My 10 year retirement plan
If you have been following my blog you know I am a huge fan of real estate as a wealth-building tool and passive income generator. If you haven’t been following me, welcome and I hope you continue and enjoy this post about my 10 year retirement plan.
I got interested in real estate at a very early age, working as an intern for the phone company right out of electrical school and was fortunate enough to get partnered up with a guy who was passively investing in real estate on the side, including living in a duplex to offset his mortgage costs with the other unit’s rental income. It didn’t take long for him to explain the process to me before the light bulb went off.
I started studying the real estate listings on my down time and found a terrific 5 unit mixed used property, I went to my credit union to apply for a loan and quickly found out I was a little out of my league at that time. Fortunately, the loan officer at the credit union was nice enough to coach me on how to prepare myself for the financing process and what to look for. First off I learned that anything over 4 units was considered a commercial property and required a different type of loan. Also, she informed me I needed to build up my credit and establish trade lines plus a 2-year work history was required. With my marching orders, I set out on my new adventure.
First step was to build up my credit, I opened a small credit card which I cautiously used to make small purchases and pay them off quickly, I also got a small auto loan and quickly paid it off which I later found did not help me since it is required to pay on a loan for more than a year to establish a trade line. Since I didn’t have bad credit to start out just no credit it was fairly easy to build up a good score with some basic common sense practices of not over extending myself and paying things on time.
As for the down payment; I started saving like a crazy person which is pretty hard to do as an 18-20 year old kid. I moved a roommate into my apartment and little did he know he was paying a bulk of the rent since I had gotten a pretty good deal on a low-end apartment. I didn’t buy any fancy new cars and fortunately, technology wasn’t a big deal at the time so I didn’t need the latest and greatest gadgets.
I made decent money at my job and since it was union the overtime paid really well so I worked every hour I could get. On my free time, I searched for ways to make extra side money, mainly in “brokering” deals in used goods. If I knew someone was selling an item that someone else needed I would play middle man and make a little extra or fix up cars and resell them for a profit, with my low-cost of living and all this income I was able to save up $20k in 2 years!
Then the time came to try again, I was 20 years old, my credit was decent and I saved $20k for the down payment and closing costs. I got pre-approved!
I found and closed on my first 2 family home a month before my 21st birthday. No co- signer, no borrowed down payment money just me, myself, and I were a homeowner. This was a great feeling and sense of accomplishment. The best part was my entire mortgage, taxes and insurance included totaled $505 a month, my tenant was paying $550. Yes, I was living for free and cash flowing $45/ month!
From there I figured out how it was possible to retire in about 10 years.
This property had I not lived there would cash flow about $600 a month if the other unit was also rented. So my goal was to buy one a year for the next 10 years. Here’s how it would break down.
Now that I was living for free I could take my annual housing expense ($600/month x12=$7200) and the money I was setting aside before for the first down payment and save it toward my next purchase. The following year repeat the process of purchasing another rental unit which cash flows a minimum of $500 a month after all expenses and reserves. Now you can stop saving your personal funds and use your normal housing payment ($600), and the $500 a month from the new property and save for the third property in year 3.
Repeat this process for 10 years, after the first couple of years the units will start to fund themselves and the down payment for the next property. Be sure to have good self-discipline and not take any of the proceeds and spend them on personal purchases, it can get tempting to treat yourself with all this cash in your account but hold off it will all be worth it.
The goal is after 10 years you should own at least 10 properties, the first few will have some nice equity due to appreciation and loan buy-down which was all courtesy of your tenants plus the rents should have increased faster than expenses such as taxes and insurance. But let’s assume any extra increases are being reinvested into maintenance and repairs. Which leaves us with 10 properties cash flowing $500= $5000 a month or $60,000 a year. From here you can decide what to do, continue buying more properties to increase your cash flow or continue to maintain the units with $60k annual salary freeing you up to do what you wish with your time.
It is an attractive idea to start adding more paying more toward the principal to the loan balance to pay them off sooner, but after a lot of personal debate I can to the conclusion that allowing the tenants to continue making the mortgages for the life of the loan and taking the cash flow to reinvest in other retirement based investments such as peer lending platforms or high dividend stocks will increase your overall income streams. You may even want to invest in a business venture you have always been interested in, remember the pressure if off since you are making a nice living from your rentals to cover your expenses.
In closing whatever you decide to do, I wanted to share a very plausible plan to retire early or set yourself up for long-term comfort. However you decide to invest in your future the main goal is that you are investing and spending your money wisely.
Good luck my friends and stay tuned for future investment ideas!