John,
Read what you are saying – “a rental”, “a resort property”, “capital gains”. One property won’t do it for most. A free and clear primary residence won’t put food on the table. You can’t eat equity. If you have other sources of retirement income that make you comfortable thinking in terms of only having one free and clear property – your primary residence – then we don’t even need further discussion.
If you don’t already have all the income you will need in retirement, then think bigger, outside your comfort zone, outside your own box. Think about owning several rental properties for risk mitigation. If you only have one property and it is vacant, your cash flow temporarily dries up. If you have ten properties and one is vacant, does your cash flow go away? Think cash flow. You don’t need free and clear property to generate a positive cash flow.
Ten free and clear properties or 25 leveraged properties can generate the same amount of cash flow. I personally prefer to let my tenants pay my mortgages, all my operating expenses, and some more giving me a positive cash flow on all my properties. Eventually, my properties will become free and clear without any supplemental contributions out of my own pocket. I got where you want to be with more properties and without enduring negative cash flows. Just trying to give you a different solution to consider.
There are many different ways to achieve your goal. Here’s a couple more.
Let’s say that your goal is to have your properties generate $25K per year, tax free, for the rest of your life starting eight years from now. You have not yet said what you will really need, so I am just pulling numbers out of the air to illustrate my examples.
Start by buying one rental property per year for each of the next seven years. Let’s say that you buy prudently in strong rental markets and only pay about $50K for each property. At today’s rate of appreciation, each property should double in value in nine or ten years. At the end of nine years, the property you purchased in year one will have (almost) doubled in value from $50K to $100K, and you have paid down your mortgage balance as well so your equity exceeds $50K.
At the beginning of year ten (your first retirement year), let’s do a cash out refinance on the property purchased in year one. Our cash out amount is $25K and should keep the LTV on the property at or below 75%. Hopefully during the nine years of rental use, your rents have gradually increased so that you will still have a positive cash flow after the cash out refinance.
In the 11th year, repeat this process with the property purchased in year two. And continue in succeeding years sequentially refinancing one property every year to take $25K per year out of your equity, tax free, and with no negative cash flows. 7/23 ARMs might be good financing vehicles to support this plan. I suggest ARMs with 30 year amortizations because the rate (and your loan payment) stays fixed for seven years, and the ARM rate is generally lower than the 30 year fixed rate. If the rate of appreciation increases during the first seven years, then you can sequentially refinance each property during the next seven years to maintain your tax free income stream, perhaps for the rest of your life.
If an extra $25K tax free cash each year is not enough to support your lifestyle (about $2K per month), then adapt the scenario to the income number you need to hit.
I am not saying that your original proposal is flawed, it is just short-sighted. I am only trying to point out that there are alternatives to reaching your goal that don’t require free and clear property.
Here is a second approach.
If you want to jump in with both feet, then sell your duplex and defer the capital gains with a 1031 exchange. Buy seven $50K properties to launch your plan using fixed rate mortgages and 80% financing. There is nothing prohibiting you from applying all your cash flow plus supplemental out-of-pocket contributions to one rental property mortgage so that you pay it off in about three years. With one mortgage paid off you have more cash flow to contribute so the next mortgage can be paid off in 2.5 years. With two free and clear properties contributing to your cash flow, you should be able to pay off the third mortgage in the next year, and then as each new property becomes free and clear, you can pay off one perhaps two properties per year until at the end of the 10th year, you make the last payment on your last property so they are all free and clear.
Now, when all seven of your properties are free and clear, you should have at least $30K clear annual cash flow if each property is rented at $750 per month. If you need more for your living expenses, implement the sequential refinancing plan to supplement your cash flow with an extra $25K tax free cash. If you have more cash flow than you need, sequentially refinance and put the money to work for you by purchasing another rental or pay off your primary residence if you just can’t sleep at night with a mortgage payment.
By the way, you never said whether you are buying the home you live in or whether you are renting. If you are buying, what is your plan for your house after you retire?