How much do you need to retire and how can your Investment Policy Statement help you get there?

When do you think you really need to start thinking about retirement? And what do you make of statements that say you need 2 or 3 million dollars to retire?

When I got my first paycheck as an attending, I thought I would be all set to FIRE (Financially Independent Retire Early) in 2020… Let’s just say I’m not there yet… and that’s not because I have not earned or saved as much as I expected to. It’s because

  • I did not know exactly how much I needed saved up for retirement to be able to live off of it for the next 30-50 years…
  • I did not realize how important it was to identify and be specific about my investment vehicles (ie asset allocation) during my years of saving and later in retirement because their rate of return would determine how fast my nest egg would grow and later how much I could safely withdraw without depleting it …
  • In short, I did not have an Investment Policy Statement (IPS)

As simple as this may seem, knowing exactly what your goals are and having a plan to get there are the first and most important steps in your journey to financial freedom. So I ended up :

  • with a much lower rate of return because of disproportionately large fixed income assets.
  • buying liabilities instead of assets (luxury cars, large personal home etc) per Robert Kiyosaki’s definition where assets put money in your pocket and liabilities take money out of your pocket.
  • and although I was fully contributing to tax advantaged accounts, in some ways I feel I was saving, not investing for retirement.

So how big does your nest egg need to be for retirement?? 1 million dollars? 2.5 million dollars?

It depends… (no cliched answers here, just mathematical ones…)

  1. First calculate how much you need annually during retirement : Make sure you include your home mortgage (unless you will have paid it down in full by retirement), property taxes, cost of health care in retirement, home and car insurance costs, cost of utilities, credit card bills and everyday expenses, transportation costs (leasing or owning a car), vacations etc… Remember to factor in pension and Social security income;
    • Annual need in retirement – (Social Security and pension) = Annual withdrawal from nest egg.
  2. Then decide which investment vehicles you will have in your nest egg… because the rate of return of your investments will determine how much you can withdraw safely every year without depleting your retirement egg. Factor in about 3% inflation rate for Stock/Fixed income assets, Income from rental real estate is inflation controlled.
  3. And finally have a goal for When you intend to retire. The earlier you seek financial freedom, the larger your contributions (accelerated acquisitions in case of real estate investments) to your nest egg will need to be every year. I am including a calculator that helps you calculate how much you need to save each month to hit your retirement goals here.. and your asset allocation and/or withdrawal rate will need minor modifications for stock/bond portfolios if u plan on retiring early.

Most people have a pure Stock/Bond portfolio that they hope to fund retirement with and there are numerous studies and recommendations for what your asset allocation should be for optimal rate of return and what withdrawal rates need to be to draw down your assets and have it last 30 years or more (it is very hard to live off the income from a Stock/Bond portfolio unless the portfolio is immensely large).

Some people use only Real estate investments to fund retirement, and the best part is – you can live off the income/ cash flow… and pass your assets down to your kids with a stepped up basis !! Win-win.

I use a hybrid Stock/ Bond/ Real estate portfolio which I will also discuss briefly. I want to point out that I will not be including commodities, cryptocurrency in this discussion as I feel for most people they don’t have a place in retirement planning and draw down strategies.

Pure Stock/Bond portfolio:

$ needed annually in retirement x 25 = Retirement Nest egg

For a pure Stock/ Bond portfolio to last you at least 30 years

So suppose you need your Stock / Bond portfolio to provide you with 60k annually in retirement, your nest egg should be 1.5 million dollars (60,000 x 25) and so on.

These numbers will work if :

  • Weighting of Stock:bond portfolio at retirement is between 50:50 and 60:40. With historical Stock returns being around 10% and Bonds yielding around 5%, this portfolio should yield anywhere from 7.5% to 8%; factoring in 3% for inflation, that leaves you with a Safe annual withdrawal rate of around 4% to have the portfolio last at least 30 years (average rate of return – inflation) as shown by Bengen in 1994 (he revised safe withdrawal rate to 5% in 2020). [ 0.04 (withdrawal rate) x 1,500,000$ (nest egg) = 60,000$ (annual withdrawal)]
  • Your Stock/ Bond portfolio investment returns match historical returns. I believe that the best retirement stock portfolios are predominantly composed of passive index funds (and not individual stocks) such as those offered by Vanguard (preferred for their passive management, low costs, wide diversification and tax efficiency).
    1. A popular strategy for Stock/Bond asset allocation is the 3-fund portfolio, which includes in varying proportions (based on your need for diversification, risk appetite and time to retirement) of
      • Total US Stock Market Index Fund (VTSAX)
      • Total International Stock Market Index Fund (VTIAX)
      • Total US Bond Market Fund(VBTLX)
    2. Or if you are like me and prefer lesser portfolio volatility to small cap and international exposure, you can stick to a 2 Fund portfolio comprised of VFIAX (S&P 500 Index fund) and VBTLX (Total US Bond Market Fund).

If you plan on retiring early, your portfolio needs to last longer which can be achieved by increasing your stock:bond allocation to 70:30 (these portfolios will however decline more sharply during big bear markets) or by decreasing the withdrawal rate to 3% (which is the safer option hopefully causing your portfolio to last 50 years or longer).

Stick to your plan for asset allocation through market ups and downs by periodically re balancing your portfolio. Over long periods the market will go up despite short term volatility and the withdrawal rate calculations only work if you stick to the plan at all times.

Pure Real estate portfolio: Real estate Investing can be passive (REITs, syndication) or active (Joint Ventures or direct ownership). I prefer direct ownership for more control over the asset and higher rewards due to increased tax benefits. I discussed FIRE with real estate in a previous post including how your rental real estate returns are actually much higher than just Cash on Cash (CoC) returns, but lets move ahead with the conservative approach of only including CoC returns in our calculations.

$ needed annually in retirement x 10 = Amount invested in rental real estate at time of retirement

For a pure Real estate portfolio (leveraged) to last you for ever

So suppose you need your Real estate portfolio to provide you will 60k annually in retirement, then you can reach this goal with around 600k of leveraged investments (60,000$ x 10= 600,000$) and so on. You could also calculate your annual cash flow from each door and see how many doors you need to own before you hit your and cash flow numbers for retirement.

These numbers will work if:

  • you have 10% Cash on Cash CoC return from your real estate investments (post tax return for passive real estate investments).
  • your investments are leveraged, meaning you have a mortgage on the property, which increases your rate of return. For example, if you buy one house for 200,000$ down and generate cash flow of 1000$ per month, your Cash on Cash return is 6%. But if you use the same 200,000$ and split it into 25% down payments for 4 homes each 200,000$ with mortgages on them and each generates 500$ in cash flow, your monthly cash flow is 2000$ or 12% CoC return.

Don’t forget the additional perks of real estate investing –

  1. Annual cash flow is tax free for most direct ownership in rental real estate due to depreciation.
  2. As your property appreciates in value and your renter pays down debt, your equity in the property is increases; you can tap into this equity by doing a cash out refinance without having to sell the property.
  3. Rent is inflation controlled
  4. In this scenario, unlike with a stock:bond portfolio, you are not drawing down assets – you are actually living off the income.

Hybrid Stock:Bond:Real estate portfolio: Some of you, like me, likely fall in this category and would rather not put all our eggs in one basket.

In our case, as we are targeting 60-100k annual withdrawal in retirement, our goal for retirement is :

  1. 750k in stocks/bonds giving us a safe withdrawal of around 25-30k (lower withdrawal rate of 3% if we retire early)
  2. 500k in leveraged real estate investments (direct ownership) that if invested well should yield 50k in tax free cash flow annually

You will notice that adding real estate into the picture will propel you towards your retirement goals much faster. But again, it is very important to be specific about how many doors/ units you will need and your markets (I prefer cash flowing markets over markets that see higher property appreciation).

My Goal Hybrid Asset Allocation in retirement

And that’s the end of a long post… Hopefully you already have a written Investment Policy Statement IPS that clearly states when you want to retire, how much you will need to retire and how you will be invested going forward to get to those goals . If not, there is no better time than now to get started!

First things first… Your ROADMAP to financial health

The right path…

As you have probably realized, growing wealth is not just about investing. If you are striving to increase your net worth, it is imperative to have certain protective systems in place prior to embarking on your investing journey and to take advantage of key strategies that help compound your investment growth. The earlier you arm yourself with this knowledge, the better and I wish I knew 10 years ago what I know now, but it is never too late to check your progress and realign yourself. This is a bird’s – eye view of what should be included in your financial blueprint…

financial planning


  • A big part of protecting your nest egg is INSURANCE. Apart from the mandatory Home/ Auto and Malpractice insurance, in my opinion there are 3 other insurances that you should consider padding yourself with in the below order:
    1. Long Term Disability Insurance: Most physicians who don’t have children prior to completing fellowship will probably end up getting a personal Long Term Disability Insurance plan prior to starting their first job as premiums are lower when you are younger and in a lower income bracket. Without going into much detail, it’s good form to get an OWN OCCUPATION policy and pay attention to contractual language with reference to Return to work, Residual disability, Cost of Living Adjustments riders. More on this later.
    2. Life Insurance: Most people start thinking of Life insurance once kids are in the picture and it is always smart to have your own Life insurance policy that you will carry with you even if you change employers, again the earlier the better as premiums begin to increase with age. With a myriad of options out there – Whole life, Term Life with ROP (Return of Premium), Term life without ROP – it can get very confusing very fast. In my opinion you are best served getting a Term Life Insurance policy for 20 – 30 years (depending on how young your children are), a tiered plan is a great strategy and invest the savings in annual premiums. More on this later…
    3. Umbrella Insurance: Considering the relatively low cost of an umbrella insurance policy, it’s always a good idea to carry some coverage, more so if you have multiple rental properties that are in your personal name.
  • LAST WILL AND TESTAMENT, TRUST AND LIVING WILL: Once you have assets, it is never too early to create a Last Will and Testament, but it is important to remember that having a Will still does not prevent your Estate from going to probate, a time and money consuming process that you do not want to put your loved ones through, which is why you ideally want a Revocable or Living Trust with a Pour over Will to capture assets that have not been transferred to the Trust. It is also best practice to have Beneficiaries (POD or payable on Death) named on your bank and retirement accounts. A Living Will is a legal document outlining your end of life medical treatment choices.


  • Tax efficient investments: It is prudent to fund your tax deferred investments before funding your investments with post tax dollars. During residency, one of the most important things you can do to speed toward your financial goals is to contribute to Roth IRAs (contributions made with post tax dollars for tax free growth) for yourself and your spouse and a 401(k) plan if offered by your employer (bonus points if there is an employer match). After training, it is best practice to max out 401(k) or 403(b) plans offered by employers that are tax deferred (Solo 401(k) or SEP IRA if you are self employed – most often a Solo 401(k) is a better option if you do not have additional employees beyond your spouse), following which you should contribute to Backdoor Roth IRAs (a way for high-income earners to fund a Roth) for both yourself and your spouse. If you have access to a Health Savings Account (HSA) this is an additional way to invest tax deferred money that can be withdrawn after age 65 to pay for any expense without penalty.
  • DECREASE LIABILITIES AND SPENDING: Remember ” a dollar saved is more than a dollar earned…” because of the taxes we pay on earned income. Reading RICH DAD POOR DAD was eye opening because a new home or fancy car are actually Liabilities since they take money out of your pocket and the best way to build wealth is to save and buy Assets that put money into our pocket.
  • DEBT: Paying down debt and/or refinancing to a lower interest rate on credit card/ Home mortgage and student loans is something you should have on your radar.

INVEST AND GROW: I will be listing the most common investment vehicles here and discussing them in future posts. With investing it is key to have a written IPS- INVESTMENT POLICY STATEMENT based on your goals, priorities and risk appetite. Your IPS will serve as a roadmap and help you re balance your portfolio allocation periodically to stay aligned with your goals and not get swayed by market ups and downs.

  • Stocks and Bonds: Please refer to my post on creating your Investment Policy Statement for recommended asset allocations; allocation will depend on your risk appetite, investment goals and timeline. I want to stress that low cost INDEX INVESTING is my preferred recommendation for a passive investor as opposed to individual stocks.
  • Commodities
  • Real Estate: My go-to for building generational wealth… I prefer direct ownership over passive real estate investing as it gives you more control and tax savings, but it does require more active participation. Check out this post…
  • Cryptocurrency: with it’s performance in 2020, it has definitely earned a mention, although I consider this risky.
  • Savings account and CDs: With current interest rates, hoarding money in your savings account will likely not even beat inflation, thereby devaluing your money over time. Therefore once you have a comfortable buffer, usually 6 months worth of expenses (your emergency fund), it makes sense to invest your money in other baskets.
  • Saving for kids: Most people contribute to a 529 College savings plan which in some states is tax deductible and front loading this contribution helps compound growth significantly. If you have a small business then a more tax effective strategy would be income shifting by employing your children through the business, and contributing to a Roth IRA in your child’s name – contributions can be pulled out to pay for college, earnings may be used for qualified education expenses without a penalty.

As I mentioned before, the first step is to sit down with your significant other, ensure your protection strategies are in place and write down your Investor Policy Statement IPS, because as simple as this may seem, knowing what your goals are and having a defined strategy are the most important steps in your journey.

A journey of a thousand miles begins with a single step…

WHY and WHEN to rehab your rental?

Many new investors in the Single Family Home space prefer acquiring turn key rentals- homes that don’t require any major work prior to renting; this is a safe and foolproof acquisition strategy for steady cash flow. Today I wanted to focus on why purchasing a property that requires some TLC actually makes more financial sense and significantly increases your cash flow.

Before we start though, we need to absolutely clear that this strategy only works if you are able to find a property that needs some work at a significant discount. In the COVID market these deals are hard to come by as property appreciation is seen across the board due to decreased supply. Properties that need significant work put in with a similar discount to the pre- Covid market are hard to come by. But if you can find a good cash flowing property that is discounted as it requires some upgrades, then this is definitely a strategy to consider.

The right time to do a rehab on your rental is right after acquisition, before you put your rental in service. When you do this, you are increasing the value of your property – FORCED APPRECIATION by increasing it’s ARV (After repair value). A lot of savvy investors will tap into this increased equity right away by doing a cash out refinance. Also, with your newly renovated property, hopefully you have increased your monthly rental cash flow; win-win. Let’s dive into an example to look at the numbers…

Scenario: Say you purchased a Single Family rental property for 250,000$ and put 20,000$ into renovations. If the ARV of your property increases to 300,000$ then you have forced appreciation of the property by 30,000$ (300k – 270k)! Now you may choose to leave the increased equity in the property in favor of increased cash flow or if you are in the growth phase, you could tap into the increase in equity with a cash out refinance. Hopefully with the upgrades you can also increase monthly rent from 2500$ to 3000$ which increases your cash flow by 6000$ annually. Now depending on your tax situation ( AGI, Real estate Professional Status and material participation in the property concerned) or if you choose to do a cost segregation study on the property in the year of acquisition you may be eligible for tax breaks that further offset your out of pocket cost of the rehab by up to 20 – 30%.

Pictures from a recent rehab on one of my rentals,,,

Budget: Once you’ve made the decision to rehab your rental, the first order of business is to determine what your budget is going to be. It’s very important to be realistic here so you are clear on what you want to upgrade from the very beginning. It’s very disruptive to the timeline and expensive to have to modify plans later if you decide to bump your budget up and add things. For rentals, IMHO the most bang for your buck is in renovating kitchens and bathrooms and converting at the very least common areas from carpet to hard surfaces so you don’t have to periodically replace the carpet if pets and kids have trashed it. Most of the time, cosmetic changes give you the most bang for your buck and moving plumbing lines or electrical fittings or tearing down walls can be expensive without a proportionate yield. I have also found that in a mid size renovation (if you are spending over 10-15k), especially if structural changes are being contemplated, it makes sense to include an architect in the initial planning. They usually get paid by the hour and their opinion and expertise could save you a bunch of money overall or at the very least ensure that your money is spent in the most high yield items in pursuit of durable and contemporary materials. You do not want to tear down walls only to later realize that there was a more cost effective solution to provide you with a better result in terms of flow in the space. Or to replace your countertops to later realize that you should have upgraded to larger appliances as they are the norm in your market. Oftentimes having someone experienced look over the renovation plans (especially if you are essentially functioning as your own general contractor) saves you money and frustration in the long run by guiding your choice of materials, appliances and helping you figure out the most cost effective way of getting to your desired outcome.

Sourcing your Materials: As the adage goes ” Kitchens sell homes”. Upgrading appliances makes your rental more attractive for sure, but other things to consider are upgrading tile countertops to single slab countertops and maybe a complimentary backsplash etc. A natural stone countertop like granite is durable, renter proof and these days very cost effective especially if you go the per-fabricated route. That being said, more and more rentals including commercial spaces are getting quartz countertops. Lately, LVP (Luxury Vinyl Plank) flooring has been taking over the lower to mid home markets – it is durable, water proof (which also means kid and pet proof) and you could run it into the kitchen and baths at or below 4$/sqft including installation. That being said, tile flooring is another hard surface flooring that while being slightly more expensive installed, increases the value of your home a tad bit more. And last but not least, a coat of paint does wonders in transforming a room. Sourcing materials for your rehab can be challenging the first time around, but once you have done the research, visited the big box stores like Lowe’s, Home Depot, Costco and all your local showrooms for flooring, appliances, hardware, lighting etc you are now armed with this invaluable knowledge base for your next project. The learning curve is frustrating but steep and if you stick with it, it is very, very rewarding. If you plan on renovating multiple rentals, it helps to use the same materials for flooring, same paint colors etc in all your rentals, this ends up being time and cost effective and if a plank of flooring need to be replaced or paint touched up, you have it handy. Find the formula that works for you, then rinse and repeat. I do want to point out here that it helps to start with a design concept and stick to it so your end result is cohesive in terms of style, scale and color – all of which enhance the vibe and overall elegance of your space.

Building your Team: If you are using a general contractor (GC) for your project, then this part is much simpler. You get a few good references and go from there. It is much harder if you are your own GC for cost considerations or if you are trying to materially participate in the renovation to qualify for Real Estate Professional Status. You will need to have a reliable flooring installer, electrician, plumber, painter, cabinet and countertop guys and handyman for drywall repairs etc. Building this team can seem like a colossal task, but doing the legwork, getting the quotes and finally assembling your team is very gratifying. In my experience, the more experienced licensed professionals were well worth the up charge in the quality of work and insight they brought to the job and I would recommend keeping that in mind while comparing quotes. The most frustrating part of working with your team is unforeseen delays in the time line as this pushes out the other members in the team due to the sequential nature of most rehabs. Changing your mindset to expect these delays shifts your energy and helps a ton.

If you have been acquiring turn key rentals, I hope I have inspired you to try rehabbing your next rental. Don’t let inertia hold you back. It will seem hard many times along the way, but if you stick with the plan and push through, you end up learning so much that you will carry with you into the rest of your real estate journey. Look before you leap, but I assure you, if you take the leap of faith, you will be rewarded ….

What does FIRE (Financial independence Retire Early) look like with real estate investing??

Our first visit to Hawaii

The FIRE (Financial Independence Retire Early) movement has been increasing in popularity over the last decade, and needless to say I am a firm believer of the concept. The idea of being able to sustain ones lifestyle through income generated passively gives one tremendous opportunities to explore passions that would otherwise have taken a backseat to the daily grind. The FIRE realm is again broken down into lean FIRE, fat FIRE and obese FIRE. Lean FIRE is when one estimates annual expenses close to $50-60k to sustain one’s lifestyle in retirement. Fat FIRE is more generous requiring about $60-100k in annual income to sustain one’s post retirement lifestyle and you may have guessed that obese FIRE means your annual post retirement needs exceed $100k. I have read multiple blogs that primarily focus on investing in the stock / bond market (allocation in stocks decreases typically the closer you are to retirement) with annualized returns of around 8-10% factoring in compounding growth, where they talk about what your nest egg should be to hit these goals. The general consensus is that you need around 1.5 million dollars in your retirement account invested in a combination of index funds and bonds to allow safe withdrawal of around 4% annually (which also equals anticipated annual return – inflation) to hit lean FIRE. If you are shooting for fat FIRE that nest egg should be around 1.8-3 million dollars and over 3 million dollars if the desire is to obese FIRE.

Now those who are self employed find that they hit those goals much faster since they can stash away more in their retirement accounts pre-tax. But I think one has to give serious thought to what the alternative out there is (especially if you are on a W2 and a much better candidate for multiple conventional loans), and this is where I think real estate investing gets very exciting. Let’s talk numbers!

Working backwards, say you are looking to lean FIRE… and would like an annual income of 60,000$ from your rental real estate portfolio, this translates to around $5K monthly. In previous posts we ran numbers for how to arrive at net income from a rental. Suppose you are invested in a high cash flow market and have a net income of around 500$ per rental property per month… that means with 10 rental properties you are all set to lean FIRE. So how much money then do you actually need to invest in each property to generate the 500$ net income? Again this will vary depending on your market and your initial down payment. But assuming a 20 – 25% down payment that keeps you leveraged and increases your overall return on investment, in a good cash flowing market, an initial investment of around 50,000$ should be adequate. Which means that with around 500K you are all set to lean FIRE. Now, in a High Cost of Living Market or in a market where it is not typical to see a 10% return on investment you may need more initial capital to lean FIRE. But there are so many strategies to explore such as BRRR (Buy, Rehab, Rent, Refinance, Repeat), house hacking, living in a property for a year before renting it out (thereby making you eligible for less money down and more attractive loan terms) that give you the opportunity to put less money down to own a rental. In my experience, I have found that in the markets I choose to invest in, 50,000$ gets me a nice rental that cash flows around 500$/ month.

Now it is important to factor in annual increases in rent… With my first rental, I immediately cash flowed around 400$, but with increasing rents and having refinanced it at a lower interest rate, I now cash flow over 500$. And through retirement, its important to remember that your rents will at least match inflation, therefore all you have to do is keep cashing those checks. It is also important to remember that although cash flow is key to rental investing, a big portion of your return on investment is from building equity through property price appreciation and debt pay down and you can easily tap into this equity by choosing to refinance and pull out the built equity. Tapping into the equity you have built in your rentals is also a means of equity stripping which helps with asset protection. If you tap into this equity and pull out your initial investment, then you are essentially in the territory of infinite returns (cash flow/ 0$ investment = infinite returns). And that is a very sweet deal….

I think its worthwhile to mention at this point that each individual is only allowed 10 Conventional loans including your primary residence, but that usually easily translates to 20 Conventional loans for a two income household. And once your conventional loan options are exhausted, portfolio lenders and non-recourse loans are out there to explore. Now, I have only been talking about single family home rental investments, but if you are willing to scale to Multifamily units or small apartment complexes, then that does make for a faster leap towards your FIRE goals. In my opinion though, Single Family Homes as rentals are a sweet spot given the ease of acquisition, smooth operation, property value increase historically and the increasing demand for Single Family Home rentals. That being said, I do see many favorable points to making the jump to apartment complexes with around 100 units, this is another sweet spot where ease of maintenance and operation make this a favorable option for those with the resources. But more on this in a later post…

Ideally you want to be diversified- therefore it would be nice to have a retirement account nest egg that can fund part of your FIRE, and a rental portfolio that feeds the rest. Here’s to getting closer to those goals and to a rapid FIRE….

What is really HOLDING YOU BACK from investing in Real estate??

Believe in yourself…

My first mentor in real estate investing was a dear colleague, a second generation real estate investor who nudged me to start building my real estate portfolio around 2012, which in hindsight was the perfect time to get started. But it wasn’t until a few years later that I eventually took the plunge. And I didn’t necessarily set accelerated goals for myself till more recently. Pondering over what really holds us back, it is clear we have to fight both internal and external influences to get started. I’d like to take a closer look at these factors today hoping that the insight will help you take the leap.

How we hold ourselves back can be broadly categorized into our understanding (or lack thereof) of how money works for us (the concept of Assets and Liabilities) and our own limiting beliefs (the things we tell ourselves that stop us in our tracks).

Start Understanding Your Own Financial Scorecard: Kiyosaki
From “Rich Dad Poor Dad”

Reading “Rich Dad Poor Dad” was eyeopening for me, because it introduced the concept of Assets and Liabilities to me in a whole new light – an Asset being anything that puts money in your pocket and a liability being anything that takes money out including your personal home and that fancy car that you just leased. It got me thinking about how I needed to accelerate asset building if I ever wanted to have options other than staying in the rat race till retirement age. Because as long as I wasn’t generating enough in monthly passive income to replace my income from my job wholly or in part, I was essentially stuck.

The Concept of ESBI by Mr Kiyosaki | by P C Marddaraj | Medium

The book also clearly puts you into one of four categories, and I realized that I was boxing myself into an E or at most an S, while the smart thing to do would be to be a B or an I. As Warren Buffet’s famous quote goes: “If you don’t find a way to make money while you sleep, you will work until you die.” Sounds kinda morbid, but it just hit me how true this was. Not to mention the numerous tax incentives and deductions that the tax code offers Business owners and Real estate investors for stimulating the economy, that in turn play a huge role in accelerating their personal growth.

But truly, even armed with this knowledge, we still have to fight our limiting beliefs – the little voice in our head that tells us how maybe we don’t have it in us to see this through, or maybe we need to know more, have more reserves, or that it’s too risky, what if we fail? Most often the only thing standing between us and success is our self-doubt. You could have no rentals, looking to take the leap – or a few single family homes, looking to venture into Multifamily homes – or be a long time investor in Multifamily homes considering taking the leap to small apartment complexes – sometimes we just freeze in Analysis Paralysis. That’s when it’s great to have a mentor or a community of like minded people who have similar goals, support us and in a way hold us accountable. This is why I also feel that a strong “WHY” and Goal setting are so important to taking the first baby steps. We covered the Why in a previous post and I want to briefly touch on goal setting as a means to get you out of a rut – telling yourself that you want to own x number of doors or properties in y years or I want to have x in passive income by year y and more importantly surrounding yourself with supportive people who will hold you accountable to that goal is a great way to get started and boost your self. Do not underestimate the power of the company you keep – in propelling you forward and in holding you back, so choose wisely.

But everything said and done, you still have to be able to defend yourself against all the external influences that say it can’t be done…. like the well meaning friends who think it’s the wrong time to be investing in real estate (gently remind them that if you invest in cash flowing properties and do your due diligence you will be able to weather storms), or the relatives who share horror stories of a friend who had to go unclog a toilet in one of his rentals on a weekend (that is what property managers and handymen are for) … or the spouse who just isn’t ready to take the plunge (because trust me, when they say NEVER- it just means they are not yet ready and you still have more persuading to do, hopefully with solid numbers backing up your proposal). When you are ready, please don’t let someone else’s limiting beliefs become your own.

Because when you don’t hold yourself back and don’t let others hold you back – when you finally do take the plunge, you will see that your first property will set you free. Once you see the numerous benefits of investing in real estate firsthand, you will kick yourself for not having started earlier…

How to RUN NUMBERS for a real estate deal and when to pull the trigger…

Now, that’s a room with a view!

When you are looking to buy a rental investment property, its crucial to know how to “run the numbers”. This is the foundation of analyzing any investment deal, rental or not, and the end result should align with your goals – for example, a decent goal would be to hit a COC (cash on cash return) between 8-10%. This is basically just expressing annual cash flow from your rental (after all expenses are deducted) as a percentage of your initial cash investment (down payment and closing costs). Depending on your market and aptitude, this number could be as low as 5% or as high as 15% before you consider the deal noteworthy. Knowing the numbers also means that you could then work backwards, arriving at an offer that may be much lower than asking, but one that allows you to hit your COC goal… So let’s dive right in…

COC = (Annual net cash flow/Initial investment) x 100 expressed as a percentage

Cash flow = Income – expenses

So the real trick then is to be able to estimate accurately rental income for the property you are analyzing and potential annual expenses for the property. An easy rule of thumb is to calculate PITI (Principal and Interest + property Taxes + Insurance)+ 5% possible vacancy + 10% allowance for Maintenance (including Capital expenditures) + HOA and Property management fees if applicable. In some circumstances, including Utilities (particularly with Multi Family Units) and Pool Maintenance may be necessary if these expenses cannot be billed back to tenants, but for the most part in Single Family rentals these expenses need not be factored in. It’s also important to remember that rent estimates on Zillow or Redfin may not be accurate, checking with your agent is important. Also current property taxes may not be an accurate estimate as these taxes are reassessed upon sale of the property.

For example, a Single Family Home SFH you are eyeing is listed for 235,000$. Current tenant pays 1995$. This is your gross income per month. Let’s calculate monthly expenses assuming 20% cash down ie 47,000$, 3.625% interest rate for 30 years (yes, rates are higher for investment properties, please factor that into your calculation), 3000$ in closing costs, property tax rate of 1.9% and no property management fees (self managed)…

Initial investment is 47,000$ + 3000$ (down payment + closing costs)

PITI (Principal + Interest + Property taxes + Insurance) = (828.2+370.3+115.7$) = 1314$

Vacancy + Maintenance = 15% of rent = 299.25$

HOA = 75$

This leaves you with a monthly cash flow of (1995-1314-299.25-75) 307$. So your annual cash flow is 3684$. And your Cash on Cash return is (3684/50,000) x 100 = 7.4%. And if you remember from my previous post, this is all TAX FREE income thanks to Depreciation.

This may or may not be aligned with your goals… You may choose to put an offer in at 225,000$ that would be more aligned with your goal for COC. But your decision is informed …

Now while assessing Short Term Rentals STRs, you will have to factor in a much higher vacancy which may even be seasonal depending on the property location, per night rates, hiring maintenance crews etc. In a High Cost Of Living HCOL market, the numbers may only work with a much higher down payment. Or you may need to tweak the numbers based on Forced Appreciation, ie if you plan to rehab the property after purchasing it (which will likely also increase rental potential), you will need to factor those costs into your initial investment. But the basic principle remains the same.

Now, go ahead and run those numbers …..

Just remember, Rome wasn’t built in a day… the more numbers you run, the better you get at spotting a great deal; the more offers you put in, the more likely you are to close on your next property. Best wishes…

About me…

I am a physician mom, with two lovely children who are my universe… But I’m also driven by this desire to keep them safe and build something that gives me the financial independence to spend more time with my family, that I can grow and pass on to my children… As a first generation immigrant, I realized that school didn’t provide me with the financial education that life demanded and I learnt some things the hard way and others from mentors I am eternally grateful to. Through this site I hope to share financial knowledge with other moms who are also trying to pass on a legacy of love and inter-generational wealth.



#generational wealth


WHY invest in real estate?

I find that the first question to ask oneself before venturing into something new is always “Why?”. Because if you understand the “why”, it keeps you pushing forward even when the going gets tough… A good “WHY” is to build something and pass it on to your kids so they can have a comfortable, risk-free life. Another good “WHY” for investing in general is to attain FIRE – Financial Independence Retire Early… It’s something a lot of professionals have been targeting lately- to get to the point where they can work because they want to and not because they have to, to be able to define how many hours they want to spend at work and how much time they want to spend traveling or with family doing the things that have been on the back-burner for so long. To get to that point, you have to generate enough in passive income to be able to cover your annual expenses without tapping into retirement savings (or have enough in retirement savings to tap into it at a reasonable rate and still have it last you as long as it should).

This is where Real estate investing comes in…

When you only have a few hundred bucks coming in every month after expenses, real estate investing may not seem so attractive, but it’s always important to factor in all these components when you are assessing returns. Let’s delve into each individually…

The benefits of investing in Real estate are FOUR FOLD:

Tax free rental income
Debt pay down by your tenant
Property appreciation
Tax savings
Magic four!
  1. Tax free rental income: One of the most important factors to consider when assessing a potential rental property for purchase is COC – cash on cash return. Put very simply, this is the ratio of annual before tax cash flow (Rent-expenses including mortgage payments, property taxes, insurance) to total amount of cash invested (down payment + closing costs) expressed as a percentage. Now in most cases, particularly if you have leveraged your money and taken a mortgage out on the property, this is tax free money due to paper losses from DEPRECIATION, a real estate investor’s friend and one of the many ways the tax code favors real estate investors. A good investment property usually fetches 8 – 12% in COC return that is tax free, already pitching it against returns from S&P 500 index funds. But there is more…
  2. Remember, if you have leveraged money in a rental property and taken out a mortgage on it, then your tenant is paying towards the principal every month, increasing your equity in the property, an oft forgotten return on investment. Let’s say this is usually around 3-4 % of your initial investment in leveraged properties.
  3. And hopefully your property is appreciating in value since your purchase, national averages are around 3 – 4%. But if your money is leveraged, meaning you only put down 20% as a down payment, then your actual ROI (return on investment) is around 15% conservatively. Again this is in a market that is trending upwards, which is the general trend if you have a buy and hold strategy.
  4. And lastly, my favorite- tax savings that are in addition to your tax free cash flow. In most rental investments with a mortgage on them, thanks to Depreciation and other expenses the government allows you to deduct legally, your year end numbers show a “Paper loss” that under the right circumstances you may use to offset taxes on other income, another factor to consider in your ROI. When you factor in Cost segregation, bonus depreciation – things can get very exciting, again proving that the tax code does reward real estate investors for stimulating the economy.

Since everyone understands numbers better with an example, let’s run some numbers… Say you put 40,000$ (20%) down on a 200,000$ single family home rental that rents for 2000$/month.

  • Your monthly expenses PITI (principal, interest, property tax and homeowners insurance costs) are around 1200$; but factoring in vacancy and other maintenance and capital expenses, possible HOA and property manager fees – let’s say your expenses are 1500$ out of pocket (very conservative numbers) – your COC ie cash on cash tax free gains each month are around 500$, which translates to 6000$ per year, fetching you a decent 15% COC. While filing taxes the following year, thanks to DEPRECIATION of rental property value that can be claimed on Schedule E where you report rental income and expenses, this rental income gets sheltered as tax free gains.
  • Your tenant pays around 200$ towards the principal each month, 2400$ annually which is a 6% return on your initial investment.
  • Assuming the property appreciates by 3%, that’s an increase in 6000$ in year one, which is an additional 15%.
  • Factoring in paper losses (depreciation and other expenses the IRS allows you to legally deduct as business expenses required for your rental investment) of around 2,400$, which is again a very conservative assessment, that is an additional 6% return on investment. Giving us a grand total ROI of 42%. Now in a different market where rents are lower or property taxes higher, or in another year when interest rates are higher, your ROI may drop down to around 25%… In yet another market with higher property appreciation, your ROI may be above 50%.

As you can see, the ROI for real estate investment done right beats S&P returns without a doubt.

So the real question then is not “WHY” invest in real estate but WHY aren’t you investing in real estate??

And for those of you thinking of the hassles of fixing a leaky faucet or toilet, and for those who have heard horror stories of tenants trashing a friend’s rental – stay tuned….