You have clearly established, at least financially, where you are now. You know exactly how much capital will be available for your first step. You also know how much you’ll be keeping back as a ready cash reserve.
It’s time to plan your journey to the retirement you’ve always wanted.
You’ve decided to retire in the next 12 years or so. You’ll be 59 years old by then. You have $250K in cash available to get started. This will include where you invest, what kind of property, how much down, and the financing. We’ll also decide how much to keep back as a cash reserve.
Since we have 12 years, and growth is the priority, we’ll begin by deciding upon Boise as the place to invest. The research has already been conducted. It’s poised for long term growth, including a doubling of it’s population in the next 20-25 years. It’s perfect for the use of prudent leverage — a great match for an investor in search of long term capital growth.
The Boise area, unlike many areas, offers solid opportunities in the 2-4 unit market, as well as single family homes. The prices for homes range from $170K to $225K. (This is the price range that makes sense.) Duplexes can be had for $200-240K. Fourplexes are available in the range of $350-450K. All of these properties will break even before tax, and do better after tax. This assumes Murphy leaves you alone, which would be a silly assumption — which brings us to reserves.
Reserves are a direct result of Murphy’s Law. Don’t be like this poor beaver, who ignored Murphy.
Whenever we tell a client “This property should break even.” we follow that declaration by immediately telling them to laugh out loud. Regardless of how closely we’ve looked at income and expenses for any particular property, we understand through decades of experience that the words break even only serve as a challenge to Murphy. Therefore, we’re constantly reminding our clients that projecting a break even is simply our way of taunting Murphy.
In this case I’d advise holding back $50K in a cash reserve account. This money will be earmarked exclusively for your Plan. I’ve often referred to this account as a Sominex account. There’s nothing like a fat bank account for peace of mind.
The Plan is as follows:
Invest $200K into the Boise region. When closing costs and down payments are considered together, this should result in the purchase of roughly $1.5Mil in residential income property. They will probably be spread between homes and small units.
Hold back $50K in a reserve, or Sominex account.
Live your life waiting for the market to tell you when it’s time to make another move.
How long? Only the market knows for sure. But when it’s time, the market will speak clearly. Then it will be time to take the significantly increased equity and move up, so that the capital growth rate can be kept at a reasonably high level. At that time the reserve account will be topped off if necessary. Also, the entire plan will be reviewed in order to insure the original goals are still appropriate for you.
Life has a way of throwing curve balls. That’s the best part of a solid Plan — it’s flexible — able to quickly adjust to real life in a way that makes sense and keeps the investor’s eye on the ball. Health changes, kids need money for college, employers need you in another city, and the beat goes on.
No matter what happens on your journey you’re going to retire. It can be something you’re happily anticipating, or a life sentence about to be imposed.
The difference between the two is a Purposeful Plan.
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Jeff, I am sure glad to hear you say, “break even only serves as a challenge to Murphy”.
I thought I was the only one who went for over 2 yrs with a negative cash flow on a property that “on paper” was suppossed to cash flow.(appreciation made up for it, tho)
I am officially the poster child for Murphy attacks.
Keep in mind that in Boise with new property, you might get the surprise of providing a refrigerator and window coverings…total bill before the renter moves in over $2K out of pocket for each property.
That’s why Jeff is so smart to remind us so often to have a sominex account.
Another thing I’ve learned is that if you are a little off profile (don’t have a six figure job and are going full doc for loans) be prepared for a change in LTV. If they promise 10% down, it could change to 20%. Then your reserves will be seriously dented.
However, even with all these bumps and grinds, R.E. investment with Jeff is VERY profitable if you can weather the “Murphy attacks”.
Jeff you are too funny. The way you decribe Murphy is so so true for some of us!!
Thanks for giving us perspective.
Frankly Cher, I just think you really irritated Murphy in another life.
What we both know is that ignoring Murphy is usually done at great risk.
Thanks for the kind words.
BTW, I think the Starbucks employees at our new store are some of the best I’ve seen.
OK, now I get it…it is past life Karma
Yep, we do not dare ignore Murphy.
We do our best reading and hatching of ideas at that Starbucks. We will run into you sometime, I’m sure. We love those gals.