Rental properties are a terrific way to invest your money, especially if you are trying to retire early. They provide cash flow, terrific returns, tax advantages and are a great way to leverage your money. I particularly think rental properties are a great means to retire early because they provide cash flow. Cash flow will keep coming every month as long as you own rental properties. You have a great idea of what your returns will be every month and you never have to eat into your principal investment.
For more information on my rental properties and investing strategies check out my complete guide to purchasing long-term rental properties.
How much money can you make from rental properties?
The returns on rental properties vary based on location, purchase price, and many other variables. I shoot for about $500 in monthly cash flow on my rental properties that I buy for $80,000 to $135,000. Some people may make more and some people less when they invest in rental properties. Here is a great article on how much money you can make from rental properties. I have 15 rental properties now and I make conservatively $9,000 a month on them.
Not only do you get cash flow from rental properties, but there is a good chance your properties will appreciate over time, although never count on appreciation. If you leverage your properties with a mortgage, you are paying down the loan every month and gaining equity as well. The tax advantages of rental properties increase returns as well because you can depreciate rental properties.
How much money do you need to retire?
There is a difference between how much money you need to retire and how much money you want to retire with. We could retire with the bare minimum to live on, but that would not be much fun. The answer to how much money you want to retire with is different for everyone and even different for the same person at different stages of their life.
I have continually increased the amount of money I want for retirement as my income has increased, and I have learned I am capable of much more than I previously believed. When I was just starting out in my real estate career, I would have loved to have $5,000 a month coming in and probably would have been happy to retire at that level. Now that I know I can do so much more, my goal is to retire with the income that 100 rental properties will provide.
I could certainly retire with much less money and be perfectly happy, but I love big goals and pushing myself to do as much as I possibly can. The question you have to ask yourself is how much money do you want to retire with? Do you want to retire at your current income level, more or less? Don’t let the belief that you could never make enough money to retire how you want to stop you. Here is a more detailed article on how rental properties can help you retire early.
Why are rental properties a better way to retire than traditional investments?
When you invest in the stock market, mutual funds or bonds; you have no real control of your investment. Sure you can choose what you invest in, but you have no way to make the company or bond you invest in perform better. You can only hope the company performs well once you put your money in. The really frustrating part is a company can do great, but the economy can tank and still cause a stock to go down.
With rental properties, you have complete control. You buy the rental property and can buy the property below market value. Try buying a stock below market value, it’s impossible. You can buy a stock that may be undervalued, but you can’t buy a stock below market value. On a rental property, you choose what to repair, how to finance the property and you rent the home. You can also hire a property manager to perform these tasks, but you have the choice of how to manage and run your rental property.
When you invest in the stock market for retirement you do not live off the cash flow provided. You live off the interest and appreciation your stocks have made you over a number of years. When you start taking money out of your retirement accounts to live on, you stop making as much money and eventually start using more money that you are making. That is why you have to estimate when you will die on stock market retirement calculators. With rental properties, you do not have to guess when you will die, because cash flow comes every month and will increase over time, not decrease.
Why rental properties let you plan for retirement easier
When you plan to retire with stocks and bonds, a retirement calculator will tell you how much you have to invest each year to reach your retirement goal. You have to guess how long you will live and what rate of return stocks will give you to predict how much money you need to save. If you live too long or get a lower rate of return, you run out of money in retirement.
Rental properties provide monthly cash flow and because of that cash flow, you don’t have to guess when you will die. You figure out how much money you need per month in retirement and you buy enough rental properties to provide that monthly cash flow.
How many rental properties do you need to retire?
It may seem simple to calculate how much money rental properties will provide for retirement. Multiply your monthly cash flow by how many properties you have and you have your number.
However, the cash flow on rental properties will increase over time. If you are using leverage and getting loans on your rental properties, eventually you will pay off loans like I recently did on rental property number one. Paying off my mortgage increased my cash flow by over $300 a month.
Rental rates will most likely increase over time as well. When I first rented rental property number one three years ago, I rented it for $1,050 a month and I just rented for $1,300 a month. I would not count on that much rent appreciation, but there should be some appreciation over time.
There is no easy formula to calculate the total returns from rental properties. No one can predict rent appreciation or exactly when properties will be paid off. I like to pay off one rental property at a time early with my cash flow. My suggestion is for everyone to write out a plan as detailed as possible for their expected rental property returns. It does not have to be exact, I have written many plans and each time my number changes quite a bit. The act and writing out and thinking about your plan will help you to achieve your goals. Here is an article with a plan for someone buying one property a year with minimal down payments. You may need 5, 10, 20 or 100 rental properties to reach your retirement goals.
For more information on why rental properties are such a great investment and how to start investing in rental properties. Check out my book: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely.
Why rental properties will let you retire early
The great part about rental properties is they allow you to retire early if you so desire. I have 11 rental properties that I have bought over the last 3.5 years. I have spent $270,000 to $300,000 buying and repairing those properties and they produce over $5,000 a month. If I wanted to retire right now, I would keep making that $5,000 or more for the rest of my life. I would not have to worry about my money running out like you do with the stock market. The stock market retirement calculators depend on people using all their money up until they die. That is why you risk running out of money with when investing in the stock market. If I would have invested my money in the stock market, I may be able to retire for 6 or 7 years before I had to go back to work again.
There is no magic formula for how much money you need to retire, and there is no magic formula for how many rental properties you need to retire. We all have different needs and different desires in life and retirement. It is still very important to write out your goals and a plan for how to reach them. An easy way to start is to figure out how much money you want in retirement, then figure how much money you can make with rental properties and that will tell you how many rental properties you need to retire.