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40 Year Real Estate Retirement Plan

by Andrew C. MacDonald on December 29, 2010

Passing GoThis is no get rich quick plan, but it’ll certainly work. Since this is meant to be more of an example of the power of real estate than an actual retirement plan, I’ll keep things simple. Assuming you have $0 right now, this plan can still work for you. The idea behind this plan is to buy 3 income properties over your lifetime which will be paid-in-full by Year 40.  If this plan doesn’t offer enough for you or is too slow, you can adjust the pace.

Step 1 – Start Saving

Start saving just $10,000 per year for 5 years and you’ll have enough to purchase your first property in Year 5 for a total of $50,000 invested. For a total investment of $50,000 at 20% down, you should be able to fetch a rental income of $1,250 or higher. To be conservative let’s assume we only get $1,250 in rent and that these properties only break even while we pay down the mortgages.

Step 2 – Buy Real Estate

To carry out our simple plan we keep saving $10,000 per year and make the following purchases:

  1. Year 5 – 1st property with 35 year amortization
  2. Year 10 – 2nd property with 30 year amortization
  3. Year 15 – 3rd property with 25 year amortization

By adjusting the amortization period as we go along, all 3 properties will be paid off by Year 40.

Step 3 – Wait

By Year 40 all of our properties will be free-and-clear, meaning there are no more mortgage payments which increases our cash flow dramatically. With 3 properties, our monthly rental income would be at least $3,750 (ignoring rental increases). Taking 20% off of our income to cover taxes, repairs and maintenance, insurance and vacancy we’re left with a positive cash flow of $3,000 per month.

This over simplified example shows how you can easily build a steam of relatively passive income to enjoy during your retirement.  To make things even better, you can hire a property manager to take care of the day-to-day management of your properties while you spend your time doing the things you love.

Would $3,000 per month of passive income have a significant impact on your retirement plan? Adding back the appreciation, excess monthly cash flow and the annual increases in income and expenses that we ignored for this simple example and this plan becomes even more appealing. An extra $3,000 per month may or may not be enough for you to retire on, but you can speed things up by buying more property along the way. To up your pace, you can take advantage of capital appreciation and refinance your properties as your equity builds to purchase more, or work with joint venture partners who’d like to earn great returns on their money.

This “40 Year Retirement Plan” may not sound very exciting next to catchy titles like the “4 Hour Work Week”, but it’s a great plan which will work for just about anyone. The key with this plan is to start early and stick to it.

Thanks for reading, and Happy New Years!

Creative Commons License photo credit: MattHurst

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