Case Study – Baby Boomers – Increasing Passive Income for Retirement

• Posted by Jeffrey King
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• Tags: 1031X, Baby Boomer, Equity, long-term investment, Property Analysis, retirement

How can Baby Boomers increase passive income for retirement?

As we have seen in the news recently, many Baby Boomers have not saved enough for retirement.  Additionally, many have also found their conservative investments yielding low returns that likely will not meet their retirement lifestyle goals. Faced with a shortening runway, many Boomers are now looking to reposition their investments to find stronger returns and increase their passive income stream.

A repositioning of how and where that equity is invested can dramatically change returns. This case study shows how one boomer used a 1031 exchange to dramatically improve his return on equity and monthly cash flow.

John (age 59) had purchased a single family home in California in 1998 for $300,000 that he rented to tenants as an investment.  The most recent tenant had signed a lease where John was receiving $2,000 per month in rent. Since his 1998 purchase, his investment home has appreciated to $500,000 in value, showing an equity gain of $200,000.  John looked at his $500K asset and was unsatisfied to see that large of a figure returning only $2000 a month.  As he neared retirement, John needed to increase the amount of monthly rent that he receives to improve the performance of his investment and to live the comfortable lifestyle he was hoping for.

Property                                             Price                           Rent/Month               Annual Total

Current Property                                 $500K                         $2K                                 $24K

With advice and guidance from Meridian Pacific Properties, John sold his California home and invested in multiple properties in Memphis, TN with a 1031 Exchange.  Memphis has two very attractive characteristics for John; one, the rents are significantly higher relative to the home values, so cash flows very much stronger, and, two, the market was much less volatile than California, so John's principal investment was well protected.

John was able to successfully purchase five investment properties with his $500,000 in Memphis and easily tenant the each property for a minimum $1,000 per month.

Property                                             Price                           Rent/Month               Annual Total

Property #1                                         $100K                         $1K                                    $12K

Property #2                                         $100K                         $1K                                    $12K

Property #3                                         $100K                         $1K                                    $12K

Property #4                                         $100K                         $1K                                    $12K

Property #5                                         $100K                         $1K                                    $12K

Total                                                   $500K                        $5K                                  $60K

With the same equity used, John’s retirement income landscape has changed dramatically.  His homes in Memphis currently provide him with a monthly passive income of $5000, instead of $2000.   This shift in equity enabled him to receive 2.5 times the rent that he previously received, and substantially added to his quality of life as he enters retirement.