Is this long-term strategy good?

Question

Hello All,Goal: to provide a fatFIRE lifestyle at a typical retirement age.  Currently, I'm 43 and my retirement age would be 68.  My wife and I own 2 duplexes and 9 SFM for 13 units, we cash flow about $5,500 a month free and clear after mortgages are paid, etc...

Stategy: by age 68 would be to own 20 SFH that each cash flow $2,000 a month completely paid off.   In my area, this will ultimately require about $4M - $5M in equity.

Rationale:

* Ultimaely no leverage, less risk, I sleep better at night.

* 20 x $2,000 is 40K after tax, insurance, and expenses more like $25K a month.

* My wife and I self-manage and we can manage about 20 SFH with the help of handymen and service companies.  This is our limit for what would allow us to live our lives with some work here and there.

* SFHs are easier to acquire 1 at a time over time.

* Newer B-class properties and tenants are easier to manage and less hassle.

* SFH tenants stay longer.  Turnover is our biggest time and money cost.

* Our children can inherit the houses and most likely have an easier time selling them.

My questions are:

* This strategy seems realistic, especially since we already have 13 under our belt, is this strategy realistic?

* Am I making the most of my capital considering time/effort tradeoffs?  I realize one can grow forever using leverage but that increases time, effort, and risk as well.

* Your thoughts or recommendations?

Thanks for any insight,  I really enjoy hearing from experienced investors that have been in real estate for decades.

Regards,

Dan

David Ramirez · Answer

Hey @Dan Williams,

Your plan is super realistic considering the time frame that you are striking for. It makes sense to have them free and clear by when you retire that way you get the desired peace of mind. I would recommend making extra payments to your properties with the cash flow coming in to facilitate the pay off.

Joe Villeneuve · Answer

You didn't do all the math did you?

Math:

1 - $4-5M in equity, if that equity is based on paying off the properties with cash, is another way of saying your cost will be $4-5M.  That's your cost. to you,...as in cash out of your pocket.

2 - $2k/month CF per unit * 20 units will equal $40k in CF/month, or $480k/year.

3 - If you do this adding on an average of 2 units/year, your average CF/year over the next 10 years will be around $265/year.

4 - Now, let's put this all together.  If you project this out it will take you about 20 years or more (if all goes perfect during those 20 years) to recover your cost.  Let's see now, what can happen during those 20 years that will delay this?  A lot of things can happen.

If you want to do this efficiently, and safely with "your" money, and cost you far less, let the tenants pay off the property, and use your money as down payments.

Dan H. · Answer

I agree with @Joe Villeneuve that the easiest way to get to your goal is to better use leverage.  I am not advocating being over leveraged which can be risky.  I am advocating for a max level of leverage that would not cause you any angst. For each person this is different and it also depends on what other resources you have.  If I could keep my RE at 90% leverage I would not have any angst because of my other resources.  However, if I only had RE as my only resource, I think 80% leverage would be the most I would feel comfortable with.

Here is another thing to consider on this recommended leverage.  While you work a W2 job you can obtain the best loan terms.  After you "retire" (managing 20 properties does not seem retired to me), you cannot obtain loans with as generous terms.  Now is the time to create the leverage even though rates are over double what they were a year ago).

Good luck

Steve Vaughan · Answer

@Dan Williams

I had 35 rentals and can tell you there's no such thing as passive retirement with rentals.

You're plan is realistic other than thinking it will be easy to keep up with so many homes.

Over a few years I consolidated my shotgun portfolio of smalls into a few larger multis, then sold them on IO contracts to syndications at ridiculously low caps last year.  Even with a PM I was still too needed.

Steve Vaughan · Answer

I get it and find myself mildly bored sometimes.Sounds like you're expectations are spot on, so go for it!

Dan Williams · Answer

I don't know if I think it will be easy, but something to keep me active/engaged after retirement where I have freedom and some activities to do that I like.  I'd rather take care of houses than golf :O

Chris Davidson · Answer

@Dan Williams I think this is practical and possible. However if you are currently getting 2k/ month in rent you likely will not need 20 of the same units in 20 years unless your market has no rent appreciation. Also your Equity in 20 years will likely be much higher than now if houses are in the 200-250k range now.

Do you want to work until 68 because if you keep this up you should be able to stop much sooner if you wanted. Finally unless you like the PM side I would look at turning it over to a PM at some point so you can spend more time with your kids before passing on the properties.

Cheers and keep up the good work!

Jon Puente · Answer

Hey Dan,

You have 25 years to achieve this and I like the idea of leaving a legacy to your children in the form of real estate. Your strategy could easily be reached, assuming you are able to pay off the mortgages and NOT do what most people do which is "cash out refinances or tapping into equity when rates get good."  It's easy to talk about it, but it's hard to stay disciplined.

My only alternative thought is that I doubt your plan goes exactly like you are outlining.  A big thing I want you to think about is do you really want to be self-managing rental properties when you are 68??? Many folks who get older end up selling off a portion of their real estate and live life more freely.  You are only thinking with your head right now (which is fine), but when you are older, you will think more with your heart.

I bet you end up exceeding your goal to 20-30 houses, but then selling a portion of those and taking your money to enjoy life.  Or you hire a full-time PM to handle all of the day to day tasks, and take less cashflow as a result, but you enjoy life at retirement!

Great thought process, and either way you will win.

Dan Williams · Answer

The rents can make $2k now, but taxes and insurance are included in my calculation in this bullet point.  $40K is the gross.

* 20 x $2,000 is 40K after tax, insurance, and expenses more like $25K a month.

Randy Rodenhouse · Answer

I like that you put a lot of thought into your future and are making a plan and work b the plan.  That being said right now it looks like you’re making just over a little over $400 per unit. Now over time the houses will pay down and the cash flow will go up but remember you always have to pay taxes and insurance.  So to make $2000 clear after TI you would have to have houses that rent for around $2500/month roughly.  What house price would get you such a rental rate in your area?

Is this long-term strategy good?

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