January 21, 2014

How Would My Projected Retirement Income Change If We Bought More Rentals?

I recently wrote the article Estimating My Future Retirement Income Based on Age of Retirement in which I figured a rough estimate of our future income at retirement for different ages from 51 to 70.   That estimate was based on the status quo situation for our finances.   However my wife and I do plan to buy more rentals in the future.   So, how would the future retirement income change if we had more rentals?



I figured the numbers for a basic rental in our area.   And then reran the calculation to refigure the retirement income estimates.  I then added more rentals to see how 1, 2, 3 or 4 additional rentals would add up.    [note : I am assuming that we finance the purchase of the rentals and then make mortgage payments while gradually building equity over time. Bear in mind these are very rough calculations with some assumptions and variables that can change over time.]



Here is how the income projection changes based on adding more rentals:



Pretty roughly speaking once I get to around age 55 I could possibly plan to retire 1 year earlier for each additional rental we buy.  

So for example, say I wanted a retirement income of $100,000.   With our current assets I am projecting that I might hit that amount around age 59.    If I add one more rental then I project I'd have $100k income at age 58.  Two more rentals would help me hit the goal at age 57.    Three more rentals and I'd hit it a few months after age 56 and finally with four more rentals I'd hit it at about age 55.5.


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5 comments:

  1. Where would the money for purchasing these rentals come from?

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  2. SteveD, Oh yeah good question. I guess I forgot to say... The rentals would be financed so we'd be borrowing the money to buy them. My calculation includes paying down a mortgage over time. In the first few years the investment would be a net loss due to transaction costs but gradually over time we'd build up equity. I'll edit the original article to add a comment about this.

    Jim

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  3. And what about a down payment? I have never purchased a rental so I don't know how much of a down payment is required to purchase a rental. I'm just wondering if you modeled that in there, and if so, if it had any other effects on your retirement income (plus or minus). Another for instance: [I assume] you can't just go out today and buy 1, 2, 3, or 4 rentals with zero down; rather, you'd have to come up with 1, 2, 3, or 4 down payments by selling or borrowing against other assets.

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  4. SteveD, You're right that you generally need a hefty downpayment with a rental and what I've seen they want 25% or more. 0% down deals are not available nowadays as far as I can see. To simplify my figuring I just assumed that we would borrow 100% of the cost by borrowing against other existing rental assets. We actually have enough equity in other existing rentals that I could pull equity out of another property and effectively finance a new property 100%. So I modeled it as if I had 100% financing. It was just easier that way. I could for example refinance an existing rental mortgage and then pull out cash and use that to pay the downpayment on a new property. The net change would be like adding a 100% loan. Its not perfect since I might be going from a 4% loan to a 5% loan in the process but this is a fairly rough estimate just to give me an idea how much new rentals might impact my retirement planning.


    Jim

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  5. That seems pretty reasonable. I was just curious how you had modeled it.

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