Most of us were taught that retirement is what comes at the end of working hard at a job for 30-40 years, accumulating a pile of cash, investing it into the stock market, crossing your fingers that there is not a market crash, then reducing your needs to only 4 percent of your portfolio balance…all the while hoping you don’t outlive your nest egg.
My friends, hope is not a strategy!
Thanks to the FIRE movement (financial independence retire early), we have a safer definition of retirement in which the income generated from your assets covers your expenses (and then some!).
Thinking of retirement in these new terms means that with the right cash flow from your real estate assets, capital preservation, and great tax benefits, we can create a level of certainty and control for ourselves in our later years (and possibly make work optional right now).
Yet when you Google “how to use real estate to retire,” you’ll find results like these:
- Own your own home
- Invest in real estate investment trusts (REITs)
- Buy, improve, and flip a property
- Purchase commercial property and rent it out
- Purchase commercial property and run your own business
- Buy a vacation home and rent it out part time
- Crowdfunding
Don’t get me wrong, all of the above are valid ways to enter the real estate game. But there are some flaws if these “assets” are going to support your retirement. Consider these four questions:
- Does the asset preserve capital?
- Does the asset create cash flow now?
- Does the asset have the potential for appreciation (but not depend on it for success)?
- Does the asset yield any tax benefits?
The above are unlikely to be a solid investment tactic for our new definition of retirement. Not to mention that you would have to accumulate quite a pile of cash to retire with assets like these in 20+ years (which brings us full circle to our old definition of retirement).
So What Are Other Ways to Retire from Real Estate?
How do you build a real estate portfolio that you can retire on? Moreover, what if you are starting the real estate game later in life?
Below are four ways you can leverage rental real estate to fund your retirement, especially if you are just starting out or have limited capital to invest. (Stick with me though, as we will discuss scaling next!)
1. House Hacking
When you house hack, you outsource your monthly housing expense (in part or all) to roommates living with you or renters (if you buy a duplex). Any extra income you generate could be used to pay down the home or to save to invest in other places. You would purchase in such a way to preserve your capital, capture tax benefits, and position yourself for the appreciation “icing on the cake.”
Repeat this process every two years for five years, and you could have a nice equity nest egg and multiple cash flow streams to live off of. Check out The House Hacking Strategy by Craig Curelop for more details on this method.
2. Turnkey
When you purchase turnkey rentals, you continue to convert saved capital or re-positioned equity (think HELOC or home sale) into multiple streams of cash flow. And like house hacking, you would purchase in such a way to preserve your capital, capture tax benefits, and position yourself for the appreciation “icing on the cake.”
Related: Turnkey Properties: Should You Invest in a Turnkey Real Estate Investment?
3. BRRRR
When you purchase a BRRRR (Buy, Rehab, Rent, Refinance, Repeat) investment, you accelerate your wealth and access to capital through forced equity. You buy the asset low, rehab the property to minimize your capital expenses for a few years, rent it to create positive cash flow, then refinance out your initial investment and repeat the process.
It is possible to create infinite cash-on-cash returns this way; thus, you are only limited by the number of projects you can do at one time, the upfront capital required, and the amount of time you have to do the projects! And like house hacking and turnkeys, you would purchase in such a way to preserve your equity position, capture tax benefits, and continued appreciation. Check out Buy, Rehab, Rent, Refinance, Repeat by David Greene for more details on this strategy.
4. BRRRR-key
A little tip of the hat to Ali Boone for coining this phrase (brilliant!). This is my favorite way to invest in real estate and has been my go-to strategy more than 20 times! Essentially, a BRRRR-key is leveraging someone else’s time, knowledge, expertise, and networks to get the BRRRR done.
Side note: All of the above strategies can be done with multifamily buildings, as well. The terminology just changes from “rehab” to “value-add” or “development,” depending on the extent of the rehab.
Additionally, these types of portfolios take time to scale to the point you can retire off the income—unless you have the capital and network to purchase a portfolio of projects all at once. (Yes, it can be done!)
Let’s Take This to the Next Level!
Now that we’ve identified four of the core real estate investing strategies you can use to fund retirement, let’s build off these strategies and cover four ways to supercharge our scaling efforts and retire much quicker!
5. Buy 1 Property Each Year for 30 Years
This strategy is simple and elegant. Buy one quality property for 30 years leading up to retirement. In 30 years, your tenant has paid off the 30-year mortgage on the first property, and now you sell it. You can live off the proceeds of the sale or reinvest all or part of this money back into future investments. (Ideal, since you are going to live way past 100!) And you still have multiple properties that are cash flowing to fund your living expenses.
6. The Buy-3-Hold-2-Sell-1 Strategy
Chad Carson speaks of this strategy often. Each year, you buy three properties. I feel this works best with BRRRR or BRRRR-key-type properties, so you can continue to create velocity with your capital. You complete all three projects, then roll two properties (ideally the two best ones) into your portfolio, and sell the third to live off of.
In five years, you have 10 cash flowing properties and a sizable pool of capital to continue investing or to fund your lifestyle. Combine this strategy with the above strategy, and now you are cooking with fire!
7. The Stack Strategy
Brandon Turner speaks quite often of the stack strategy. It looks like this:
- Year 1: Buy one single family home
- Year 2: Buy one duplex
- Year 3: Buy one fourplex
- Year 4: Buy one eight-unit building
- Year 5: Buy one 16-unit building—hitting hyper growth mode now!
- Year 6: Buy one 32-unit building—you get the point!
In six years, you have 63 cash flowing units under your belt (with only six buildings to manage). Now that is a nice little next egg!
8. The Buy-and-Hold-to-Syndication Strategy
Where many investors get stymied with scaling is making the leap from purchasing single family homes to larger multifamily buildings. Now, for simplicity here, we are going to skip how to do your own multifamily syndication (aka being a general partner) and discuss a scaling strategy that anyone can do (even sophisticated investors).
When you have scaled your single family investments to a point where you no longer want to add more units, you can then shift that cash flow and invest as a limited partner into someone else’s syndication.
Related: Buy and Hold 101: How to Evaluate Investment Properties
The reason I LOVE this strategy is because:
- I can, again, leverage other people’s time, knowledge, expertise, money, and credit.
- If I partner on the right deals, I get similar cash flow, appreciation, and tax benefits as I would if I owned the property myself. (Yes, less any active income I could have gotten… for my syndicators out there!)
- I get access to the economies of scale with multifamily, greater leverage, and greater diversification of geographical areas and asset types (multifamily, self-storage, mobile home parks, residential assisted living, etc.) than I probably could on my own.
So how do you fund a strategy like this? I use my single family and small multi-units as a mini-ATM, printing cash for me to invest in larger projects and I live off the cash flow of the larger project. This scaling solution does take a little more time to execute, but I can pair it with any of the above strategies and have a secondary exit plan for my retirement.
Most importantly though, I get time to actually enjoy my retirement that I worked so hard for!
Conclusion
When you are thinking of how to retire with real estate, be sure you are evaluating:
- Does the asset preserve capital?
- Does the asset create cash flow now?
- Does the asset have the potential for appreciation (but not depend on it for success)?
- Does the asset yield any tax benefits?
And there is one more question to ask yourself…
In 20-30 years (or whenever you want to retire), how do you want to spend your time?
Because in the end… Isn’t control of your TIME what you want anyway?
In what ways has real estate investing helped prepare you for retirement—whenever that may be?
Share with a comment below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
