So, how does it feel to Retire Early with Real Estate? When you talk about retiring early with real estate, the default answer for many is, “I’ll pay off the house.” A common second answer is, “I can borrow against my home equity if I need the money.” The best answer would be, “That’s how I pay for my early retirement.” Real estate is often viewed as an effective way to hedge against market volatility. The best way to retire early with real estate is by investing in rental properties as they generate passive income.
Is Real Estate a Good Investment for Retirement?
The short answer is: yes, real estate is a good investment for retirement if done right. Too many people think that you cannot retire early with real estate because it requires becoming a handyman. In reality, you can outsource that work to a property management company, generally for 10% of the rent collected on the rental property. This means you could buy five to fifteen rental homes and have someone else do the bulk of the work. If you invest in apartment buildings, commercial real estate, or other projects, you are even more removed from the day-to-day operations of the property.
The wrong answer to this question is to start buying properties to rehab and hope that you can sell them at a profit. Yes, house flipping shows are popular. No, it is not a good way for retirees to invest in real estate. You risk losing a large portion of your nest egg if the property takes longer to sell than expected or if the rehab costs of the property are far higher than expected.
For skilled contractors, this may be a viable real estate investing strategy, but they risk owning their job because they only clear as much money per flip as they’d earn working for others. In summary, house flipping is not a viable method for most to retire early with real estate. When you choose to invest in real estate for your retirement or otherwise, don’t buy properties in an area where people are moving out. Yes, the properties are cheap.
No, you won’t earn much in rent and your ability to sell the property if you want to get out is declining. Be careful of buying rental properties in markets going up, since the property in a good school district may be desirable but the rents you could get are not as high as a percentage of the property’s value. After all, if the rent is too high, they may find it cheaper to simply buy the house next door. Do buy properties to rent that you can sell as required, since those who retire early with real estate may need to sell the property to pay major medical bills or for long-term care.
Can You Retire Early With Real Estate?
Before we answer this question, let’s compare real estate to some alternative forms of investments that can be included in your early retirement strategy. Government bonds are theoretically the safest investments around, but they’ve often failed to pay interest rates above the inflation rate. Savings accounts are hardly better. Corporate bonds pay slightly better, but they are hard to find. The higher the interest rate, the greater the risk the business will go under. Nor can you assume that your corporate bonds will pay back your principle.
During the Obama administration, the federal government overturned years of established precedence and said the unions get their money ahead of bond holders, most of whom were retirees.
Stocks that pay dividends were considered a gold standard, but the sheer volume of money pouring into the market via tax advantaged retirement accounts has driven up their cost relative to the dividends they may or may not pay. You cannot plan a retirement budget off of praying for capital gains. A viable rental income retirement strategy balances income with security.
And this brings us back to the question, “can you retire early with real estate?” Yes, you can retire early with real estate by owning a portfolio of rental properties. The rental real estate retains its value as long as you vet tenants, supervise the properties and maintain proper insurance. It generates cash flow every month the tenants pay, and you can ensure this by vetting tenants and evicting those that don’t pay rent. The return on investment for rental income is in the 5% to 10% range, depending on the type of investment. It is difficult to find those rates of return without far greater risk than rental real estate. This is why it is a good idea if you choose to retire early with real estate than go out for risky investments.
How Investing in Real Estate Can Boost Your Retirement Income?
Yes, you can retire early with a passive real estate income if you do it right. You can follow these successful real estate investment strategies to boost your retirement income.
Investing In REITs For Early Retirement
While owning real estate can be lucrative, it's not necessarily the most feasible option for every investor. Acting as a landlord for some can be both costly and overwhelming. Investing in a real estate investment trust is considered a sound way to secure your retirement.
REITs by comparison, offer many of the same benefits associated with direct property ownership without the hands-on management responsibilities. In this retirement strategy, you're is buying shares in REITs or real estate investment trusts. You’re buying shares of a corporation that builds apartment buildings, commercial real estate, or other types of property. They are required by law to pay out 90% of their taxable income as dividends to shareholders. You receive regular income from them, though it may only be paid out annually.
The main benefits of this approach towards securing your retirement are liquidity since you can sell the shares, and the ability to diversify since you can buy shares in medical property developers and apartment builders. Many real estate-related investments have done quite well in the last decade or so. The median sales price of single-family homes hit $315,700 at the end of the third quarter, up 23 percent from the prior peak for values in 2007 before the financial crisis hit.
Compare this to the risk of putting all of your money into a single commercial building or several single-family rental homes. A better way to assess REITs is to look at their funds from operations or FFO. Whereas reported earnings treat depreciation on real estate holdings as an expense that lowers results, FFO adds depreciation back, which more accurately reflects the value of a trust’s property. As you're planning your early retirement strategy for 2019 and beyond, it's important to ask yourself whether a real estate investment trust belongs in your portfolio.
According to Scott Crowe, chief investment strategist at CenterSquare Investment Management, “REITs offer significant advantages to investors who are seeking access to real estate relative to direct property ownership, including much lower asset management costs, improved liquidity in terms of geographic and property sector exposure and greater transparency.”
Rental Income Retirement Strategy
A second viable strategy is a retirement through rental income. There are many ways to make passive income in real estate. One of them is direct income from rentals. A rental income retirement strategy is the best option for retiring early with real estate. Once the income surpasses the expenditures, then you are on the winning side. In this strategy, you'd be buying detached single-family homes to rent out. You receive a higher rate of return on these properties than duplexes or triplexes. The properties are easier to sell if you want to get out of them.
We recommend single-family homes over owning condos because condo home owner association rules could limit how the property is used – including as a rental unit. Another issue is the boom and bust cycle of condos. While you could find a condo at a deep discount during a bust, the lower limit of rent you could charge is set by the surrounding apartments. If you buy at the peak, your return on the investment is lower while the rent you charge is still determined by what surrounding apartments go for. The only potential benefits to condos are the elimination of yard work and the occasional ability to get a bulk discount for buying several properties.
While you can replace your income with a good rental income retirement strategy, you will have to pay the bills either up front or over the long term. Don’t delay paying for that new roof and have to gut the house to fix the rotting walls. Don’t ignore pest control and have to pay for termite treatment of the property. Don’t skip the process of vetting tenants and end up paying for the damage they cause. Shortcuts will cost you dearly.
These issues arise even if you’re buying condos instead of single-family homes. If you don’t want to do the work or hire someone else to do it, consider investing as a partner in an apartment complex or buying REIT shares instead. Remember, to retire early with real estate, you must choose a property that is “turnkey” and “rent ready.” A good rental property is fully refurbished or a new construction residential property. The property must be in growth markets and must produce a positive cash flow. The property must have a good appreciation potential.
Norada Real Estate Investments can help you retire early with real estate investing. By researching top real estate growth markets and structuring complete turnkey real estate investments, they help you succeed by minimizing risk and maximizing profitability. For below market value rental properties for sale (Click on the hyperlink).
How Many Rental Properties Do You Need To Retire Early?
The answer to this question depends on how much money you need to retire early on. If each property clears $300 a month, then you need 10 filled properties to replace a $3000 a month income. If you need $6000 a month in income, then you’d need to rent out 20 single-family homes.
According to a recent study, single-family homes in large U.S. cities have generated returns of about 9% annually between 1986 and 2014. Half of that gain was rental income, and half of it was in capital appreciation. This means that rental real estate yielded an average 5% ROI each year after expenses like insurance, property taxes, and maintenance. Those who chose to sell a home gain about 5% per year of capital gains. Average rents were about 10% of the value of the property, but 40% or more went to pay bills like the mortgage, insurance, taxes, and maintenance.
This suggests that if you invest $100,000 into one or two single-family rentals, you’d reap about $5000 a year in rental income. However, that figure is based on purchasing the property outright. In reality, since those figures assume you’re carrying at least a partial mortgage on each property paid in part by the tenant’s rent, you could invest $100,000 into two large single family homes or four smaller ones worth around $200,000 and reap $10,000 or so in rental income per year.
The more money you put down on a property, the more you clear each month. At the other end of the spectrum, if you put 10% down on each property, you may only clear $300 a month in passive income and need ten homes to generate that $3000 a month income stream. If you can buy the properties outright, you could clear $700-$1000 a month – and in the last case, you only need three single-family homes to pay your bills. Note that the rental income retirement strategy will depend in part on the level of debt you take on and the interest rates you pay on the debt, so run the numbers before you buy a rental property.
This means that your rental income retirement strategy depends on several factors. How much income do you need to pay your bills? And how much risk are you willing to take in the form of debt? Greater debt levels could yield many properties that end up paying your bills, but if you don’t manage costs and make sure the rent is paid, it can all collapse on you.
Conversely, you have significant upside potential if you can live on less than the generated cash flow and start paying down the mortgages. Once a house is paid off, you clear far more income from it each month without additional expenses. If you have a small portfolio and aggressively pay down the debt, you have an inflation-proof way to retire early with real estate since your income will automatically go up with time.
If you are a beginner in rental property investing, it is very important to read good real estate books. You must also learn from successful real estate investors who have retired early on in their lives by investing in some of the best real estate markets like the Dallas Housing Market. Dallas housing market is a great market because it has a strong economy and a constant population growth which will make your pockets bigger. As rents go up smart investors should invest in Dallas for their early retirement.
Another great market for investing for your early retirement is the Houston Housing Market. The Houston Real Estate Market is becoming a hotbed of buyer activity that could be beneficial for real estate investors; just ask the multitude of overseas investors who are choosing Houston as the city of choice to invest in for the foreseeable future.
We also recommend these hottest real estate markets for investors looking to build their portfolio of single-family rental homes for their early retirement. The single-family market is particularly hot right now. Following the housing market decline in 2007, single-family rental properties became favorable options for investors, saving on construction or refurbishment prices. The quick turnaround for an owner to rent out their property means cash flow is almost immediate.
Almost all the housing demand in the US in recent years has been filled by single-family rental units. Between 2019 and 2020, the number of built-to-rent residences – single-family homes designed specifically for rental purposes — grew by 30%. They currently account for around 6% of all new homes built in the United States, a figure that is expected to grow in the next decade. Rent growth is strong in every price tier, but strongest at the very top and some markets are hotter than others.
Remember, caveat emptor still applies when buying a property anywhere. The information contained in this article was pulled from third-party sites mentioned under references. Although the information is believed to be reliable, Norada Real Estate Investments makes no representations, warranties, or guarantees, either express or implied, as to whether the information presented is accurate, reliable, or current. All information presented should be independently verified.
ROI of single-family homes
40% of rent goes to expenses, not including mortgage