Hypothetical Scenarios – Using Retirement Funds to Purchase Real Estate

investing-ira

In my last article “Using Retirement Funds to Buy Real Estate”, we discussed using retirement vehicles like IRAs to purchase actual real estate.  The next big question you may be asking yourself is how do I know if this will make sense for me?  I Below, I provide some hypothetical scenarios to help you determine if this makes sense for you.

I want to very clear here….these are purely hypothetical scenarios s for illustration purposes only and past performance is no guarantee of future results.  As you’ll see here in a moment, I did use quite a few assumptions just to build the financial models in the examples, but as there are literally dozens upon dozens of scenarios and assumptions one could use, so it is nearly impossible to try and quantify all of them here.

With that said, let’s take a look at some hypotheticals….

Here are the assumptions used in calculating all three scenarios:

Starting Portfolio Size: $500,000

Current age of person: 50

Number of years in simulation: 35 years or until age 85

Monthly Income Need from retirement portfolio in Today’s Dollars: $30,000 per year or 5% of current portfolio size

Monthly Rent from Rentals:  Investing in two properties at $250,000 each with $1,500 per month in gross rent from each property.  $3,000 gross rents per month less taxes, insurance, and maintenance resulting in a net rent of $2,200 per month.

Inflation Rate: 3%

Yearly Rent Increase: 3%

Average mutual Fund and ETF Growth net of fund expenses years 1-10:  7% (using more growth oriented funds and ETFs until retirement at age 60)

Average mutual Fund and ETF Growth net of fund expenses years 11-35:  5% (using more conservative oriented funds and ETFs during income distribution at retirement)

Average financial advisor charge to manage portfolio:  1%

Average growth in real estate years 1-35: 4%

Years 1 through 10: No income disbursements from retirement account

Years 11 through 35: Income disbursements begin in year 11 at a future value of $40,317 ($30,000 today) and will continue to increase with inflation

Interest Earned on Rental Income inside Retirement Account: 1%

Now, let’s take a look and see what happens over a 35 year time span using these assumptions.  Option A will be a do-it-yourself investor using a mix of traditional mutual funds and ETF’s inside of an IRA, Option B with be an investor who has hired a financial advisor who charges a fee to manage retirement funds using a mix of traditional mutual funds and ETF’s inside of an IRA, and Option C will be an investor who has decided to buy some rental properties inside of their IRA.

 

Option A – Do It Yourself Investor Using Traditional Mutual Funds and ETFs
Years Income Distribution Portfolio Value
1  $                                      –  $                           535,000.00
2  $                                      –  $                           572,450.00
3  $                                      –  $                           612,521.50
4  $                                      –  $                           655,398.01
5  $                                      –  $                           701,275.87
6  $                                      –  $                           750,365.18
7  $                                      –  $                           802,890.74
8  $                                      –  $                           859,093.09
9  $                                      –  $                           919,229.61
10  $                                      –  $                           983,575.68
11  $                         40,317.49  $                           992,436.97
12  $                         41,527.02  $                        1,000,531.80
13  $                         42,772.83  $                        1,007,785.57
14  $                         44,056.01  $                        1,014,118.83
15  $                         45,377.69  $                        1,019,447.08
16  $                         46,739.02  $                        1,023,680.42
17  $                         48,141.19  $                        1,026,723.24
18  $                         49,585.43  $                        1,028,473.98
19  $                         51,072.99  $                        1,028,824.68
20  $                         52,605.18  $                        1,027,660.74
21  $                         54,183.34  $                        1,024,860.44
22  $                         55,808.84  $                        1,020,294.62
23  $                         57,483.10  $                        1,013,826.25
24  $                         59,207.60  $                        1,005,309.97
25  $                         60,983.82  $                           994,591.64
26  $                         62,813.34  $                           981,507.89
27  $                         64,697.74  $                           965,885.54
28  $                         66,638.67  $                           947,541.15
29  $                         68,637.83  $                           926,280.38
30  $                         70,696.97  $                           901,897.43
31  $                         72,817.87  $                           874,174.43
32  $                         75,002.41  $                           842,880.74
33  $                         77,252.48  $                           807,772.29
34  $                         79,570.06  $                           768,590.85
35  $                         81,957.16  $                           725,063.23

 

 

Option B – Using Traditional Mix of Mutual Funds and ETFs –

Using Financial Advisor

Years Income Distribution Portfolio Value
1  $                                       –  $                    530,000.00
2  $                                       –  $                    561,800.00
3  $                                       –  $                    595,508.00
4  $                                       –  $                    631,238.48
5  $                                       –  $                    669,112.79
6  $                                       –  $                    709,259.56
7  $                                       –  $                    751,815.13
8  $                                       –  $                    796,924.04
9  $                                       –  $                    844,739.48
10  $                                       –  $                    895,423.85
11  $                           40,317.49  $                    890,923.31
12  $                           41,527.02  $                    885,033.23
13  $                           42,772.83  $                    877,661.73
14  $                           44,056.01  $                    868,712.19
15  $                           45,377.69  $                    858,082.98
16  $                           46,739.02  $                    845,667.28
17  $                           48,141.19  $                    831,352.78
18  $                           49,585.43  $                    815,021.46
19  $                           51,072.99  $                    796,549.33
20  $                           52,605.18  $                    775,806.12
21  $                           54,183.34  $                    752,655.03
22  $                           55,808.84  $                    726,952.39
23  $                           57,483.10  $                    698,547.38
24  $                           59,207.60  $                    667,281.68
25  $                           60,983.82  $                    632,989.13
26  $                           62,813.34  $                    595,495.35
27  $                           64,697.74  $                    554,617.43
28  $                           66,638.67  $                    510,163.46
29  $                           68,637.83  $                    461,932.17
30  $                           70,696.97  $                    409,712.49
31  $                           72,817.87  $                    353,283.11
32  $                           75,002.41  $                    292,412.03
33  $                           77,252.48  $                    226,856.02
34  $                           79,570.06  $                    156,360.21
35  $                           81,957.16  $                      80,657.46

 

Option C – Buying Income Property(s) Inside IRA
Years Income Distribution Monthly Rents Accumulated Cash Real Estate Value Total Value
1  $                                       –  $                     26,400.00  $                     26,400.00  $               500,000.00  $            526,400.00
2  $                                       –  $                     27,192.00  $                     53,856.00  $               520,000.00  $            573,856.00
3  $                                       –  $                     28,007.76  $                     82,402.32  $               540,800.00  $            623,202.32
4  $                                       –  $                     28,847.99  $                   112,074.34  $               562,432.00  $            674,506.34
5  $                                       –  $                     29,713.43  $                   142,908.51  $               584,929.28  $            727,837.79
6  $                                       –  $                     30,604.84  $                   174,942.43  $               608,326.45  $            783,268.88
7  $                                       –  $                     31,522.98  $                   208,214.84  $               632,659.51  $            840,874.35
8  $                                       –  $                     32,468.67  $                   242,765.66  $               657,965.89  $            900,731.55
9  $                                       –  $                     33,442.73  $                   278,636.04  $               684,284.53  $            962,920.57
10  $                                       –  $                     34,446.01  $                   315,868.42  $               711,655.91  $         1,027,524.32
11  $                          40,317.49  $                     35,479.39  $                   314,189.00  $               740,122.14  $         1,054,311.14
12  $                          41,527.02  $                     36,543.77  $                   312,347.65  $               769,727.03  $         1,082,074.68
13  $                          42,772.83  $                     37,640.09  $                   310,338.39  $               800,516.11  $         1,110,854.50
14  $                          44,056.01  $                     38,769.29  $                   308,155.05  $               832,536.75  $         1,140,691.80
15  $                          45,377.69  $                     39,932.37  $                   305,791.28  $               865,838.22  $         1,171,629.50
16  $                          46,739.02  $                     41,130.34  $                   303,240.51  $               900,471.75  $         1,203,712.26
17  $                          48,141.19  $                     42,364.25  $                   300,495.97  $               936,490.62  $         1,236,986.59
18  $                          49,585.43  $                     43,635.18  $                   297,550.68  $               973,950.25  $         1,271,500.92
19  $                          51,072.99  $                     44,944.23  $                   294,397.42  $            1,012,908.26  $         1,307,305.68
20  $                          52,605.18  $                     46,292.56  $                   198,443.66  $            1,053,424.59  $         1,251,868.24
21  $                          54,183.34  $                     47,681.34  $                   193,926.09  $            1,095,561.57  $         1,289,487.66
22  $                          55,808.84  $                     49,111.78  $                   189,168.29  $            1,139,384.03  $         1,328,552.33
23  $                          57,483.10  $                     50,585.13  $                   184,162.00  $            1,184,959.40  $         1,369,121.40
24  $                          59,207.60  $                     52,102.68  $                   178,898.71  $            1,232,357.77  $         1,411,256.48
25  $                          60,983.82  $                     53,665.76  $                   173,369.64  $            1,281,652.08  $         1,455,021.72
26  $                          62,813.34  $                     55,275.74  $                   167,565.74  $            1,332,918.17  $         1,500,483.90
27  $                          64,697.74  $                     56,934.01  $                   161,477.67  $            1,386,234.89  $         1,547,712.56
28  $                          66,638.67  $                     58,642.03  $                   155,095.80  $            1,441,684.29  $         1,596,780.09
29  $                          68,637.83  $                     60,401.29  $                   148,410.22  $            1,499,351.66  $         1,647,761.88
30  $                          70,696.97  $                     62,213.33  $                   141,410.69  $            1,559,325.73  $         1,700,736.41
31  $                          72,817.87  $                     64,079.73  $                   134,086.65  $            1,621,698.76  $         1,755,785.40
32  $                          75,002.41  $                     66,002.12  $                   126,427.23  $            1,686,566.71  $         1,812,993.93
33  $                          77,252.48  $                     67,982.18  $                   118,421.20  $            1,754,029.37  $         1,872,450.57
34  $                          79,570.06  $                     70,021.65  $                   110,057.00  $            1,824,190.55  $         1,934,247.55
35  $                          81,957.16  $                     72,122.30  $                   101,322.72  $            1,897,158.17  $         1,998,480.89

Recap of numbers:

 

At the end of 10 years using the above assumptions, here is what each option looks like:

Option A: No disbursements from account and an ending portfolio value of $983,575

Option B: No disbursements from account and an ending portfolio value of $895,423

Option C:  No disbursements from account and an ending portfolio value of $1,055.990 ($740,122 in real estate values and $315,868 in cash from rental income)

 

 

At the end of 20 years using the above assumptions, here is what each option looks like:

Option A: Disbursements from accounts starting in year 11 starting at $40,317 per year and inflating from there and an ending portfolio value of $1,027,660

Option B: Disbursements from accounts starting in year 11 starting at $40,317 per year and inflating from there and an ending portfolio value of $775,806

Option C:  Disbursements from accounts starting in year 11 starting at $40,317 per year and inflating from there and an ending portfolio value of $1,294,005 ($1,095,561 in real estate values and $198,443 in cash from rental income)

 

 

At the end of 35 years using the above assumptions, here is what each option looks like:

Option A: Disbursements from accounts in year 35 are estimated to be at $81,957 per year and total disbursements over that 25 year time period of $1,469,946.08 and an ending portfolio value of $725,063

Option B: Disbursements from accounts in year 35 are estimated to be at $81,957 per year and total disbursement over 25 year time period of $1,469,946.08 and an ending portfolio value of $80,657

Option C:  Disbursements from accounts in year 35 are estimated to be at $81,957 per year and inflating from there and an ending portfolio value of $2,074,367 ($1,973,044 in real estate values and $101,322 in cash from rental income)

 

Summary:

Again, these are hypothetical but I think you can draw some fairly clear observations here.  From my vantage point, if you were to consider purchasing income property inside of your IRA you have a cash flow for life that should increase with inflation and backed by an actual hard asset you can look at and touch and is something everyone will always need regardless of economic circumstances.  Also, you likely won’t be subject to the wild swings of the stock market and that may help you sleep a little better at night.

As always you should weigh the risk vs. return to help you decide what you are truly comfortable with.  If this is something that looks appealing to you, please consider using me as a resource as I would love to earn your business.

Thanks and happy hunting!

Disclosure:  The author of this article was a previously licensed Registered Investment Advisor and a securities licensed broker, but is no longer in the financial services industry.  This article is not intended to provide financial advice, but is intended to be used for informational purposes only.  The author is currently a licensed real estate broker and Realtor in the State of Colorado.  You should always consult your tax and/or financial professional if you should have any questions.