byrdiegyrl via flickr
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.
It is quite difficult to get positive cash flow with rentals on the Coasts. I heard that it is much easier in the midwest and other parts of the country. Of course, the potential for appreciation is higher on the coasts too.
I think it is best to raise the price at least a little bit every year so the tenant can get used to the idea.
I have actually been considering buying in the Midwest, as my wife’s family is there. It will take me a year to save up the down payment, but this time next year, I could be making the plunge.
Unfortunately, what keeps appreciation from occurring much in the MidWest can also keep rent in check. There is currently more supply of housing than there is demand in certain areas. Look at Detroit. You could plow under complete city blocks and still have plenty of housing to go around. That keeps rent in check. Until that supply is diminished or demand increases, you can’t raise rents. But you can still cash flow. You just have to buy right.
That’s a great point CFM. It does seem to balance out. There still are better markets than others.
Rentals are a strong part of my passive income strategy. I ignore price appreciation — which I think is akin to gambling — and focus solely on cash flow.
In this most recent housing market, I don’t blame you. That sounds like a great way to ensure you are getting a positive cash flow.
It can be a great source of income but one that needs a lot of work at the begining. Especialy dealing with tenants and choosing the right ones.
By the way Corey, how do you get the Progess Bar on the right hand side? is that a plugin?
Yes, it is a plugin. It’s called Pretty Simple Progress Meter.
Agreed. I hope to use a management service when I do decide to take the plunge.
I agree that it is indeed possible to retire on rental properties. As you pointed out, one needs to start early, but that is true of most retirement plans. Myself? Owning and maintaining my own home is enough of a challenge for me…I have never been interested in unplugging a renter’s toilet.
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My biggest concern with rental properties, and the one that keeps me from diving in head-first, is the trust issue. Sure, a stock I buy can tank because the company steps in the wrong direction – but I can hedge against that and dump the stock quickly as it plummets. With a rental property, it’s difficult to hedge against a renter who doesn’t pay, won’t leave, or worst of all damages the property. Are these horror stories overhyped?
I had several properties in the early part of last decade. Ultimately, I probably should have done 1 at a time vs. 4 in 2 years. A job relo forced me to sell all (for a profit) as I didn’t want to go with a prop mgmt co. Would probably have had them all paid off by now.
I would like to comment about the real estate business whether its buying and selling homes fixing them up what have you. I do not have anything against real estate investing. But lets be clear this is a business just like if I own a used car lot a health food store a convenient store any variety of businesses. Each type of business has its own little little quirks of sorts real estate is no different. To many folks look upon real estate as an investment and that is why they fail to succeed in the real estate business’ when in fact it is clearly a business thats how one should look upon real estate. A good example of this is commercial real estate. When ever I drive around I see many almost empty or completely empty stripe shopping stripes. I don’t mean big box stores that are empty. I talking about a small commercial buildings that might house ten or at most fifthteen small mom and pop businesses along a major thoroughfare. I have seen dozens and dozens of partially or completly vacant stripe shopping stripes and I don’t live in detroit. I live in the suburbs of chicago and this is not something recent. I have seen this five ten twenty years ago so what does that tell you about investing in commercial real estate. Their must be many problems with these type of properties.
I have been considering rentals for a long time, but the hassle that comes with them is absolutely a concern for me. I would love to retire off them and make them my full time job, but then you start thinking — I would need about 30 units (and manage them myself) to make that possible. 30 units — that is a scary number to manage.
If I used property management, I bet that number would be almost double.
I completely agree! My niche site is mainly about how I’ve managed to purchase several rental properties. It is my main form of passive income stream and I have a few articles written on how to value these potential properties and make certain they are worth the investment.
I know way too many other landlords that retired by 40 and none that waited longer than 45! Of course if didn’t happen over night, they just kept at it and then once they were making a serious profit, they simply retired
I give myself another 5 years to do the same and I will be 35 then
I’m retiring at age 57, and part of my income is from a duplex I bought when I was 30?. Paid 70K for it back then. I paid it off in 12 years, and currently clear about 13K/Year after taxes/maint. I’ve got a management company to run it day-to-day (screen tenants, minor repairs, etc). They charge 6% of the gross for this service, well worth the no-hassle aspect of it.
I agree that rental properties seem to suggest a modest return rate in certain markets. I do need to investigate REITs more as well. Real estate investment does have the huge benefit of leverage, being able to invest in a lot of house for little initial investment.
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Retiring on rentals depends on how much you want to be involved in the day to day. Our focus is on passive investors who want long term safe predictable income. Our neich is 55 plus rental attached new construction homes.
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Corey,
Retiring on rentals is certainly doable. Your approach is spot on relating to building streams of income vs building a balance. This is the way to go..
My novice advice for what it’s worth is: Take your time and build a portfolio over time. Once you get one or two paid off, it really starts to snowball. Keep your day job and just pick up a property or two per year.
My other advice would be to self manage your rentals (at least at the beginning). After your first property you will quickly learn if landlording is for you or not. Don’t expect this to be completely passive.
Good luck to all.