Real estate investors’ goals vary in nature: Sometimes it’s about growing their portfolio’s value or income from it to a certain amount. In other cases though, it’s all about time. How can they achieve what they want (retirement, financial freedom, quit the job to stay home with the kids) in X number of years? How many assets do they need to purchase and what level of invested capital will be required? And most importantly, how do all the pieces fit together in a coherent strategy?
Our Blueprint Investment Strategy can answer all these questions.
As an example, let’s look at a case study. Say you have a married couple in their mid 40s with 3 kids who have a combined income of $150,000/year. Their goal is to retire in 7 years with an income from their investment portfolio of $75,000/year. Now you might ask: How are they retiring if they’re only earning half of their current income? True, but think about what their current income funds: Their retirement investments, college funds, additional savings etc. All things that go away when you actually, you know, retire. So in this case, they’ve figured out that their living expenses would be comfortably covered by this $75k goal.
So let’s think this through. Each paid off property they will own at the end of 7 years, will produce about $11k/year in pre-tax income. So they will need to own about 7 debt free properties at the retirement finish line to accomplish their desired income. At an average of $30k of invested capital per property owned, that will require about a $200k investment to acquire a portfolio of properties worth about $980k. At acquisition, each of these assets should have a positive cashflow of about $4400/year that we could use to pay off their mortgages within a 7 year timeframe. If this investor were to use nothing but the positive cashflow to accelerate the payoff of mortgages, she could pay off the entire thing in 12.5 years. Since we’re trying to get there in just over half the time, we need to add more firepower to our cashflow to make the process burn faster. So, for this investor to retire in 7 years with an annual income of $75,000 he would have to invest an additional $1,300 each month to increase the rate of debt payoff.
Usually this is the part where things get very quiet. Because it’s a cardinal sin for an investor to invest money monthly in their real estate portfolio, right? I mean, this should be an income producing strategy not an income spending strategy. Think about it this way. Your real estate investment portfolio is being used as a tool to achieve retirement. So let’s look at all the other tools you’ve been using for the same purpose. Mainly your 401(k). You invest about 14k each year in that thing don’t you? And it doesn’t even come close to producing $75k in annual income and over a million in asset value in 7 years. So explain to me, why is okay to invest that kind of money in an “invest and hope for the best” strategy that might get you to retirement at 65 but not in your real estate investing portfolio?
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I’m 61 years old and have very modest amount of retirement money. I own two properties free and clear that I’ve sold on a contract for deed and it’s bringing me and approximately 1100 dollars per month. I have a job and make decent money can accumulate more money for investment. My main concern and question is how should I invest my cash into real estate investment at my age?
Hi Bob
That depends on a number of factors – What the income goals are for retirement, How soon are you planning on retiring, What’s the accumulation rate given your current income?
I think it would be better to pick up this conversation via email given the confidential nature of this info.
We *are* that family! 40s, three kids, rental houses, a little lower income. We are doing just what you suggested…4 houses purchased, and now paying down with W-2 income while we still have it. Add in pension from job which will replace the income from two houses…now just need to cross the finish line. Thanks for this post~
Erion, as you know I love your site and agree with pretty much all your articles. I have been following my own blueprint with stellar success.
One thing I have noticed though is that the income taxes I am paying keep increasing as the properties are paid off. Typically when you have a leveraged property the cash flow is completely tax sheltered by the depreciation. When the property is free clear a large chunk of the cash flow is not sheltered.
Keeping this in mind means that one pays a lot less income tax for the same amount of capital invested if that capital is spread out over more properties. The only problem is that one is also increasing their risk.
I think that when I finally retire with that $100K/year this will be less of a problem as my 9 properties will shelter around $40K/year and the highest tax bracket on $60K married filing jointly is 15%. As apposed to my rental income now on top of my salary which puts me in the 33% bracket.
I know you don’t like to include the topic of tax in your articles but I think this truism must be considered.
Great comment, Robert.
It took me a long time to address it as business has been in overdrive leaving me less and less time to write but the topic deserved its own article.
https://investingarchitect.com/income-taxes-free-and-clear-investment-properties/