As I mentioned in my post detailing my alternate retirement plan, I don’t look at retirement the same way that most people do. Instead of building up a lump sum, I am creating income streams. One of these income streams, which is more long term, is real estate -more specifically residential properties. When I was talking with one of my friends, they asked me if someone can really retire on rental properties. Even though it sounds crazy, it is not only quite doable, but a secure retirement income.
How to Retire on Rental Properties
Using rental properties as a source of income in retirement is not a quick process. It takes time to build up your collection of residential properties. Because people typically don’t have the cash laying around to buy up properties left and right, it usually means acquiring these properties one at a time. Usually people will secure a property by applying a down payment and then taking out a loan for the rest. If you have a large enough down payment or find a great deal on the property, you can have a positive cash flow from the beginning.
If you begin with a positive cash flow, the idea then is to continue to raise rent prices with inflation. Typical increases vary by region, but can go up 2-3%, if not more. Some landlords choose to raise the rent every year or even every two years, while others raise the rent only when switching tenants. As the rent increases (and the mortgage stays the same), your cash flow increases. If you repeat this process multiple times, by the time the mortgages are paid off, you will have a substantial amount of passive income.
The Benefits of Using Rental Properties for Retirement
The benefits of using rental properties to fund your retirement are many. As I already hinted at, using rental properties equates to income. This means that as long as people are in need of a place to rent, you will have a decent income from your property. While the recent drop in housing prices have led many to question this, using real estate in this way isn’t dependent on the sale price of houses. In my housing market, even though the prices have dropped, the rates for rentals have stayed the same. The increase in rent, as mentioned above, also means that it naturally fights against inflation.
Rental properties can also be a truly passive source of income. If you hire a property manager, you don’t have to worry about the day-to-day tasks. They take care of all of the things that can make real estate investing not passive (emergencies, necessary repairs, etc). You are still responsible for the bill, but for a minor fee, you can take away a lot of stress.
Beyond the security and the potential for a passive income, rental properties also offer you a huge tax benefit. While I don’t have time to go into the specifics, there are generous tax benefits that involve depreciation which will minimize the taxable income from real estate.
While it takes some upfront time and money, rental properties can be a secure long term investment. If you can find cheap home loans as well, it will make your work even easier as your monthly payment will be that much lower (and higher profit). If you work hard now, you can pave a much smoother road for the future.