Retiring on equity vs cash flow

[Schadrac Mertis]

We live in Austin, tx area where cash flow is hard to find however buy and hold appreciation is promising. We've decided as a family to just move into sfh every 2 to 3 years. Looking forward in the future I would assume that I will be equity rich however cash flow poor. How do you retire on equity? For those who are in the appreciation camp what's your plan when on paper your a equity millionaire but can't live off the cash flow?

[Randall Alan]

@Schadrac Mertis
So we found that lower class rentals … like C class… gave us better cash flow, but also comparable appreciation in line with their lower price point.  It is also way easier to buy them because they cost less.  We didn’t know about the comparable appreciation at the time we were buying them, but having held them for  5-6 years I can tell you that they doubled and tripled what we paid for them in that time, so it is comparable to nicer rentals… but again, scaled for their lower price point.  While C class is not as enjoyable to own (lower class clientele), they haven’t been hard to deal with and the tenants are respectful, and not scary for us.  

I would encourage you to try and buy properties in just one of your names if possible, because you are limited on how many loans you can have at once (10 per person), and there are increasing reserve requirements as you have more loans… like they will want you to have 6 months worth of cash reserves across all your loans as you push towards 7 or so loans as I recall.  So if you put them in just one name, it lets you theoretically have up to 20 loans… but then you would each have to qualify individually as well for each of those if doing it that way. 

Your challenge will likely be debt to income ratio at some point.  It’s a balancing act…My wife and I have had to deed properties back and forth at times to meet the lender’s metric requirements when we needed more income. 

For your 2nd home… since you will not have rental income on your first yet, it is likely they will want to see your ability to afford both loans at the same time… after a year or so of renting your property they will count the rental income into your income figures which helps offset the increased debt.  I’m by no means any sort of specialist on all of this, but any mortgage broker will be able to give you the specifics. You can also google the Fannie Mae lending requirements online and look them up yourself. 

In 5 years we acquired 37 doors across 25 properties using funds we had set aside for retirement to purchase. All but 3 of those properties were financed. Along the way we sold a few we didn't like managing, taking the profits and paying off other loans. We also did a commercial loan to consolidate 5 loans into one DSCR loan to lower our interest rates on the other 59, which doesn't count toward the Fannie Mae limit. We bought most before the values started to really jump with Covid, so have pretty good cash flow… enough to replace 2 - 6 figure corporate jobs. We now manage our rentals full time. I'm a big believer that your units need to earn income to cover themselves and maintenance costs. You only get appreciation once or twice (when you sell or refi)…. But income you get every month. Our properties are like a giant ATM machine… every 30 days they get refilled with cash! Loving life at 54 years old!

All the best!

Randy