You Can Retire Early! by Deacon Hayes

Author:Deacon Hayes
Language: eng
Format: epub
Publisher: Adams Media

Case Study: Jacob and Samantha Invest in Real Estate

Jacob and Samantha are in their mid-thirties, and they are in the process of building a real estate portfolio for their ERP. Jacob is a science teacher and Samantha is an administrative assistant for an insurance company. Their combined income is $110,000 per year. For the past five years they’ve been saving $25,000 per year toward their dream of living off of real estate investments. They know they want about $4,000 a month to live on, so they are working on structuring their real estate portfolio in a way that will accommodate that amount of income.

The first property they buy is a single-family, three-bedroom, two-bath home. The home is in a fairly decent area in their larger metropolitan city. The house was a foreclosure, and they were able to purchase it for roughly $45,000 due to its extensive need of cosmetic repairs and their willingness to pay cash. (Note that this house was in a less expensive area of a major metropolitan city; opportunities like this might not be available depending on where you live.) Jacob and Samantha put $15,000 worth of repairs into the house, so their total cost invested, including closing costs of $3,000, is approximately $63,000.

Jacob and Samantha have been living frugally the past several years and were able to put $125,000 ($25,000 a year for five years) into their “dream” account, so they had plenty of cash to pay for the house. Based on market data, the house will rent for between $1,000 and $1,200 a month. Including landlord expenses such as property taxes, insurance, vacancy rate (a small monthly savings deposit to cover the mortgage payment during any potential vacancies), and maintenance and repairs, they should have expenses ranging roughly in the area of $350 a month. If they can rent the property for $1,000, Jacob and Samantha have just given themselves a $650 per month income, before income taxes.

The following year, Jacob and Samantha decide to purchase another rental property. This time they settle on a triplex that is listed for $160,000. They don’t have the cash to pay for the triplex outright, so they put 20 percent down plus closing costs (taken from their savings account) and end up with a mortgage of $1,300 per month, including property taxes and insurance, over a fifteen-year term. They spend $20,000 in improvements for the property, which needed cosmetic work and a new roof.

This rental property is in a better area of town than the first one they bought, so the main unit rents for more money. Rental unit number 1 is a three-bedroom, two-bath unit that takes up the whole main floor and rents for $1,600 a month. Rental units 2 and 3 are split equally on the upper level and they are each one-bedroom, one-bath units. Each unit rents for $900 a month.

Their costs for landlord expenses for this house run roughly $600 per month (more than the first property since this is a triplex with

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