I hope today’s post speaks directly to many you. Are you the proud owner of multiple small rentals, made up of 1-4 unit properties? Are they free and clear or at least have more equity than debt? Are both you and the properties located in a more or less moribund, or at least less than dynamic real estate market? So far, you’ve done a stellar job. Some, if not most of you have added some value through rehabbing. Still, you’re slowly but surely beginning to realize that what you see now, is what you’re gonna get upon retirement. For dozens of real estate investors with whom I’ve talked this year, the vast majority in the above mentioned scenario have the option to vastly improve the cash flow available at retirement, if not also their current take. In the vast majority of the cases, you’ll also enjoy significantly superior capital growth.
Here’s a recent example that came up earlier this month.
The guy has done pretty well, having garnered about $200,000 in net equity on about $330,000 in total value. His current cash flow is roughly $22,000 annually. He’ll be free and clear by retirement, which means his cash flow will rise by $7,200 a year. Let’s round up then, and say his retirement cash flow will be $30,000 a year. The youngest property is over 40 — now. The locations are C- to B- at best — his description, not mine.
What would happen if he trades, tax deferred, now?
He’d end up with three brand new properties — duplexes — each side sportin’ their own separate Tax ID. His immediate cash flow would decrease by $4-6,000 annually. He’s 41 years old. He’d like to retire in about 15 years. If he takes the cash flow from all three new props, then applies the BawldGuy Domino Strategy, here’s what will happen, in chronological order.
He’ll pay off the first duplex in just a month short of 10 years.
The next one will fall in less than five years — 58 months.
The last duplex will be debt free in another 34 months.
Three dominoes down, one at a time — methodically.
That’s 17.5 years. If our guy adds $500 each month out of his own Levi’s, something he said is doable without strain, the time will shorten to less than 15 years easily. Let’s assume he adds just enough to make things happen in exactly the 15 years for which he’s planned.
Let’s compare retirement incomes.
His old props in relatively inferior locations back home? They’d be sending him about $30,000 a year. That assumes the unlikely scenario of 55-75 year old props not costing more money to maintain 15 years from now, than they do today.
The three duplexes will be cash flowing to the tune of $54,000+ annually. For those keepin’ score, that’s 80% higher. Also, since the locations are hugely superior, so is the tenant quality. Again, that figure is based on the assumption the Net Operating Income will never rise during those 15 years.
Here’s the kicker.
If he still wants to do some flips for profit each year, whether it’s one or several, much of the after tax profits can be funneled into the early payoff of his duplex loans. One plan I did recently showed that the real estate investor would be able to free and clear 6-10 duplexes in less than 20 years.
This stuff isn’t so much ‘outa da box’ as it is the application of what I’ve come to call ‘The Physics of Economics’. Imagine retiring with more income each year than you ever made on the job. If you do things right — that is, on Purpose and with a Plan — that’s how things should turn out — naturally.
Remember: None of these figures relied on either value appreciation or increases in the investments’ Net Operating Income for one second in time.
Now, you might be scratchin’ your head, wondering what any of this has to do with gaining higher ground. It’s simple. When you need to see the lay of the land for any reason, what is the most logical thing to do? You quickly look around, locate the highest ground, and hike to the top. Using that improved view you’re now able to see exactly what you may’ve been missing all this time. It allows you to see the big picture — all of what’s on your menu, so to speak.
In this case, the difference was an 80% increase in the real estate investor’s annual income at retirement. What I haven’t mentioned till now, is the huge difference in his capital growth — and ultimate net worth at retirement. If he’d decided to stand pat, his net worth woulda been about $330,000 or so. On the other hand, since he traded that equity to the duplexes, his net worth at retirement will slightly exceed $750,000 — AND — those properties will only 15 years old. My OldSchool math says that’s more than double the net worth.
Gee, I dunno, maybe seekin’ the high ground to check out all your available options ain’t such a bad idea.
I have some high ground for ya, especially if ya gimme a call. Try 619 889-7100 and we’ll find some high ground in your scenario. Have a good one.