Ever thought that your enthusiastic retirement plan had become a case study fixing mistakes? Many of us have, including yours truly, way back in the day.
Transcript: Hi this is Jeff Brown the “BawldGuy”. Today, we’re going to talk about turning lemons into lemonade. Our investor bought four pretty cheap properties in a state in which he didn’t live. He got them at a really good price. The problem is, he didn’t count on the market taking him down further after he spent a lot of money fixing them up into the pretty good condition. Now, we’re going to talk about the steps that I would have him take in order to first extricate himself from his mistake and really, the market did it to him. Then, step by step, what we would do after he got out of them and how to create a retirement about twenty years down the road. He’s forty-five when he bought these homes. Let’s start, they’re not great locations, but they have decent price rent ratios, and due to the price he paid, that was the case. Now, when he sells three of them, which I’m telling him to do in order to buy three other properties in Texas, what he’s going to do, he’ll net about 300,000. Now, he’s got about 350 into them. He has no capital gains or anything like that. It’s a complete wash, he doesn’t have to worry about any of that. He’ll end up with three small multi-family properties. It will cost him about 265,000 in down payment and closing costs. Now, when he did that, he bought himself a little over $97,000 in gross scheduled income, which will generate after financing and using the 50% Murphy rule for expenses and vacancies, about a grand a month or so in cash flow. Now, what’s going to happen is, he’s going to take that fourth property and he’s going to sell it, and he’s going to net out about a hundred grand. He’s going to go out and buy a note. When he gets that note, he’s going to be making payments every month. Those payments are going to be a little over 1,300, but after taxes and everything, he’ll probably end up with a thousand if he is lucky. You look at the cash flow from his three small multi-family properties. He’s doing a thousand a month in cash flow, and that’s completely sheltered. You don’t have to worry about taxes there. You take that fourth property and the payments he’s getting, about a thousand a month after taxes from those. You take what … from his family budget, he says he can afford, very comfortably, about a thousand a month to add to those two. He’s got about $3,000 a month. He’s going to add to the monthly payments on those three properties in order to pay them off as quickly as possible. What he does, is he just starts doing that. That ends up in him paying off those properties, in about ten years, maybe just ten years in a month or two. Now,he’s about fifty, maybe fifty-five and a half, and he’s got three free and clear properties. We’re going to assume they have a risen value, a dime, their income hasn’t gone up, their net operating income is the same as it was a decade ago. Now we’re going to refinance them, and we’re going to pull out about 550 grand. 550 grand, I’m talking like I know that it’s going to make sense to refinance them, we don’t know, let’s just do the scenario and see what would happen. We’re going to assume that everything works out with 550. They’re worth 70% of that, the loan is … it’s a pretty safe loan, he’s going to end up with notes now because he’s going to put 270,000 in down and closing on three new properties from this 550. He’s going to buy $280,000 notes, which means the note values won’t be 280, they’ll actually be around 430. Those notes are going to generate almost $3,800 a month. After taxes, though, it’s going to be lucky to do around 3,000 or so. His cash flow is about $2,100 a month from his new duplexes. Remember, now, he’s got six duplexes. Because he re-fi’ed the first three, he bought three more. The cash flow from those now, using the 50% rule, is up to around $2,100 a month. Keep following me. He’s got six properties, and he’s got $430,000 in notes in face value. He’s doing, now if he adds up everything, and he starts paying all that money, 1,000 a month from his family, he’s got a whole bunch of money from his notes, he’s got the cash flow from his property, he’s adding $5,600 a month to his six loans. That pays off in another ten years and a few months. He’s now sixty-five, getting real close to sixty-six, he’s got six free and clear duplexes. They’re not that old, three of them are ten years old, three of them are twenty. He’s making about $100,000 a year from those things, free and clear. They’ve got a lot of value, even though they didn’t go up in value, they’re worth about 1½ to 1.8 million. He’s got 100,000 from them. His notes are now generating $61,000 a year before taxes. He’s doing $161,000 a year. He started out with four really bad purchases. He got out of them. He turned his lemons into lemonade. His notes at this point are, no doubt, way past the point where they would have paid off. Let’s say they paid off, and now he buys more property. No, that wouldn’t be smart. He’s going to buy more notes, because remember, he’s retired. Let’s keep the loans on the property out of here. He’s got, let’s don’t get greedy, six is fine. He now takes his after tax, after capital gains tax, note payoff money, and he buys even more notes. You know what this means? He’s now making more than 61,000 a year. We don’t know how much because we don’t know what the market is at that point. From my guess is, he went from $5,100 a month to way more than $5,100 a month. In twenty years, he turned four investments, all turning into actual real-life losses into over 160 grand a year in retirement income, and that’s the way you do it. This is Jeff Brown, the BawldGuy. Thanks for coming in today. I’ll see you next time.