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great-investing-questions.jpg 10 Houses in 10 Years-A Retirement Strategy

Overview

There is a concept out there that discusses buying ten houses over a ten year period, and by the time you buy the tenth house in the tenth year, the first house has doubled. If you bought it for $200,000 and it appreciated 7.2% a year (the national average is 7.7%), it would be worth $400,000.

In year ten you cash out refinance the first home to take $100,000 to $200,000 out, and this cash is tax free (until you sell the property, of course.)

 The eleventh year you can do this on house #2, because it has now doubled in ten years. You can do this over and over again, and by the 21st year, your first house has doubled again, and you can continue pulling money out until you die, sell the property, or live in the property for two years to claim the capital gains exemption.

 
The Plan


You’ve got the general idea already. You need to buy several houses, and as they double in price, you can refinance them to pull the money out. The reason most people use ten houses and ten years in their plan is due to a pretty cool concept called the “Rule of 72.” This rule says that if you take your average appreciation rate and divide it into 72, you’ll learn how many years it will take to double. In other words, if your average annual appreciation rate is 7.2, by dividing 7.2 into 72, you get 10, or ten years to double. If your average appreciation rate is 10%, it will take you 7.2 years to double. As the national average appreciation rate is 7.7%, it’s close enough to ten years. If you could bank on 10%, you could make the plan “7 Houses in 7 Years.” You get the point.

Another misunderstanding is that you should only buy one house per year. Obviously, if you buy three houses a year the plan works fine, you’ll still need to wait the same amount of time (ten years in our 7.2% appreciation scenario), but if you buy four in the first year, by year eleven you have four houses that have doubled, and so on year twelve when you dip into house #2, the house has MORE than doubled.

Study the Table 1 below. You’ll notice several things. First notice how House 1 appreciates over the ten years. In Year 11, your house is worth just over $400,000, or a little more than doubled in price (funny how that worked out, eh?) Now you have a little more than $200,000 in equity (you have the little extra that it appreciated, but you also have the initial down payment as equity in the house.) Because these are non-owner occupied properties, it’ll be quite challenging to pull ALL the equity out. There are products that allow you to do this, but the rates are considerably high and it’s pretty hard to find and utilize these products. More reasonably you’ll leave 10-20% into the property. For the exercise below, I have shown taking $150,000 of the $200,000+ of equity you have. This will also improve the cash flow of the house because you still need to own and rent the property.

One of the negative issues with this plan that is rarely discussed is how inflation devalues the idea of $150,000. But if inflation is 4% and houses annually appreciate 7.2%, the value of $150,000 in ten years will be worth $100,000 in today’s money. Due to inflation, that degrades over the next ten years to about $68,000 in today’s money. Funny enough, if you run the same numbers over two ten year cycles, you’ll be able to pull $350,000 TAX FREE/DEFERRED a year, and that’s worth $160,000 in today’s money. According to this theory, your quality of living gets better by about 50% each cycle.

Raise the cost of inflation, things get less favorable. Increase the appreciation, things get much better. You really can’t control inflation, but you can influence how your properties appreciate. While buying and selling properties takes a little wind out of the sails of this method, it would be more than offset by finding a property that is appreciating much better than your current properties.

One thing to consider is that when you pull the money out, you’ll need to be considerate of the rent and how the increased debt load will affect your cash flow. This isn’t a show stopper, but it is something to realize. Additionally, you might go one or two cycles where the rent will be a premium, but once the houses start seeming old compared to the newer properties that are produced twenty years from now, the rent compared to the value will drop off. Additionally, older houses tend to appreciate less than newer. Like most things in real estate, there are many, many variables, but on the whole, this is a very sound technique.

One of the interesting aspects that is available today is the ability to avoid capital gains on a huge portion of the profit by living in the house for two years. In other words, if you wanted to, on year 21 you could live in House 1 for two years, and then sell it. As your gain will be about $500,000 (you can write off maintenance and other expenses, as well as the cost to buy and sell), the money would be TAX EXEMPT (for two people, as the exemption is CURRENTLY $250,000 per person, max of $500,000). You could spend the next 20 years liquidating all of your properties, tax free.


Needless to say, there are very many options in real estate investment. If you like this idea, or if you’re looking for more ideas like these, Contact Us 
to discuss real estate investment. 


(As the width of this forum is too narrow for the entire chart, the far right column "House 10" has been eliminated. The point is still clear.)

Table 1


Year | House 1 | House 2 | House 3 | House 4 | House 5 || House 6 | House 7 | House 8 | House 9
Year 01 $200,000
Year 02 $214,400 $200,000
Year 03 $229,837 $214,400 $200,000
Year 04 $246,385 $229,837 $214,400 $200,000
Year 05 $264,125 $246,385 $229,837 $214,400 $200,000
Year 06 $283,142 $264,125 $246,385 $229,837 $214,400 $200,000
Year 07 $303,528 $283,142 $264,125 $246,385 $229,837 $214,400 $200,000
Year 08 $325,382 $303,528 $283,142 $264,125 $246,385 $229,837 $214,400 $200,000
Year 09 $348,809 $325,382 $303,528 $283,142 $264,125 $246,385 $229,837 $214,400 $200,000
Year 10 $373,924 $348,809 $325,382 $303,528 $283,142 $264,125 $246,385 $229,837 $214,400
Year 11 $400,846 $373,924 $348,809 $325,382 $303,528 $283,142 $264,125 $246,385 $229,837
Year 12 $429,707 $400,846 $373,924 $348,809 $325,382 $303,528 $283,142 $264,125 $246,385
Year 13 $460,646 $429,707 $400,846 $373,924 $348,809 $325,382 $303,528 $283,142 $264,125
Year 14 $493,813 $460,646 $429,707 $400,846 $373,924 $348,809 $325,382 $303,528 $283,142
Year 15 $529,367 $493,813 $460,646 $429,707 $400,846 $373,924 $348,809 $325,382 $303,528
Year 16 $567,482 $529,367 $493,813 $460,646 $429,707 $400,846 $373,924 $348,809 $325,382
Year 17 $608,340 $567,482 $529,367 $493,813 $460,646 $429,707 $400,846 $373,924 $348,809
Year 18 $652,141 $608,340 $567,482 $529,367 $493,813 $460,646 $429,707 $400,846 $373,924
Year 19 $699,095 $652,141 $608,340 $567,482 $529,367 $493,813 $460,646 $429,707 $400,846
Year 20 $749,430 $699,095 $652,141 $608,340 $567,482 $529,367 $493,813 $460,646 $429,707
Year 21 $803,389 $749,430 $699,095 $652,141 $608,340 $567,482 $529,367 $493,813 $460,646
Year 22 $861,233 $803,389 $749,430 $699,095 $652,141 $608,340 $567,482 $529,367 $493,813

By Sean Brown, www.NARREIA.com


Kim Robbins & Gord Karpinsky
Kim Robbins & Gord Karpinsky
REALTOR®