How to set myself up for retirement from my day job in 5 years at 65?

Question

I am seeking suggestions on how to prepare for retirement effectively. My aim is to maximize my monthly income to supplement my retirement fund (CalSTRS) after 25 years in education, within the next five years. Additionally, I aspire to continue investing in properties post-retirement, as I find great enjoyment in this endeavor.

In 2009 and 2011, I acquired four properties in Southern California. Presently, I reside in one (built in 2003) and rent out the other three (two built in 2006 and one in 2003). The combined value of the three rentals is $1,500,000, with remaining mortgages totaling $290,000 (with 12 years left), leaving me with $1,210,000 in equity. These properties have the potential to generate a total rental income of $8,700 monthly. Currently, the principal, interest, taxes, and insurance (PITI) amount to $3,329 monthly. Other costs include $1,100 for taxes and insurance, $580 in HOA fees, and $200 for lawn care, totaling $1,880 per month.

These rental properties are situated in desirable locations, and I have enjoyed consistent long-term tenancy with minimal turnover. Upon retirement, I have the option to allocate a significant portion of my income to pay off all four properties.

My inquiry arises from an opportunity that recently presented itself: the chance to invest in new duplexes in Indiana. Upon analyzing the figures, with the prospect of a 1031 exchange involving the three California rentals to acquire five duplexes, along with additional cash investment, I could potentially generate $13,000 in monthly cash flow within five years (factoring in paying off the mortgages on the five duplexes). Conversely, if I choose to retain the three California rentals and pay off their mortgages, my estimated cash flow would be approximately $6,800 per month, albeit with properties that are 20-25 years old. This realization has prompted me to actively explore my options rather than procrastinate.

I eagerly anticipate your insights and suggestions on how best to proceed. Thank you.

Rick Pozos · Answer

You are doing fine with what you have. The properties are almost paid off!! That will increase your cash flow even more. You know YOUR area, you dont know Indiana.

Get involved locally and see what others are doing in your area. Go to some meetings. See about finding another rental or two before you retire. Add to the cashflow that way instead of going 1000+ miles away where you dont know anything except what some salesperson has told you.

Dave Foster · Answer

@Denise M. Tschida, using a 1031 exchange if you sell one of your rentals  - yes definitely.  The move from CA to IN is going to be very personal.  But The move from capital expense risk to lower risk with new construction does make things potentially smoother.  Oopsies in retirement are harder to recover from.

One other option (either with 1031 sales or not) would be to sell your primary and take that exclusion tax-free.  and convert one of your rentals (or a nice rental you buy with a 1031) into your new primary.  After owning it for 5 years and living in it for at least 2 years you can sell that and get a proration of the gain tax-free.  Then convert the next one.  And so on and so forth.   Particularly when you have a decent base of monthly to live on, a periodic large chunk of tax-free money is perfect to maintain and even continue to grow your wealth in retirement.

Bjorn Ahlblad · Answer

@Denise M. Tschida Congrats on your considerable achievements. Make sure you listen to your accountant on this next step; it can be a rewarding one. I sold my Ca properties and bought in Wa state-some were in a 1031x which continued.

If you live in Ca or own rental property in Ca you will have to pay some or all Ca state income tax. Indiana has state tax too, but far lower than Ca.

Since I no longer had a day job I became REI pro and cut my income tax to a fraction of what it was. My wife was not of retirement age but she quit her day job and became the PM. She had the know how from our Ca experience.

All the best and make sure you leverage this next step fully.

Glen Wiley · Answer

I would exit the California market due to the tenant favorable laws and regulations and the risk of long term population loss in the state.

Be careful about paying off mortgages to increase cash flow - it may make you more money to refinance and reinvest to increase the number of units. Model the portfolio over time with projections for appreciation, rent increases etc., don't assume that paying off mortgages is the best way to generate cash flow.

Josh St Laurent · Answer

Hello! As a Certified Financial Planner specializing in real estate investments, I'm excited to offer some insights into your retirement planning question. Congratulations on your successful journey in real estate investment so far! Your situation is unique and presents an exciting opportunity for your retirement planning.

Given your aim to maximize your monthly income to supplement your CalSTRS retirement fund, and your desire to continue investing in properties post-retirement, here are a few suggestions:

• Assess Your Risk Tolerance: Transitioning from California properties to Indiana duplexes involves a shift in market dynamics and possibly different risk profiles. Ensure that this aligns with your risk tolerance and long-term investment goals.
• 1031 Exchange Considerations: Utilizing a 1031 exchange to acquire the Indiana duplexes could be a smart move, as it allows you to defer capital gains taxes. However, ensure that you fully understand the rules and timelines associated with a 1031 exchange to make the most of this opportunity.
• Cash Flow Analysis: Your estimated cash flow of $13,000 per month with the Indiana duplexes is impressive. However, consider the expenses and potential vacancy rates in the new market. Also, compare this with the $6,800 per month cash flow from your California properties. Factor in the age and condition of the properties, as well as potential appreciation rates in both markets.
• Diversification: Investing in a new geographic area can provide diversification benefits. However, ensure you conduct thorough research on the Indiana market, including economic drivers, rental demand, and property management options.
• Consult with Professionals: Given the complexities of 1031 exchanges, out-of-state investing, and retirement planning, it might be beneficial to consult with a financial advisor, tax professional, and real estate expert who can provide personalized advice based on your specific situation.
• Retirement Income Planning: Consider how this investment aligns with your overall retirement income plan. Ensure that your cash flow needs are met, and you have a diversified income stream to support your retirement lifestyle.

In conclusion, your decision should be based on a comprehensive analysis of your financial goals, risk tolerance, and market research. Understanding your retirement income needs is crucial. Determine how much income you'll need to support your desired lifestyle and whether the additional income from the new properties is necessary. Reflect on what you envision for your retirement and assess whether you're prepared for the effort required to manage properties in a new market. Working with a financial advisor to create a comprehensive retirement plan can help you make an informed decision based on your overall financial picture.

Wishing you the best in your retirement planning journey!

Chris Seveney · Answer

@Denise M. Tschida

Some questions you should ask yourself are, do you really want to own property in Indiana at the age of 65?

What is your long-term goal, is it strictly just cash flow or to continue to build wealth?

For me, I still have about 15 years till I get to that point, but my portfolio will be more diversified across different classes .

I will still own real estate, but that will be long-term holds that will get passed down. For cash flow I will invest it in syndications, funds, private lending etc so i can enjoy retirement

Christie Gahan · Answer

While you are making these plans, read "Retire Secure" by James Lange.  You should be able to convert some of your retirement funds to "Roth" funds.

Sean O'Keefe · Answer

Following - I'm based in California

Jeff S. · Answer

Congratulations, @Denise M. Tschida, on your wealth creation.  When you run your numbers, you will likely find your return on equity is very low. That is, your money is not working as hard as it could be for you.    The good news is that there is an unusual split in the market now, which won’t last forever, of which you can take advantage.

Residential properties, at least in SoCal where you own, are still selling for relatively high prices.  Yet the commercial market has taken a hit.  In fact, 5-unit and up multi-families are off at least 20% locally and with a lot of distress.  Most of this is due to the current high-interest rate climate.

With the amount of equity you have, you could get a huge bang for your buck doing a 1031 exchange into a 5-unit or greater property -- perhaps substantially greater than 5 units.  If you can maintain around a 50% equity position, your payments will still be low and you will still have good positive cash flow.  This would improve even more when you refinance.  Alternatively, many owners are currently motivated and might offer competitive financing.

These would not be value add properties, which do not
want, but those in good maintainable shape.  Nor does this strategy make sense in a low appreciation state, as you’ve experienced.  Stick to what you know and do it locally.

Find a good broker who can run the numbers for you, but don’t wait too long since this split in the market is not going to last forever.

How to set myself up for retirement from my day job in 5 years at 65?

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