7 Proven, Impactful Steps to Retire on Rental Income

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Real estate can provide ample flexibility for those seeking retirement, both early retirement or just pure financial independence. What does it take though? How can you achieve financial freedom with income properties? I’ll highlight what it takes to retire on rental income.

What Does it Take to Retire on Rental Income? (Exact Steps)

Retiring on rental income is an awesome goal and a great dream. You can build a nest egg that provides some serious income while also providing additional opportunities for capital appreciation.

But what does it take? Is it as easy as buying a few properties? Do you need to have patience?

There are a bunch of factors that you need to take into consideration on your journey to retirement from real estate.

I created a real estate investing spreadsheet that is completely free to download. It will help you make better investment decisions when looking at real estate properties.

It takes only 5 seconds to download.

If you don’t use some sort of investment model, you are simply investing blind. I like to use my investing model to also track my investment properties.

I combine it with Personal Capital, which now they include the Zestimate on the home value. This has been extremely helpful in tracking my cash flow and net worth for completely free.

Why consider retiring off of real estate investing?

Real estate investing offers many advantages. Why should you consider retiring on real estate as opposed to other means of investing?

I love the idea of retiring on real estate because it can provide the exact benefits that are at the core of my ideologies, which include:

  1. Financial flexibility
  2. Locational-based investing
  3. Ability to earn income without sacrificing capital appreciation and upside (you make money and build equity)
  4. Simple investing (real estate doesn’t require complex modeling or due diligence)
  5. Autonomy to build a business that can be automated and streamlined

Here are some of the pros and cons of real estate investing to help you understand why it might make sense for you.

How to Invest in Rental Properties

I believe that investing in rental properties has become much more streamlined in recent years. Technology has enabled investors to make better decisions for a lower cost.

This makes real estate investing an attractive proposition as you can spend less time, make more money and have the financial flexibility that you have always wanted.

If you want to start investing in real estate, consider finding an outstanding real estate agent and mentor to show you the ropes.

Use forums like BiggerPockets to meet and interact with some of the savviest investors in real estate today.

How to Retire on Rental Income (Steps to Consider)

Here are the steps you need to take to start living on rental income.

1. Harvest Cash for Purchases

Before you start your journey to acquire income properties for passive income, you need to harvest cash in a bank account that will be used to acquire your first or first set of rental properties.

You’ll need to build a balance for your first downpayment or multiple downpayments. You should have at least 25% down for your home purchase as equity.

I use my CIT Bank savings account to dump all my savings into that particular account. That helps me harvest cash for downpayments.

If I don’t land a deal, I’m at least earning an above-market interest rate relative to the average providers out there.

Here are some other highly liquid investments you can consider to stash your cash before investing.

2. Find a Trustworthy Real Estate Agent (That Also is an Investor)

I cannot emphasize the importance of working with a real estate agent that understands the lens of an investor. I like the idea of being aligned with your real estate agent.

Find a real estate agent that also invests in properties. You’ll learn a lot and get information from him that you probably haven’t thought of previously.

3. Execute on Properties (Target a Specific Cash Yield)

You should follow one simple formula for all your properties.

It’s pretty simple to understand the amount of money it takes to retire on rental income.

Here are some steps that will guide you to calculate the exact amount of capital you’ll need to retire on rental income:

  1. Target your annual cash flow for retirement: In this example, let’s say you want to use $60,000 of annual rental income for retirement.
  2. Determine a reasonable cash flow yield on your downpayment for your properties: Realistically, people target 7-9% annual cash yields on their properties, depending on the market of course. Consider these other real estate investing terms if you need to learn more.
  3. Finally, dividend your annual income target by the cash yield. This will equal the amount of capital you’ll need to be invested in your rental properties. In our example, $60,000 divided by an 8% cash yield equals $750,000.
  4. Add in a reserve balance in your checking account to fund capex and other maintenance items equal to about 5%. That would equate to $37,500. You never know if you’ll have a tenant leave, vacancy, economic conditions, etc.

So, to earn an annual income of $60,000 from your retirement properties you’ll likely need about $787,500. That may seem like a lot of money.

There are a few considerations:

  • An 8% cash yield could be conservative… If you beat that number with your rental properties, you are already ahead of the plan. You might need less than $787,500 to retire.
  • You won’t need to buy all these properties right away. It’s actually better to slowly build your real estate nest egg over a few years. This gives you the opportunity to “dollar average” in while markets change.
  • The $787,500 is your downpayment value. The value of the properties will increase over time and you’ll likely have multiple millions of dollars in real estate value offset by mortgage obligations.

Here is a video on how I think about real estate investing and financial analysis. I walk you through an exact rental property opportunity to help guide you on how to use the model:

See Related: Renting vs Selling Your Home (Pros & Cons)

4. Stabilize Your Rental Income

The next question you should ask yourself is, ‘how much rental income would I need to retire peacefully?’ You must calculate your expenses and plan for the rental income according to your financial requirements.

You must decide how much passive income you’ll need to live entirely off of your rental income. 

The question is, how many rental properties you need? Is one enough for your lifestyle? Do you need more?

If you’ve invested in multiple properties, chances are the market will fluctuate in your favor sooner than later due to inflation. 

Make a list of all your spending and compare it to your rental income. If you’re left with money to spare, you’re on the right path.

Once you’ve executed on your properties and are close to your income goal, you can do more… Like increase your rent for tenants and lowering expenses can help you increase cash flow without doing much additional work.

Or, if you need to rent your property do you need a realtor? Maybe not… Here is how I rented my house without a real estate agent.

You may want to consider diversifying your rental income stream by also investing in real estate crowdfunding.

My favorite app is Fundrise. They are the leading platform for commercial real estate crowdfunding and you can invest with as low as $500.

It’s completely free to join and browse investment opportunities.

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Fundrise
Minimum:

$500


Fundrise is a leading real estate crowdfunding platform that allows you to directly invest in private commercial real estate opportunities. With an investment minimum of only $500, you can start earning passive income or capital appreciation through one of funds and investment plans. I personally use Fundrise to invest and diversify my real estate portfolio.
SIGN UP FOR FREE

5. Minimize Your Expenses to Maximize Growth Opportunities

If you’ve reached the conclusion that your spendings are exceeding your rental income, it’ll be beneficial for you to cut down on expenses. 

Create positive cash flow and immediate growth opportunities by revamping your properties and making simple yet impactful changes. This will help in renting out your property for a much higher price. 

Once you’ve generated positive cash flow, you can use it to either pay-off debts, mortgages, or re-invest in more properties before you retire.

Using a tool like Landlord Studio will help you find opportunities to reduce expenses and maximize cash flow. 

6. Take Care of Your Debts

Debts can make or break you – and they’ll break you if you don’t pay them in time. Make sure you first use your positive cash flow to pay off any mortgage or debt that may be looming over you. 

Your passive income will immediately rise once you get rid of any pending debt. Retiring off rental income will be event more fruitful once you’re debt-free (on your personal real estate).

Without debt, comes more flexibility. It’s always a battle between paying off personal debt or buying more real estate.

See Related: Real Estate Crowdfunding Guide

7. Keep Interest Only (If Possible)

If you don’t want to use all your cash flow to pay off your debt, another way is to keep your properties with an interest-only loan. 

This will minimize your monthly cash flow expense, and an interest-only loan can also provide you with tax savings. 

Referring to a qualified tax advisor or financer will help you manage your loans better.

If you know that you are going to hold onto your properties for only a few more years, moving to a 5/1 ARM or a balloon principal payment oriented structure could likely save you a ton of money. 

See Related: How to Get a HELOC on a Rental Property

8. Check Your Assets

As a rental property business owner, you must take care of your properties from all angles. That doesn’t only mean maintenance, but to protect them from legal or physical harm.

Properties aren’t immune to litigation or disaster, so make sure you’ve covered those aspects through legal means. 

Keep a lawyer or professional in the loop and protect your assets well before time. Once your rental business blooms, the risks that come with handling real estate also increase. 

If you’re investing in multiple properties, it is also a good option to diversify your investments by investing in residential, commercial, and industrial properties.

When you check your assets, use a tool like Personal Capital to monitor all of your investments, including the value of your rental properties. It’s completely free to use and you’ll get a free retirement planner and net worth tracker.

I use Personal Capital to manage my money in less than 20 minutes per month.

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Personal Capital
Price:

Free


Personal Capital is my personal favorite for managing my passive income cash flows, investments and retirement accounts. With their free net worth tracker and retirement planner, I can manage my money in less than 10 minutes per month.
JOIN FOR FREE

9. Utilize the Tax Advantages

The rental business comes with some great tax advantages, and you can make use of them as you retire. 

Your rental property is an asset that can be depreciated. Hence, any interest that you pay on your property will be a deduction on your tax returns. 

You can deduct a certain amount of money from your taxes every year. So make sure you utilize this feature to its extent. 

See Related: 12 Best Apps for Real Estate Investors

Conclusion – Retire on Rental Income

Retiring on real estate is worth it. It’s a marathon rather than a sprint, however. You should continually think about the longer-term picture. Hiccups will happen along the way. It won’t always be easy.

Continue to learn and stay focused on building a stabilized asset base and you’ll be retiring on rental income before you know it.

Use tools to make your life easier and become a better investor. To summarize, these are my favorite tools to help you retire on rental income:

  1. Rentometer: Use it to instantly screen for rental comps for lease rates. It’s free to start and if you move to premium, you’ll get the best bang for your buck.
  2. Landlord Studio: Use Landlord Studio to track all your cash flow and all things accounting for your rental properties. It will save you a ton of time.
  3. Fundrise: Use this to gain exposure to commercial real estate and diversify your market risk. You can invest for as little as $500. You can even sign up for free to get market intel on properties around the U.S.
  4. Personal Capital: This free tool will track all your property values and mortages. The free net worth tracker AND free retirement planner will help you better your financial future. You can track your progress towards retirement in less than 15 minutes per month.

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