    You’ve given me a solid post topic, which is a real life case study from a little over a decade ago. It’s right on point.

    There is room, Donnie, for the various schools of thought here. But we do our best not to begin conversations with a pejorative tone. I apologize in advance if I’ve read you incorrectly.

  9. Jeff-question for you; what about the $600,000 of additional debt free cash flow received from the 4 less expensive homes over the 20 years until retirement? Those funds either have helped the guy paying cash for properties purchase additional properties or if he did nothing else but put the money in the bank he’d be sitting on that much more cash versus having to use the monthly rents to service the debt, right? What am I missing here? Thanks

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