Establishing an agenda isn’t rocket science for most of us. Hit retirement in high gear with more than enough income to pay for the lifestyle we’ve chosen. It’s the details that can get a bit involved. 
We began the story of Ralph and Liz yesterday, as the facts of their real estate investment status quo were laid out. They needed to decide on a strategy — refinance their existing multifamily income property for cash to buy more — OR — complete a tax deferred exchange. Most people can do the simple arithmetic, comparing the results of each approach.
The objective Purposeful Plan factors
-
What yields the highest retirement income?
-
What are the differences in after tax benefits?
-
How will the size of any future capital gain be affected?
-
Given retirement is 15-20 years away, will operating expenses be an issue?
-
What’s the difference in the time it’ll take to pay off all debt by retirement?
What are the ComfortZone subjective factors?
-
They like having at least one local multifamily property — just cuz.
-
Ralph really likes puttering around his local multifamily with ‘projects’.
-
Liz is somewhat apprehensive about owning ‘so much’ property.
-
“Aren’t tax deferred exchanges incredibly complicated?
-
Wondering if increasing their debt by a factor of 5-7 is ‘necessary’.
Other factors to consider
The age of their four unit multifamily was 15 when they bought it. It’s now closing in on 30 years old. If they retire 15-20 years from now, as planned, it’ll be approach 50 years old. Not only will their operating expenses be far higher than significantly younger buildings, but the size of their tenant pool will have shrunk measurably — a chunk of the tenant population simply don’t like living in old units.
Then there’s the dreaded functional obsolescence. What’s that? It’s fuses instead of breakers for the electrical system. An ‘I Love Lucy’ kitchen — small appliances — no dishwasher — and so small, if two people are in it at once, they better be in love. Then there’s the floor plan itself, which may be cut up like a puzzle with missing pieces. Ever seen a rental with a bedroom whose only access is through another bedroom? I have. Functional obsolescence is very expensive to solve.
What’s happened to the neighborhood in the 13 years or so Russ ‘n Liz have owned it? Are there subtle, or not too subtle hints it’s goin’ the wrong way? Has it become a noticeably less desirable place to live? If they do discern some of these things, and the trend continues as they almost always do, will they want to own it 20, 30, 40 years down the road?
Job earnings the next 20 years?
Russ and Liz have three kids, but they’re long outa da nest. Russ is an infrastructure engineer, making about $115,000 a year these days. It’s stable, and he expects to end up making around $150,000 in the few years immediately before retirement. Liz is a high school principal, making just over $65,000 yearly. By the time she retires it should be around $80,000ish.
Notes: A) Liz’s pension should be somewhere around $40,000 a year. B) They’ll remain in their current home which currently sports a loan balance of $119,000. Part of their Purposeful Plan will be to pay this loan off by retirement, or very soon thereafter.
BawldGuy ThougtProcess:
1. It makes no sense for them to continue owning their local multifamily. It makes far more sense for them to hit retirement with income properties 15-20 years old, instead of almost 50. A no-brainer from where I sit.
2. Using only the cash flow from their properties, they can rid themselves of all real estate investment debt in less than 17 years. (16.75 if you’re keepin’ score.) If they choose to add any additional money of their own each month it’s easily possible to shorten that time to 10-13 years. They’re considering doing just that — comparing it an alternative.
3. A little factoid that eludes many: If they kept the four unit multifamily instead of exchanging, they’d reach retirement with no depreciation whatsoever left on that property. Furthermore, it’d be almost 50 with ever increasing operating expenses and equally decreasing Net Operating Income. Why would anyone do that to themselves on purpose?
4. The alternative mentioned as an afterthought in #2? Use a grand a month for the next 20 years paying on an EIUL. Frankly, this is a better use for the money than paying off the real estate a few years sooner. The income is tax free for life. Another no-brainer.
What’s your thinking so far?
Next time, we’ll take a look at Ralph and Liz’s retirement, assuming they followed the Plan. It’ll show what’s possible for the typical real estate investor.
Let’s put our heads together and figure out a how your retirement can be magnificently abundant. Gimme a call at 619 889-7100 and we’ll get started. Have a good one.
Related posts:
- Let’s Talk Analysis — Before Starting, What’s Your Agenda? It Matters
- The Answer To the ‘Drive-By’ Real Estate Investors
- I Don’t Have The Answer For A Garden Full of Memories
- To Refinance And Buy More OR Complete A Tax Deferred Exchange?
- What Gettin’ Outa Dodge Means To A Real Live San Diego Real Estate Investor
About BawldGuy
Recent Comments