with interest rates as low as they are, it appears that currently you could “almost” retire in 6 years.
Buy a 4-plex for 315K, FHA (I just did). Principal remaining on mortgage: 306K. current income when fully rented: $2400/month. mortgage: $1950/month.
Assuming you can put 12K/year extra payments into the principal (from your daytime job–possible currently for me, at least theoretically), with appreciation of 5% on rental rates (and 5% increase in your 12K/year dumping into it, from raises), in 6 years, you’ll have paid off 81K of it, so after 6 years:
principal remaining: 224K
rental income: $3200/month
so if you refi’ed at 4.5% at that point, that’s a new payment of ~$1200
So you would then be netting 2K/month. If you got a mortgage today at $1000/month (zillow says that’s a home of up to $250K) then you would be really net’ing $1000/month after real estate investments.
Enough to retire on? perhaps. Or maybe switch jobs on.
Also even without refi’ing and *without paying it down a dime toward principal* you’re already making $1300/month cash flow from the 4-plex (less repair expenses, of course…)
Caveats: doesn’t include tithing, assumes that you can get a 4.5% refi in 6 years, which is unlikely. But still, and it shows the possible wisdom in investing on things today, so that they can appreciate for you. Also in terms of retiring early, this much might not be enough because it would have to pay for health insurance, so that might keep you working for awhile (at least until you can afford to pay for your own, private health insurance for the family). Also your needs will increase over time as your family grows and your lifestyle might get more lavish as the rental incomes come in and you want to spend that money instead of save it. Also the standard recommendation for retirement is 70% income, which would be $3000-ish for me, so netting $1000 might not quite cut it). Also it doesn’t include other expenses from the 4-plex, like having to pay monthly for the water, and any repairs (minor or major).
Also this prediction didn’t include you dumping any extra cash from the rents back into the principal, which would equal another 55K against the mortgage. Also didn’t include the fact that your traditional mortgage will pay off a bit during that time, another 25K-ish.
So principal remaining could be as low as $144K after 6 years.
This would equal a new mortgage with payments of $800, and gross income of $3200 (so if your mortgage on your other house were $800/month, that’s $1600/month net cash flow–which might be enough to retire on).
original (related) post was here:
http://betterlogic.com/roger/2009/09/how-to-retire-in-5-5-years/
Note that I don’t actually recommend anyone actually doing this. It’s just food for thought of “one option”
See what I really recommend here:
http://betterlogic.com/roger/2010/10/how-to-retire-in-6-years-as-a-newlywed/
[...] http://betterlogic.com/roger/2010/10/how-to-retire-in-6-years-part-2/ Comments [...]
Pingback by *do not* save to retire « Roger's woze — October 15, 2010 @ 10:22 am
Basically you’re are contracting with the bank to buy a good business.
You say to the bank “I bet this business can pay you $500,000 over the next 30 years. But it will only cost you $300,000. I’ll pay 5% then it will pay you off over time. Interested?”. A good bet for them, because currently it nets $2,000 a month or so–just enough to pay them off. So you covenant to pay the bank $2000 a month for 30 years.
What you also say to the bank is “any income above $2,000 a month (the $500,000 total) that it profits I get to keep”
now if the business didn’t grow any during that time, that wouldn’t be much. When it starts off you are getting 1/10th what the bank is getting. So the bank thinks they are really getting it good.
However, over time the business does grow. Since you, the investor, were shrewd and saw that it would grow, it does. With time, each year it has a small (exponential) growth. You get to keep all of that growth income, or do with it as you please. Since the growth is exponential, this means that after 15 years, the bank is now getting $2000 a month and you are also getting $2000 a month. 15 years after that, the bank is getting $2000 a month and you are getting $6000 a month.
You also say to the bank “since you got your $300,000 paid back to you plus some ($500,000 total) and got the money at the beginning, I get the business after you’re paid off, even if it’s much larger” — it’s an unfair partnership, really, except the bank did make some money, so they don’t feel bad about it.
So when you get the business, at that point you are making say $7000 a month, and the bank now 0. So you can keep the business getting that reasonable sum monthly, or resell it for probably around $500,000 (which is how much we paid the bank, so basically the place paid for itself, plus any net growth went into our pocket during that time).
So the question is what did you put in and get back from this?
You paid 5% down (15K down). And you had to manage it for 30 years. What do you get back? All net growth (which is pretty substantial by the end) goes straight to your pocket. The business is yours after the bank is paid off, plus it’s worth a bit more now since it has appreciated over time. So it’s like you’ve gained 3-fold. And had to deal with annoying tenants and not much return for several years, then the natural growth kicks in–straight to your pockets.
So anyway this goes to show you that while you are still paying off a rental property, you can be making money on it along the way. And why that actually makes sense to the bank. It’s your shrewd “leverage” of the appreciation in the property that you get to benefit from twice–once while paying it off, and then again after it’s yours.
The bank filled its pockets, too, and got the lion’s share at the beginning. But remember that the bank was paid off all from the business earnings, and the business started net’ing far more after awhile than its original value, so by the end, the bank wasn’t getting a very high percentage, but they got their money back, by gum, with interest.
Also note that the business grows exponentially–now that’s exponentially on the entire (300K) original value, so the bigger it is, the more potential for you to earn money as it appreciates. Also note that it’s on the original value, so it’s almost like you’re making money on “the money owed to the bank,” on the sly.
A few notes:
note that over time, as rents increase, you could put that money back into principal if so desired. Better of course would be to save them and invest in more real estate (you can own up to 4 edifices).
The bank only makes money on the original + interest (paid off over time). You make money on the increase of the original, as well as getting the original + interest in value (of course, because of inflation, it’s not as valuable to you then).
Note that, the larger it is, the larger your growth from appreciation will be, and also the larger your end “ability to sell it for” (== rental income from it) will be. Also note that this is *exponential* growth, so really, slightly larger means “grows faster to higher numbers” too
Comment by rogerdpack — October 15, 2010 @ 2:04 pm
also have interactive website for it.
Comment by rogerdpack — October 17, 2010 @ 11:29 pm
[...] Until then. Here’s http://betterlogic.com/roger/2010/10/how-to-retire-in-6-years-part-2/ [...]
Pingback by how to retire in 6 years as a newlywed « Roger's woze — October 18, 2010 @ 7:03 pm
another option would be to dump money into lucrative *other* rental investments, like 20% down into investments that pay $400/month or so. You wouldn’t need too many of those…
or owner occupy them, for less money down required, and better interest rates (see http://betterlogic.com/roger/2010/10/how-to-retire-in-6-years-as-a-newlywed/)
Comment by rogerdpack — November 3, 2010 @ 8:20 am