When Is Free and Clear Damaging – Even Sabotaging Your Retirement?

Several times a month a reader, or maybe a client referral will gimme a call and a great fix by asking if I could, “just tweak our plan a bit to make it perfect.” So many times they’re under the mistaken belief that owing to (Stellar pun, Jeff.) the fact they own a $300,000 income property debt free, their retirement plan is only subject to minor adjustments. Sometimes that’s the case, though in my experience rarely. The answer to my follow-up question dictates my advice.

How long till you retire?

The answer often falls in the 10-15 year range. Let’s construct a scenario that mirrors many of the callers’ circumstances. The facts will be as follows:

Their property is worth about $300,000.

Net Operating Income (NOI) about $15,800 a year.

If sold, net proceeds would be roughly $270,000 or so.

Here’s pretty much what I’d suggest they strongly consider. It’s a no-brainer from where I sit, and I suspect from their viewpoint too.

I’d have them execute a tax deferred (1031) exchange (finding a buyer for their property first) into three duplexes in Texas. The new properties offer NOI’s of roughly $18,360 apiece. If the investor put a down payment of about 1/3 the price for each, their net proceeds of $270,000 would cover pretty much everything required to close, including all related costs.

Here are the numbers in a nutshell without goin’ all medieval on ya.

Each property would be cost just over $250,000 — and the loans would be a tad over $168,000 each at just 4.625%, amortized at only 15 years. The cash flow from the three combined would be a latte less than $700/mo., but we’ll round down to $500. We’ll also assume the investor can easily, comfortably add another $500 monthly to the cash flow.

Enter — The BawldGuy Domino Strategy

The monthly cash flow, $500, plus $500 a month from the investor allows $1,000 to be added to the monthly payment of just one of the duplexes. This will be done till it’s paid off completely. That’ll take less time than you might suspect — 7 years and 3 months.

One domino down — which means that duplex is now adding a few lattes over $1,500 monthly to the cash flow. Suffice to say that the second duplex is paid off much more quickly, while the third and final duplex is paid off almost faster than you can watch it happen.

Bottom Line

In this scenario, which is pretty OldSchool conservative, all three properties would be free and clear — no loans, sans debt, adios lender — in less than 12 years — 11 years and 2 months to be precise.

Furthermore, instead of a retirement income of less than $16,000 annually, it will be a month’s worth of lattes over $55,000. In other words, well over triple what they would’ve ‘enjoyed’ had they insisted on sticking with their wonderful debt free original property.

Epilogue — The increase in their annual depreciation (read: tax shelter) allows them to receive at retirement, more sheltered income than what woulda been their total annual cash flow had they opted for the status quo.

Again, this move is a no-brainer any way ya wanna look at it.

BawldGuy Takeaway: Contrary to popular belief, owning free and clear income property isn’t magical in and of itself. Having cash flow and being debt free 10-30 years before you retire will — in the vast majority of cases — actually sabotage what coulda been, and shoulda been a vastly superior retirement income.

Then there’s a little somethin’ I’ve not yet brought to your attention. Instead of hittin’ retirement with an equity of $300,000, they’ll have just over $750,000 of equity following this plan. That’s more than double, people. Think double the security when retired. Put into perspective, if an emergency arose after they retired, they could easily pull out more money than their entire equity woulda been had they stayed put with their original property.

Also, notice how relatively devoid of any real sophistication it took to execute this plan’s strategy. We’re back to Grandpa’s day, when basics couldn’t be ignored, and rent increases and/or price appreciation were merely daydreams folks had while sittin’ on the front porch.

Next time you’re relaxin’ on the porch, gimme a call, ok? You’ll find me at 619 889-7100 — or simply click on the Contact BawldGuy button up top and send me a note. Have a good one.

Related posts:

1. The Facts About Owing Free and Clear Property in High Priced Regions
2. Everything’s Free & Clear — Rentals Included — Yet Still Taking Home 25-35% of What’s Easily Attainable
3. You Own Free & Clear Land — It’s Not Selling — What To Do?
4. Real Estate Investors — Is Your Addiction To Cash Flow Lowering Potential Retirement Income?
5. How Your 401(k) Is Sabotaging Your Retirement — Maybe Postponing It