Real Estate & Retirement
Let someone else pay off your mortgage and establish your retirement nest egg.
You’ve graduated from Lesson 1–Personal Finance & Budgeting and now you’re on to Lesson 2–Real Estate & Retirement.
Lesson 2 does several things for you. It gives you a place to live. It has someone else pay off your mortgage. It begins to create multiple income streams for your retirement.
In Lesson 2–Real Estate & Retirement we look at:
- Fully Funded Emergency Fund
- Finding the Right Property & Loan
- Books to Read
- Finding the Right Manager & Tenants
- Tracking for Taxes
- Business Creation
- The Payoff Party
- Downloads
- Summary
We don’t recommend long-term debt except in this one situation. We justify this because you’ll be using your regular income as well as rental income to pay off the mortgage. This drops your time with the mortgage significantly.
After paying it off we recommend playing it safe and buying (or building) your next rental property debt free.
As someone has said, “You can always tell who was financially skinny dipping when the financial tide goes out.”
Stay out of debt if you can. It takes a bit longer (like 10-20% longer), but it’s so much safer and stress free.
fully funded emergency fund
3–6 Months of Expenses
Now that you’ve paid off your debt in Lesson 1–Personal Finance & Budgeting you can throw that same money at building your fully funded emergency fund which includes 3–6 months worth of expenses.
This amount will look different for each family and individual so look at what your average expenses are throughout the year to get an idea of how much that will be. If you have average monthly expenses of $3,000, you should save between $9,000–$18,000 to get fully funded.
Building this larger emergency fund will help you when larger emergencies come your way and will allow you to not slip back into debt.
Depending on your income level and how much you want to save you’re probably looking at 6–12 months of saving before you get fully funded. Remember, you’re throwing all the money into it that you were throwing at your debt. Don’t give up, just keep moving forward.
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finding the right property
Patience is a Virtue
Be sure to download our Mortgage Payment Tracker to track all of your normal, escrow and extra payments.
Not everyone has patience and you’ll need some to make sure you purchase the right property for you.
This might be a duplex, triplex, quadplex or small, separate single units on the same property.
This isn’t a property that you’ll be selling any time soon so you’ll want to do your research.
Who will your renters be? Students? Professionals on a career path? Military?
What area of your city or town do you want to live in? Remember, you’ll be living on this property along with your renters so it needs to be a place for you and your family to grow up in and feel safe too.
Loan Details
When applying for a loan there are some details that you should be aware of.
This idea of living in one of your rentals while the renters pay off your mortgage isn’t new, but it can be a little different than what your bank or credit union might be used to.
You’ll want to present them with the idea and show them you’ve thought through the details and what kind of income and time-to-payoff timeline you have in mind.
Typically, credit unions will be easier to work with in this type of arrangement rather than banks. Be sure to checkout your local credit union first to see what type of interest rates they can offer you.
Be sure to download our Mortgage Payment Tracker to track all of your normal, escrow and extra payments.
15 vs 30 year mortgage
This shouldn’t even be an option for you. You’re going to crush this mortgage like a fly. Choose the 15 year mortgage. All day, every day. Never choose the 30 year option.
total income
When you’re applying for a loan, the bank or credit union will count your rental income towards your ability to pay off the mortgage.
So, if you have a job that pays $3,000/month and you have 3 renters paying $1,000/month/each you now have a total of $6,000/month of income.
fixed vs variable interest
The fixed interest rate loans don’t change your interest rate during the lifetime of your loan.
Variable interest rate loans can change the interest on you mid-loan. We don’t like this possibility and don’t recommend it.
pay off early fee
Make sure to find out if your mortgage agreement has a fee for paying it off early. The last thing you want when you’re sending in your last payment (WAY EARLY) is to find you also owe some kind of “early termination” fee.
If your financial institution has a fee like this negotiate it out of existence or at least be aware of it when it comes time to pay the mortgage off early.
don’t forget about escrow
Escrow is simply a set amount of money which is used to pay taxes and insurance.
Escrow is included above and beyond your mortgage payment.
So, if your mortgage payment is $800/month your insurance and taxes might be $100/month more for a total of $900/month.
The bank uses the money from your escrow account to pay the property taxes and property insurance. This ensures that you don’t default on your taxes and covers them for liability purposes.
keeping track
Be sure to download our Mortgage Payment Tracker to track all of your normal, escrow and extra payments.
Another thing you can do with this is create multiple tabs and run hypothetical situations if you were to pay additional money each month.
In the example from the document above, making an extra payment of $200/month and one additional $1,200 payment/year cuts your loan from 15 years to a mere 10 years!
As you move along in this process, running hypotheticals really helps encourage you to pay more to the mortgage instead of other things in life.
Property Search & Loan Research Timeline
Once you’ve found the property you think will suite your needs it may take a few more months to get a credit union or bank on board with your plan.
This may take an additional 2–6 months to get the paperwork finalized before you actually own the property and can begin to move into your new home as well as begin finding a property manager and tenants.
So, the total time to find your property and get all the paperwork complete from your financial institution may be between 3–12 months.
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Books to Read
A cycle hiding in plain sight for all to see. Yet, even professionals in the space ignore it.
This time will be different they say.
But human nature hasn’t changed, so why would this time be any different?
The Secret Life of Real Estate and Banking
Author: Phillip J. Anderson
Did you know that real estate has an 18-year cycle that’s been going on since 1800? Yep, it’s true.
From the book:
The US began selling off its real estate, officially, under a set legal structure, on May 10, 1800. This marks a convenient starting point for our study of the secret life of real estate and banking.
This book is the story of those 18-year real estate cycles: why they happen, and why you can be assured they will repeat. A little knowledge of which could be exceedingly profitable.
“Exceedingly profitable.” Uh, yeah, give us some of that action!
The Richest Man in Babylon
Author: George S Clauson
Since it is a easy and quick read we’d recommend re-reading The Richest Man in Babylon to solidify the basic financial principles of
- Keeping out of debt
- Paying yourself first
- The power of compound interest
This book came out nearly 100 years ago and many, including Ramsey and Kiyosaki, borrow ideas from this book.
Property management
Finding the Right Manager & Tenants
Will you manage your property or will you have someone else do it for you? Property management, whether you do it yourself or hire it out, is important.
Doing it yourself? Here are some things to consider:
- You’ll be spending time taking care of building and tenant needs
- You’ll be on the hook for finding new, qualified tenants
- You’ll be on the hook for diagnosing building repairs and for finding a company to repair it
Hiring it out? Here are some things to think through:
- It will cost you money (5%–15%) to hire a company to find new tenants
- This company will also diagnose and have a repair company fix it
- You still have to pay the repair company
Unless you’re the fix it kind of person or you have a family member or friend who can do home repairs we’d suggest hiring a company to do it for you.
If you have 3 rentals which are renting for $3,000/month you could expect to pay between $150–$450/month. This fee varies from which area of the country or world you live in.
We don’t recommend hiring an individual who wants to trade rent for services rendered. This cuts into your ability to pay off the mortgage quickly and these types of situations don’t always work out as planned, as well intentioned as people are.
Months Minimum
Months Minimum
Tracking it
Tracking for Taxes
Once you begin tracking all your income and expenses you’ll want to make it easy on yourself. Your tax person is going to want details with all the info. Download our Income & Expenses Tracker and make it easy.
After you get going you’ll want to track how your rental business is doing on a month-to-month and yearly basis. You can do that by grabbing your income and expenses from the Income & Expenses Tracker each month and input it into our Profit & Loss Tracker.
business creation
LLCs, EINs and Bank Account
You want to keep your personal finances separate from the rental income as well as the business you’ll set up in Lesson 3–Entrepreneurship & Your “Side” Gig.
By forming an LLC for the rentals you’ll protect your personal income in case something awful should happen.
Here are a few companies which deal with legal matters such as creating LLCs.
The LLC creation generally costs between $300–$500 depending on the exact services you are purchasing.
Some of the above services also try to sell you a package to create your EIN (Employer Identification Number) from the IRS. You can do this in about 5 minutes yourself and save some money.
Once you’ve created your LLC you’ll also want to signup for a business bank account. This will force your finances into 2 “jars” which is helpful down the road if and when you get audited by the IRS. This also helps you keep your “personal” finances separate from your business finances in case someone decides to sue you or the LLC.
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The Payoff Party
Once you’ve paid (ahem, Once “they’ve” paid off your mortgage, you seriously need to throw a party.
Take 2–4 months of savings (or whatever you feel comfortable with) from your rentals and go have fun with it. You’ve worked incredibly hard and been ridiculously frugal to get to this point.
We’re proud of you!
Go you!
Our story. It took us 6 years 9 months to pay off our 15-year, fixed mortgage. We threw everything at it. Bonuses, financial gifts, vehicles, everything.
Now we’re debt free and saving the rental income to build more units. In 20 years we’ll have 10+ units–debt free.
For our payoff party we took a family vacation with 3 months of rental income. We celebrated as a family. It was hard, but we did it. And we’re better off financially because of our dedication.
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downloads
Get ’em While They’re Hot
mortgate tracker
After every payment keep track of it here. Also run hypothetical situations for fun!
Download our Mortgage Payment Tracker.
Income & Expenses
Every piece of income. Every expense. Keep track of it here.
Download our Income & Expenses Tracker.
Profit & Loss tracker
After each month grab your income and expenses from the Income & Expenses Tracker and input it here to track how the business is doing.
Download our Profit & Loss Tracker.
Summary
Real Estate & Retirement
Wow. What a journey so far.
You’ve got control of your Personal Finances & Budgeting in Lesson 1 and now you’re cruising forward, having someone else paying off your mortgage and you’re planning for retirement.
Good work.
Obviously, paying off the mortgage is going to take time to get paid off, even with the help of others. Now it’s just a matter of living life and concentrating on Lesson 3–Entrepreneurship & Your “Side” Gig.
After the mortgage is paid off, you can begin taking that rental income and purchasing or building another rental property. If you don’t use this money for personal reasons, you’ll be able to continue building or purchasing rental property for your future retirement. In 20 years or so, you could have as many as 10–20 rentals!