Potential investor, has $ and outside income, need advice

Any advice greatly appreciated.

My situation:

mid 50s, wife late 40s, 2 yr. old daughter. Wife finishing medical residency next Oct. Probably begin PT practice 1st qtr. 2017 so she can spend time with daughter. Expect combined income at that point to be $140 - $170K. Not sure she’ll ever go into FT practice.

Would like to invest in SFH rentals to help finance retirement.

I’m cash poor because all $ is paying live-in nanny for daughter plus fully funding 401ks to reduce tax bite.

My assets are ~ $450K in primary home and condo where wife lives. No mortgage on either. Have ~$500K in retirement accounts. NOT willing to use retirement $ for rental DPs. Only debt is HELOC used to pay nanny and car payment which is paid off in 3 months. HELOC balance will be same as sales price of condo when I sell it next fall so no $ in my pocket at time of sale.

Probably buying new home next fall so sister can move in with us (in-law apt.) and intend to use $100K from sale of current home for DP. Would use the remaining $250K to fund rental DPs. I think this would be enough to fund 4 - 5 rental DPs for rentals in the $175K - $200K price range.

Under this scenario, I est. mortgage of $300 - $400K on primary and additional mortgages on rentals of ~ $600K. My plan was to greatly reduce 401K contribution and use monthly rental positive income to prepay rental mortgages. I think I’ll only be able to pay off 2 mortgages by the time I’d like to retire leaving me with substantial mortgage debt in retirement.

How concerned should I be with this debt level with only 10 -12 yrs. until retirement. Should I reduce target # of rentals from (4 or 5) to (2) ? I recognize that in the long term rentals can greatly increase net worth but is it too late in the game for me to make rentals a large part of my retirement plan (4 - 8 SFH rentals)?

I should clarify from original post that my plan was to reduce 401k contributions and use added take home pay plus the income from the rental properties to prepay the mortgages on the rentals one at a time. Once I paid those off, I’d use rental income to prepay mortgage on primary residence.

You’re not gonna like my advice, but you asked…

Emptying out the equity in real estate to pay for a car and a nanny, and then dumping the asset, is frankly the stupidest thing I’ve heard in a while.

How many years did it take you to get free and clear on that condo? How many months will it take you to unwind all that on automobiles and “nanny” payments?

Drive the Pinto, and have mommy stay home. Have her sacrifice the job deal, rather than make your baby sacrifice its emotional and psychological development.

Otherwise, there’s a reason rich kids kill their parents in their old age, and abandon them when they’re most wanted and needed.

You know, here’s a way to get rid of that inconvenience ahead of time, without milking and dumping the condo; just shoot the baby. You know, protect yourself from it in advance?

Meantime, if you can’t afford the car, or the nanny, it’s certainly not worth it for your baby, and yet you’re liquidating assets to do just that?

Be that as it may, you’re not gonna be realizing any critical mass of cash flow from single family investments, until your future rents equal 2% of today’s purchase price, with no additional debt. At that point, you’ll have a ton of dead equity that will need to be reinvested for management-free cash flow.

This is not likely to happen anytime before you’re 70 years of age.

But for giggles, let’s say your future rents begin to reach and surpass 2% of the price in ten years compared to what you paid today, and you begin realizing more and more cash flow.

How long that actually takes depends on your market, how you manage property, and/or how you manage your managers.

The simplest and surest way to “guarantee” a good result, is to buy right at the beginning. What kinds of deals can you steal?

Let’s say you need $1M for retirement, and/or $144k in pre-tax retirement income in ten years.

We work backwards.

Assuming each rental house doubles in value every ten years (or plug in what you think will happen).

That is, a $100,000 house with no equity today, will be worth $200,000, and contain $100,000 in equity by 2026.

So, of course, that means you need to control 10 houses beginning today, in order to be worth at least $1M in ten years.

But what about the income?

Assumptions:
50% of your market rent will go to overhead, including maintenance, management, reserves, replacements, and hiccups. Plan on it.

This percentage is one reason why you’re not likely going to experience actual cash flow for several years, because it takes a while for the rent/price ratio to reach 2%, or more.

Assuming the rents started at $1K/mo on each $100k house (or a 1% rent/price ratio), in ten years, you can expect the rents to be $2k/mo each house, achieving a 2% rent/price ratio (based on the original purchase price).

This, on houses that are now worth $200k each, and pushing off a gross, scheduled, monthly, pre-tax cash-flow of at least $12k/mo, or $144k annually.


To illustrate an example of a 1% rent/price ratio:

$100,000 Price Paid (Today)
<$ 20,000> Down Payment (Today)
$ 80,000 Balance financed (30yr/5%) (Today)

$ 1,000 Current Monthly Rent (Rent/Price Ratio 1%) (Today)
<$ 500> All Expenses (50% of rent, and always equals 50% of the rent)
$ 500 Cash Flow Before Debt Service (Increases every year)
<$ 429> Monthly Debt Service (Same every month)
$ 71 Pre-tax Cash Flow (Increases every year)
4.2% Pre-tax Cash-On-Cash Return (Increases every year)


To illustrate an example of a 2% rent/price ratio (achieved after ten years):

$100,000 Price Paid (Ten Years Ago)
<$ 20,000> Down Payment (Ten Years Ago)
$ 80,000 Balance financed (30yr/5%) (Today)

$ 2,000 Current Monthly Rent (Rent/Price Ratio 2%) (Today)
<$ 1,000> All Expenses (50% of rent, and always equals 50% of the rent)
$ 1,000 Cash Flow Before Debt Service (Increases every year)
<$ 429> Monthly Debt Service (Same every month)
$ 571 Pre-tax Cash Flow (Increases every year)
34.26% Pre-tax Cash-On-Cash Return (Increases every year)

I hope that helps you visualize what you can expect. And yes, I’m a meddler.