By Lee Sherman
Buying and selling real estate is a lot of work but did you know that it’s possible to use real estate as a vehicle for passive income? Your rental properties can fund your retirement, providing you with a regular source of income that won’t eat into your principle. Real estate is one of the best asset classes you can invest in, with the potential to appreciate up to five times in value on average over the mid-to long-term.
But while you’re waiting for that to happen, you can rent the place out, either traditionally or through one of the new online platforms such as Airbnb. The rental income can be used to pay off your mortgage or to actually live off in your golden years. As a rental property owner, you’re also eligible for substantial tax deductions and write-offs for upkeep on the property, property taxes, and even travel expenses. But, how many rental properties do you need to own before you can retire and live off the income? More than you might think.
An investor we know says it took him acquiring 20 single family homes before this strategy paid off (meaning it brings in $100,000 in rental income yearly). He buys properties that are being foreclosed for cash. Of course, your mileage may vary. There are many things to consider, including where you purchase your rental properties (property values vary widely from state to state as do incomes), your timeline for retirement, and what other sources of income may be available to you.
Location, location, location
So assuming we are talking about a single family home in a part of the country where property values are reasonable (we’ll exclude the left and right coasts for now), a median priced neighborhood in a growing medium sized city, and our current low-interest rates, you can see where you might need multiple properties to make this work. The calculus for real estate cash flow is based on three things; how much you need to live comfortably in retirement (this could be more, less, or the same as what you are living off now), how much you’ve invested in real estate, and the return on that investment. For example, if your expenses add up to $100,000 a year and you can find rental properties that will return 10%, then you will need to invest $1 million. In the middle of the country, you can find homes for $120,000. If you can afford to pay cash (as our friend does) then you can avoid going into debt but it is also possible to lock-in low-interest long-term debt and still come out on top, especially in a down market like the one in which we currently find ourselves.
Whether you’ve paid for the homes outright with cash or are using debt to finance them, real estate is one of the most sure-fire passive investments you can make. Owning 20 single family homes might sound like a lot but in fact managing these properties is relatively hands off. While your tenants may call on you if the pipes burst or the heating goes out, these events are extremely rare and, for the most part, you’ll be able to just sit back and let the money roll in. And don’t forget that you still own these properties and, should they appreciate in value (as is likely to be the case) you can always decide to sell them for a profit.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.