In the first three parts of this series, I outlined my retirement plan and tracked it until 2012. I showed how I measured that the plan was failing and then described how I began an exit from the stock market and based my retirement plan on real estate. As I had projected home values in the Sacramento area have bounced back quickly, 73% since 2012, and continue to rise, 13% projected for 2016. Rents are currently also rising and my portfolio is back on track in just 3 years time. This is in spite of the fact that the value of the part of my portfolio remaining in the stock market performed at a measly 4% gain for two years, and then dropped 15%, during the most recent market corrections. Thanks Greece and China, although I really don’t understand why you get the credit or the blame.
I am now taking all of the remaining money out of the stock market and putting it all into more real estate. That’s right all eggs in one basket, or at least in one neighborhood. The people who most strongly recommend otherwise are the ones who can’t recommend a better alternative other than leaving some in the stagnate stock market.
In order to make the plan work at the current recovered real estate values, I am leveraging my new investments with special non-recourse loans designed for 401k real estate investing. An interesting note is that 3 years ago I could only find one bank offering these kinds of loans and the rate and cost of these loans was exorbitant. So I did not leverage those investments. Had I done so I could have bought almost twice as many and would have made an even bigger gain. Now when I shopped I was able to get term sheets from 8 banks and chose one with a 4% rate and 65% loan to value. These competitive rates tell me I am not the only one investing this way.
Looking forward, I am projecting that the market values will continue to increase at a more conservative 5% and hopefully, continue at that rate, without needing another real estate correction anytime soon. Even with a correction, rents have historically been stable, even during the recent and historical bubble bursts, increasing at about the same rate as inflation. So, the plan is to retire on the net from rental income and still have the properties themselves as backup or legacy.
That slight decline in the actual graph at 2015 is due to the China drop that occurred while I still had some in stocks plus some purchase and rehab costs for the new real estate. The graph to the right of that is projection based on 5% growth and repayment of the loans from rent proceeds.
At retirement the gross value of the real estate will be as much as my original plan, probably more, but I am still going to retire with a bit of reduction in income using just rents. Remember my original plan expected 5% return on the gross value for income. Not something you can count on in bonds, CDs or dividend stocks anymore, nor from rent in buy-and-hold real estate investments. It also may take as much as a year longer than my retirement age goal to eliminate the debt. However, if I take into account my income grew to a larger value than I expected, and I will no longer need to contribute 15% and I can add in Social Security at 62 I think I can manage on just the rental income.
What this series of blogs all represent is a personal anecdote. The point is not that I recommend real estate over the stock market for everyone. In fact, it may very well make sense for me to liquidate my real estate at some time should sanity return to the stock market or insanity return to real estate. My main point is to make a plan, track it often and make adjustments. My second point is don’t believe everything “they” say, be proactive, and trust yourself. I could have become a more savvy stock and bond investor or a hard money lender or an angel investor. The point is I quit trying to hire a professional and took charge. Only you can really, always have your best interest as a priority.
For those interested in real estate investing inside a 401k here are some links I found useful
I got a kindle version of this book for free when I contact the bank back in 2012