The Great Unwinding
By: Aj Borowsky
Tags: Real Estate, Investing, Financial Independence, Fire, Retirement

When I retired at the age of 48, over two years ago in September of 2018, my finances and portfolio looked very different than today, but that was the plan. I had built one portfolio to get me to FIRE (Financial Independence Retire Early), and now I have to unwind that to see me through what I hope will be a very long and successful retirement.

Newly retired and enjoying a local craft beer

The work, the effort you put into retiring early doesn’t end on the day you leave the office for the last time. In many ways, the work is just beginning. You’ve spent years, maybe decades, obtaining assets that would grow. Now you have to reposition them for sustenance (and growth, you still need growth). To really get a feel for how my plan was going to unfold, I’m going to start a little farther back, near the end of 2017.

The Decision

Motivation hung on my office wall

Having just come back from my vacation home/rental property in California in November of 2017, I was three years away from my target retirement date of spring or summer of 2020, or so I thought. Circumstances at work pushed me over the edge, and I decided now was the time to get the ball rolling. My wife and I had recently sold a business and purchased this new rental property in CA that would eventually become our second home, bringing our real estate holdings to four homes, including our primary residence.

Real estate, and rental properties, in particular, are great ways to retire early, either providing income in the form of rent or, as was my plan, unleashing large sums of money, what I call a flood of cash, as you sell properties that have extensively been paid for by your tenants.

At this time, we also had the typical and more readily accessible investments in a brokerage account as well as our retirement accounts: 401k, IRA, and Roth IRA. The money in the investment accounts could be used while the real estate could either generate income from rents or be sold and converted to more liquid investments.

The first sale

Usually, your primary residence is not a source of income since you have to live somewhere, but in our case, we could sell our primary residence and move into one of the rental properties, which is exactly what we did.

At this point, before making any changes, our portfolio was made up of:

Brokerage/Cash: 23.39% of assets

Retirement accounts: 39.79% of assets

Real Estate: 36.82% of assets

In June of 2018, we sold our house and moved into one unit of our three-unit vacation rental property at the Jersey Shore. We were now down to three homes, and the proceeds moved from real estate to brokerage.

Choices

We no longer wanted to be in the rental business, at least not the kind of rentals we were doing, vacation rentals. We decided to sell our Jersey Shore property but hit a snag. Since opening our business in 2012, we had neglected our rental property a bit, and it needed work; add to that the fact that rental properties had fallen out of favor with buyers, it proved difficult to sell at what we considered a fair price. Our money would remain locked and unavailable for a while longer.

In California, where we had two rental properties, we decided to stop renting one and use it exclusively as a second home. The other rental, which had been short term vacation rentals, was converted to a long term lease providing some more steady and regular income. We preferred to sell that property, but the rental seemed just as good a choice.

That’s the key to choices, there’s always more than one, and you need to be flexible as you decide which path to follow.

Pandemic

In March of 2020, we still had three homes, the Jersey Shore rental where we were also living, our second home in CA, and one rental property also in CA. Up until this time, our other investments had been doing well, and we were ahead of projections meaning my early retirement was on track (my wife is still working, and that’s another choice for another post).

My tenant in the CA property informed me that he would not be renewing his lease for a third year and so I decided this was the time to sell. I had no idea that the second home market would get hot due to COVID, but it sold fairly quickly and for 98% of the asking price. I had now reduced my real estate from a high of four homes to two and had released a flood of cash. But I wasn’t going to use that cash in a typical way.

Options

Closely related to choices are options. In order to maximize flexibility, we decided that we would sell our Jersey Shore property, a choice, but once again, we couldn’t get near the price we were asking. There was a building boom taking place, however, and we figured it would be more profitable to demolish the existing structure and either sell the vacant land or build and sell the new house; these were options. The flood of money from selling the CA rental made these options possible.

Out with the old, in with the new…maybe

But what if we couldn’t sell the vacant lot for a high enough price? What if we built a new house and couldn’t recoup our expenses? The final option was that we would simply live there until such time as we could sell it for a profit we felt worth it. This last option was made possible by the flood of money released from the sale of the business mentioned above, the sale of our primary residence, and the sale of our CA rental property.

With the decision made, the house was emptied of our personal items, an architect was hired, and plans were submitted to the town. Once the plans were approved, the structure was razed, and a sign was placed on the vacant lot advertising it for sale. Within four days of placing the for sale sign, we had an interested buyer. That one fell through.

Empty lot with a sign

Our second interested buyer came to us nine days after the for sale sign was put up, and three days later, we had a deal to sell the property for 92% of our full asking price and 97.5% of our expected sales price. With this sale, we have gone from four homes to one in less than three years, releasing a large chunk of cash to sustain us throughout our retirement.

At this point, our break down of assets changed as follows:

Brokerage/Cash: from 23.39% to 40.12%

Retirement accounts: from 39.79% to 50.47%

Real Estate: from 36.82% to 9.41% (but this is no longer spendable since it’s our last and only residence)

More to Do

The great unwinding, converting our illiquid real estate holdings to more liquid investments might be complete, but our work is not finished. Our balance is out of whack. Instead of investing the proceeds of these various real estate transactions for the long term, we kept the money in much more short term investments in anticipation of big expenses of building and possibly holding onto a new home. Since that won’t be happening, I now have to rebalance and plan for a much different future.

This won’t be a quick or easy process, but I will approach it just as I’ve approached all of my investment decisions over the years, with research, planning, and focused execution.