How To Retire Early With Rental Properties Rental properties have a lot of advantages especially for people who want to retire early.
Retiring early is a dream many people have. They may picture themselves on a tropical island with nothing to do but play golf or surf.
However, the reality is, it takes money to retire early and figuring out how to make enough income for retirement as well as early retirement takes some planning. Having enough rental property to give a good cash flow is considered one way to do it.
Before retiring at any age, people need to know how much income they need to meet their living expenses. This is usually 25 to 30 times their annual spending put into investments.
Social Security will help, but not until later for anyone who wants to retire early. Some want to continue to spend lavishly after they retire, and others want to reign in their spending to be happy on less. Also, some like the idea of working at something they enjoy after retirement to earn money and some never want to work again. This is a personal decision, but one that has to be made before making an early retirement plan.
Rental properties have a lot of advantages especially for people who want to retire early. It’s difficult to figure out how much money is needed to last before the retiree dies. What if the money runs out, and they are 80 years old with the possibility of living until 90?
Rental properties solve this problem because there is a cash flow that can be spent without using the capital investment. In some cases the rents may go up, and an estate manager will take care of tenants and maintenance. As the mortgages reduce, the cash flow gets even bigger.
Another advantage is tax benefits. With deductions for depreciation, repairs and maintenance and more, the property owner basically gets to keep all of the net rental income. There are also ways to avoid paying taxes when the property is sold. If a house is lived in by the owner for two of the last five years, they pay no tax on capital gains when they sell up to $250,000 or double that with a spouse.
This can be used to sell property for a profit with no capital gains tax, and that profit could be rolled over in to more rental property. There are still transaction fees, agent commissions, but this is minor compared to the profit. In other words, the government is encouraging people to invest in rental property.
The first step is to buy rental property in a place that will have favorable returns. This excludes large cities such as Los Angeles, New York, Boston and Chicago and focus on small towns. The gross rental income should be one percent of the cost of the property. This means that if the property cost $200,000, the rent should be $2,000 per month. If it’s possible, it’s better for the owner to get two percent which means $2,000 rent of $100,000 property.
The owner should put 25 percent down and find a reputable turnkey company that manages their own property, so the interior is in good shape and tenants will be found. Also, it’s a good idea to buy two to four properties of different types such as a single family home and a duplex.
The owner has much more control over their investment than they would if the money was in stocks, bonds and mutual funds. The aim is to buy the property at below market value, repair what is needed or wanted, and choose how to finance the property. A property manager will look after repairs and tenants for the owner, but this is still the owner’s decision.
The number of rental properties needed to retire will depend on the amount of cash each one generates. However, the mortgages will gradually get paid off, or the property may be sold at a huge profit, and a new property purchased, which will increase the cash flow. Some people pay off one property at a time to increase their cash flow.
Minimal Down Payments
Others buy one property per year with minimal down payments. The number of properties needed to retire early with rental properties will be different for different people depending on their expenses. Some may be able to manage with five rental properties, and some may need 100.
The way to retire early by using the income from rental properties is for people to start purchasing property as soon as they have the income to make payments on a mortgage and a down payment.
If they are careful to buy in an area that doesn’t have exorbitant property prices, live in the house or condo at least two years before they sell it and sell it for a much higher price than they paid, they can pay no capital gains tax and be set up to purchase another rental property or maybe two. When the cash flow reaches the amount they need added to any other income sources, they can retire.