Go From Zero To $8K/Month in Retirement Income

I speak with investors almost every day about the same thing: How do I replace my income or at least a part of it? What does it look like, and what do I do to get there?

You’ve found yourself on BiggerPockets, reading blog posts, listening to podcast episodes, getting fired up about real estate. And the end game is your form of financial freedom. Let’s dive in on this concept.

Defining What You Want Out of Life

You ran across this article and decided to start reading on your laptop or your mobile device, wondering if it was specifically about having money in retirement, reaching a certain lifestyle, being able to retire early, or maybe even a perfect blueprint of how to have passive income. Here is the first driving question to me: What exactly are you looking for? Once you retire, or once you have X amount of income, then what do you want to have or what do you want to do?

For the sake of putting you into the right state of mind, let’s ponder this quote for a moment.

“The question you should be asking isn’t ‘What do I want?’ or ‘What are my goals?’ but ‘What would excite me?’”
—Timothy Ferriss, The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich

What are you excited about? To me, it is about what I want to do—play with my kids, get back into classical piano, learn to fly, do more interesting and cool real estate deals, grow our turnkey business. Whatever it is, define it.

Retirement Income Is About Lifestyle Choice

From zero to covering your lifestyle with retirement income means nothing without knowing what you are actually fired up about doing. Once you’ve defined what you want to do, these specific things lay the groundwork for your plan.

If you are excited to travel, then where do you want to go? And how often? If you are excited to read books and find every cool coffee shop within 100 miles of your house, what does it take to do that? You’ve dreamt about being a pilot your entire life, so now that you have the time to do it, what’s next?

“People don’t want to be millionaires— they want to experience what they believe only millions can buy.”
—Timothy Ferriss

People don’t want to be millionaires; they want to experience what they think it is to be one. Now, I do believe that most of us, me included, do in fact want to be a millionaire, because it affords us the opportunity to experience the things in life we want. But it is NOT about the money. It’s about what we can do—the opportunity, the experience, the time with family and friends.

What Is the Makeup of Your Budget?

What does it cost you today to run your household per month? Is it $5K, or $8K, or $10K-plus? What are you actually paying for, and are they fixed expenses or random costs? What kind of choices have you decided to spend those dollars on? Is it a car payment, a house payment, school debt, or your kids’ sports and activities? Or that pesky credit card you keep having to pay off but aren’t so sure what you really are paying for? What other items are you paying for that you shouldn’t be? Over the course of a few years, what can you pay off?

Save More Now

Right now, it costs you $6K a month to run your household, and you are trying to replace that income with passive income. What if you have $6K in monthly income in retirement, but you are able to make decisions to get your fixed expenses down to, say, $4K a month? For instance, you pay off your car, and your $400 car payment goes away. Your mortgage payment is $1,500, and if you have 10 or 15 years left on the mortgage, could you have your home paid off at retirement? Or if you just bought your house, could you do a 15-year note on it or pay down extra principal every month to pay it off faster?

In Tony Robbins’ book MONEY Master the Game: 7 Simple Steps to Financial Freedom, he talked about the “Money Power Principle 3.” Tony makes an example of a 30-year mortgage on a $270K house with 6 percent interest, equaling a monthly payment of $1,618. He says, “With this technique, you would also write a second check for an extra $270—next month’s principal balance—a very small number, relatively speaking. That second check of $270 is money you’ll never pay interest on.”

You literarily just cut the amount of money you would pay over the lifetime of the loan in HALF.

30 years of payments, 12 months X $1,618 = $582,480 (paid on schedule)

15 years of payments, 12 months X $1,618 + $270 = $339,840

You added $270 a month to your payment for 15 years and saved $242,640.

This is an incredible amount of money you now have the choice to pay to the bank with interest—or pay to yourself with interest. Apply the $242K and begin investing it in buy and hold properties for the next 15 years (with 20 percent down and leveraged with a mortgage). Let’s say you average 8 percent cash-on-cash return over those 15 years. You have now turned that $242K into $615K (and don’t forget all the wonderful tax advantages and someone else paying down the principal).

Stop Saying You Can’t

Taking action is key here. You can’t save money? Spend less. Make more. Get a second job. Don’t buy a new car—keep the one you have (and pay it off). Stop spending $200 a month at Starbucks. Whatever it is, stop it! Even if you are saving a few hundred dollars a month toward buying your first investment property, you are actively visualizing and seeing where your future is going. An average investment property here in the Midwest can be purchased for $80K to $120K. You will need roughly $16K to $24K to acquire this first property.

If you are just getting into the earning years, you might have a different approach than someone within a few years of retirement. If you are just getting started, you can buy your first home as a rental in a few years. Use the benefit of whatever financing and purchasing you can and live in it; maybe even do some work yourself. After two to three years, you can buy a second property and keep the first one as a rental. Do this again in two to three years.

If you bought your first house at age 25 and then bought a new house every three years using this idea (and you would need to work with your mortgage person to make sure you were following all the rules of that lender/mortgage), at age 49, you would be up to eight properties! If they were all on 30-year mortgages, the eighth house would be paid off at age 79. But the first house you bought would have been paid off at age 55! If they were on 15-year mortgages, they would be paid off at age 64.

Let’s say at age 65 you retire and review where your real estate investments are. For the sake of the example, you decided to run 15-year mortgages to have them all paid off at that point.

Starting at Age 25 With the 8-Property Plan

Year 1 @ Age 25 — House 1: $100K/20% down/15 yr AM

Need $20K down (save over 3 years, $555 monthly savings goal)
Any extra cash flow after expenses/reserves goes to buying next property ($1K a year towards next property)
At age 40, house 1 is paid off

Year 4 @ Age 29 — House 2:$100k/20% down/15 yr AM

Need $20K down (save over 3 years, use $3K from house 1 yearly income after expenses, and the 3-year savings goal is now $17K over 3 years, or $472 monthly)
House 2 is paid off at age 44
Any extra cash flow after expenses/reserves goes to buying next property ($1K a year towards next property)
At age 44, two houses paid off, and $2K monthly in passive income (minus expenses)

Year 7 @ Age 32 — House 3: $120K/20% down/15 yr AM

Need $24K down (save over 3 years, use $6K from house 1/house 2 yearly income after expenses, and the 3-year savings goal is now $18K over 3 years, or $500 monthly)
House 3 is paid off at age 47
Any extra cash flow after expenses/reserves goes to buying next property ($1K a year towards next property)
At age 47, $3K monthly in passive income (minus expenses); 3 houses are now totally debt-free

Year 10 @ Age 35 — House 4: $120K/20% down/15 yr AM

Need $24K down (save over 3 years, use $9K from house 1/house 2/house 3 yearly income after expenses, and the 3-year savings goal is now $15K over 3 years, or $416 monthly)
House 4 is paid off at age 50
Any extra cash flow after expenses/reserves goes to buying next property ($1K a year towards next property)
At age 50, $4K monthly in passive income (minus expenses); 4 houses are now totally debt-free

Year 13 @ Age 38 — House 5: $135K/25% down/15 yr AM

Need $34K down (save over 3 years, use $12K from house 1/house 2/house 3/house 4 yearly income after expenses, and the 3-year savings goal is now $24K over 3 years, or $611 monthly)
House 5 is paid off at age 53
Any extra cash flow after expenses/reserves goes to buying next property ($1K a year towards next property)
At age 53, $5K monthly in passive income (minus expenses); 5 houses are now totally debt-free

Year 16 @ Age 41 — House 6: $135K/25% down/15 yr AM

Need $34K down (save over 3 years, use $15K from house 1/house 2/house 3/house 4/house 5 yearly income after expenses, and the 3-year savings goal is now $24K over 3 years, or $527 monthly)
House 6 is paid off at age 56
Any extra cash flow after expenses/reserves goes to buying next property ($1K a year towards next property)
At age 56, $6K monthly in passive income (minus expenses); 6 houses are now totally debt-free

Year 19 @ Age 44 — House 7: $150K/25% down/15 yr AM

Need $38K down (save over 3 years, use $18K from house 1/house 2/house 3/house 4/house 5/house 6 yearly income after expenses, and the 3-year savings goal is now $20K over 3 years, or $555 monthly)
House 7 is paid off at age 59
Any extra cash flow after expenses/reserves goes to buying next property ($1K a year towards next property)
At age 59, $7K monthly in passive income (minus expenses); 7 houses are now totally debt-free

Year 22 @ Age 47 — House 8: $150K/25% down/15 yr AM

Need $38K down (save over 3 years, use $21K from house 1/house 2/house 3/house 4/house 5/house 6/house 7 yearly income after expenses, and the 3-year savings goal is now $20K over 3 years, or $555 monthly)
House 8 is paid off at age 62
Any extra cash flow after expenses/reserves goes to buying next property ($1K a year towards next property)
At age 62, $8K monthly in passive income (minus expenses); 8 houses are now totally debt-free

Equity, Appreciation, and Cash Flow

Not assuming any real estate appreciation:

Your real estate portfolio is now worth $1,200,000.

If you had a modest growth in the value over the holding and building period, a few years later as they are all paid for and with a 3 percent growth rate of appreciation, the properties have nearly doubled in their value. At that number:

Your real estate portfolio is now worth more than $2,000,000!

Cash flow: The rents went up by roughly 3 percent, and you are now at a modest $2K monthly per property, grossing $16K monthly cash flow.

Let’s assume you are running at roughly 50 percent of your expenses with maintenance, vacancy, taxes, etc.—and you are now cash flowing AFTER EXPENSES roughly $8K a month.

Many Ways to Move

You have $8K in monthly income after expenses. You have $2MM-plus in your real estate portfolio, plus whatever you had saved or had in your other investments. And now, you could divest part, 1031 exchange to larger multifamily properties, or simply let it ride and collect your check.

The opportunity to live with what you want in retirement IS possible, you just have to determine what you want to do or experience, how much will it cost you, and begin your savings and investment plan NOW.

How are you using real estate as your lifestyle and retirement vehicle? Any questions about the above case study?

Let me know your thoughts with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.