How To Retire Early With Real Estate

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Ways Rental Properties Can Help You Retire Early

How to Retire Early from Real Estate Investing

Once upon a time, workers saved up a nest egg over the course of a 40-50 year career, and then spent it down in retirement. And hoped they didn’t run out money before kicking the bucket.

That drawdown model raises all sorts of questions about safe withdrawal rates and how much you need to save for retirement. As you approach retirement, it also forces you to move money into lower-risk, lower-return investments to mitigate the sequence of returns risk .

Nor should you expect much help from Social Security. A 2020 study by the Senior Citizens League found that the buying power of benefits have fallen 30% since 2000.

Enter: rental properties.

How To Retire Early Using Real Estate Investing

Is your dream to retire early? It may seem impossible at the rate the markets going or just relying on stocks and bonds. But what about real estate? It provides a monthly cash flow, and it builds wealth, enabling you to reach your financial goals much faster. Investing in the right real estate at the right time can create the passive income you need to replace your 9 to 5 job while building wealth for you to use during your golden years.

9 Ways to Retire Early Using Real Estate Investing

So how do you retire early using real estate investing? We outline the steps for you below.

1. Establish Financial Security

Before you consider retiring early, you must get your debts under control or pay them off. Retiring with high-interest consumer debts wont work. At the very least, pay off your credit cards and student loans. Ideally, you should have your principal residence mortgage paid off too, but if youre close, youre on the right path. Use this time to get control of your budget. Limit expensive purchases, live below your means and focus all efforts on paying off any high-interest debts.

2. Know Your Income Needs

3. Prepare for Emergencies

4. Know the Rental Income

5. Figure in Taxes

Since youre operating your own business, youre responsible for the taxes. As a real estate investor, youll have many write-offs, but there will always be tax liabilities. Work with your tax provider to get a good number for taxes, as it will decrease your monthly cash flow.

Llcs And S Corps For Real Estate Holdings

From his writing, it seems the family doesnt operate the ownership of the two rental properties as a business. This is pretty common with small business. Plenty of gig workers and small landlords file a simple Schedule C with their 1040 tax form. This doesnt offer as much protection to the business operator as setting up a simple Limited Liability Corporation . It doesnt have the deduction flexibility of having an LLC taxed as an S Corporation.

The cost and difficulty of setting up the LLC and S Corp tax filing designation varies from state to state. Its usually not too difficult or costly. In Virginia where we are, the annual renewal fee is $50 for an LLC. Switching the tax designation requires a form .

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New Property Every 3 Years

It assumes you will buy one new property every three years.

You could buy more if you have more capital available.

Or, as your equity is paid down in Property #1, you could borrow a home equity line of credit against it for the down payment funds needed to buy another property.

One more thing . . . $200 per unit per month cash flow is just todayâs numbers.

In three years, you should increase your standards as market rents increase.

So by the time you buy Property #2, it should generate a minimum of $218/month cash flow per unit, or $874.18 for a four-plex.

Example #: Early Retirement In 10 Years

Real Estate Investing Articles

Rachael and Justin had some friends named Kim and Steve. In many ways their lives were similar. But Kim and Steve had an itch to leave their regular 9-to-5 jobs MUCH earlier.

Why did they want to leave their jobs? First, they didnt want to wait until their 60s to enjoy the lifestyle and flexibility of retirement. They wanted to pursue mini-retirements, and they wanted options to engage in what matters to them while still relatively young.

Like their friends, Kim and Steve are both 35 years old, and they live outside of St. Louis, Missouri. But unlike their friends, they didnt just buy any old house. Kim and Steve applied the strategy of house hacking to buy a similarly priced house with a rentable garage apartment.

Their house financing terms were the same with a 5% down, 30-year, $907/month, 4% fixed-interest loan. But by renting the garage apartment on Airbnb, they easily earn $1,000/month or more to eliminate their entire mortgage payment.

Of course, they long ago paid off the last of their personal debt . And because of their ambitious retirement plans and because more spending doesnt make them happier anyway, they save a HUGE portion of their income .

Like their friends, Kim and Steve are now ready to begin building wealth in earnest.

At the start, their assets look like this:

  • $28,000 = current equity in their house
  • $25,000 = 401k balances
  • $25,000 = cash saved for real estate investing

And going forward, their savings and investment assumptions look like this:

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Financial Results Of Example #2

The results of Kim and Steves build-up phase looks like this:

After 10 years at the age of 45, Kim and Steve have a total net worth of $1,456,900. The breakdown between different categories looks like this:

And most importantly, their income looks like this:

Like example #1, I assumed their free and clear rental properties produce net rental income at a rate of 7% and their cash produce 1% interest.

Because theyre too young to withdraw from a 401k penalty free, they withdraw 0% from retirement accounts. Theyll let it continue to grow and compound. Even if no more contributions are made, at their current growth rate of 8.175% the $347,000 could grow to around $1,128,000 by the time they are 60 years old.

Kim and Steve now have the luxury of covering all of their living expenses with rental income. True to the hold fast phase described above, their net worth stays intact until they can reach retirement age and access retirement account and social security funds.

But because they are only living off rental income AND because they keep their expenses at a reasonable level, their net worth will likely continue to grow at a good rate even after early retirement. Theyll continue to build equity in their home, their untouched holdings in their 401k account will continue to grow, and the value of their real estate investments will likely grow at the rate of inflation.

This is a big reason to love real estate investing as a strategy to retire early!

Buy A Rental Property Every Year For 10 Years

With that in mind, here is what it might look like if you tried to buy a rental property every year for 10 years. Here are the rules of this model:

  • Each property purchased is a single family home.
  • The purchase price stays constant at $100,000 .
  • Each year requires a 30% initial investment .
  • The home loan starts at $70,000
  • The max # of home loans at any one time is four. According to Fannie Mae / Freddie Mac, you can possibly have up to ten residential home loans, but after four it becomes a bit more difficult to get additional loans, so decided to keep it at four.
  • Cash flow per property is $400 a month. This number was chosen because this is very attainable, as proven by my own rental property.
  • Cash flow = Income Expenses. Income = rent. Expenses = Mortgage Principal + Interest + Taxes + Maintenance + Property Management + Vacancy.
  • All the cash flow throughout the year is saved and goes back into paying down the home loans at the end of the year.
  • Once a property is paid off, the property cash flows $800/month. Thats because there is no longer mortgage and interest to be paid.
  • If you have the max 4 properties, the $30,000 initial investment goes towards paying down one of the loans.
  • Referencing the Case-Shiller index, used 3.4% as the appreciation rate.
  • What is not taken into account in this model:

  • Equity pay-down over time, which works significantly in your favor but can get confusing for the calculation.
  • Rents increasing over time, which would work in your favor
  • Year 2

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    Check My List Of Advice

    Start saving for retirement as soon as possible.

    Reduce or eliminate your Debt and Retire Early

    Consider Your Future Retirement Budget Needs Accurately

    Pay Off High-Cost Debt

    Get a Handle on Your Current Spending

    Everyday Cut Household Expenses

    Have a Solid Retirement Investment Plan?

    Save Automatically or Save for Emergencies

    Make Sure You Have a Plan for Staying Engaged and Active

    Plan for Healthcare Costs Especially Insurance

    Investing funds: make sure it reflects your risk tolerance.

    Choose Healthy Habits

    Open a Health Savings Account

    Retirement through rental income

    Buy your home last as it increases your borrowing capacity.

    Approach Each Property to create a Win-Win strategy

    Look for Properties You Can Immediately Add Value To

    Buy a Property that you can resell Immediately and Make a Profit.

    Reduce What You Spend on Housing

    Dont Be Influenced by Negative Attitudes of Friends or Family.

    Its Never Too Late to Get Started

    I suggest you take a look at my articles:

    Use The Fire Lifestyle To Accelerate Your Timetable

    How to Retire Early with Real Estate | Tips from a Real Estate Entrepreneur

    Lowering your living expenses accelerates your retirement timetable from two directions at once.

    First, it lets you put more money into investments, as outlined above. But just as importantly, it lets you lower your target for post-FIRE passive income. The less you spend every month, the less passive income you need to cover those expenses, and the sooner you can reach it.

    For an easy illustration, consider this tiny blocks visual we covered in our Retirement Catch-Up Plan. To keep the math simple, imagine youre following the 4% Rule. That means that you need 25 times as much money saved as you spend each year. In other words, for every dollar you spend in a year, you need $25 saved.

    In this visualization, each red block represents $1,000 of spending. Each green block represents $1,000 of savings. Heres how it looks if you spend $30,000/year:

    Not pretty, right? Cut your spending, reach FIRE exponentially faster.

    Thats the bad news. The good news is that trimming your spending and living the FIRE lifestyle actually helps you save on other expenses that most people have to pay. For example, many people following the FIRE lifestyle can avoid the costs of life insurance and long-term disability insurance, as they build their net worth and passive income. Their families could survive even if they were no longer earning active income.

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    Financial Results Of Example #1

    The results of Rachael and Justins build-up phase looks like this:

    After 25 years, Rachael and Justin have a total net worth of over $3,100,000. The breakdown between different categories looks like this:

    And most importantly, their income looks like this:

    I assume their free and clear rental properties produce net rental income at a rate of 7%. I also assume they could withdraw 4% of their 401k portfolio each year without penalty now that theyre over the IRS threshold age of 59.5. And finally, I assumed their cash reserves received 1% yield per year.

    Although these results are in future dollars , you can see that Rachael and Justin met their goal of $150,000 per year. Their $2,706,000 of investments now support them financially. They also have no housing payment to worry about now that the mortgage is paid off.

    Its worth noting that if the $2,706,000 had only been in traditional investments, a 4% withdrawal rate would drop their spendable withdrawals to $108,000 from $155,000. Because of this, they might have had to keep working longer in order to accumulate a larger net worth, or they might have had to settle for a lower withdrawal amount.

    Their real estate investments and the higher income they produce allowed them to avoid that choice.

    I havent mentioned another income source, social security, because Rachael and Justin are only 60 years old. They can begin withdrawing social security income at age 62 or age 67 .

    So Can You Retire Early With Real Estate Investing

    In this example, starting from a nest egg of $25,000, it took a full 5 years. If you start from zero, it will take a couple years of saving $1,000/month in order to build up the initial down payment and rehab fund.

    One of the many benefits to real estate investing is that with some creativity, you can get into a home for little or no money down. With creative financing or private money loans, you can get started with very little money. You also don t have to wait a full year between investments. For these reasons, your path to early retirement could be even quicker.

    Action Step: for more info on how to purchase rental properties for no or low money down, read The Book on Investing in Real Estate with No Money Down: Real Life Strategies for Investing in Real Estate Using Other Peoples Money.

    Also, remember that the amount of passive income required to retire will be very different depending on your lifestyle, family size and cost of living. Those that live in a higher cost-of-living city will likely experience higher expenses overall.

    But as you can see, it is entirely possible to retire in just a few short years by taking advantage of real estate investing.

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    Investing For Fire In Real Estate Whats The Upside Some Real

    Purchasing a home is a good thing. Everyone needs a place to live. Buying a home provides the homeowner with a fixed cost of living for housing as compared to renting. As a property owner with a fixed-rate mortgage, your payment remains level versus a renter where rent can increase year after year.

    The upside to purchasing a home is that every month part of your mortgage payment is applied to the loan balance. So rather than paying rent that helps to pay off someone elses mortgage, every month, part of your payment goes towards paying off your mortgage.

    If you were to own a small multifamily property, the upside is even more significant. First of all, if you own a 2-4 unit building, unlike owning just one house, you now have other people paying rent to you, and this rent is going towards paying off your mortgage!

    In 1995 George E from Baltimore purchased his first 3-plex at the age of 26. He lived in one of the units for five years- rent-free. The other units paid all expenses: mortgage payment, real estate taxes, property insurance, and property management.

    George sold the property in 2007 for four times the original purchase price. That sounds good, but what was his return on investment?

    Using $100,000 as of the original purchase price and selling 12-years later for $400,000 creates a return on investment of 11.6%. The actual return on investment is higher because the mortgage was paid down over the 12-years of ownership, and he lived rent-free for many years.

    The House Hacking Plan

    How to Retire Early with Real Estate using the Live

    My first deal was a house-hack! I love this plan because it allows you to utilize low, or no, money down loans such as the FHA or VA loans!

    The traditional house-hack consists of buying a duplex, triplex, or four-plex and living in one unit while renting the other units out. Coach Carson talks about a few other ways to house-hack as well.

    He mentions buying a home with enough room to park/rent an RV or mobile home out, the use of Airbnb in order to rent spare bedrooms, and several other creative strategies!

    Check out my description of the VA house-hack here!

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    What If You Cant Find Cash Flowing Properties

    I am lucky that in Northern Colorado houses are relatively cheap and rents relatively high. It still takes me a long time to find great deals that cash flow well. Some people are in areas of the country with much higher proprieties values and rents are not high enough to create any cash flow. One strategy is to buy rentals and hope for appreciation based on the local economy and housing demand. If you buy for appreciation, you have to prepare for the worst because prices could go down. When you buy with negative cash flow it gets really old putting money into a house every month that is supposed to be going up in value, but is actually losing value. Most investors also do not calculate their cash flow correctly and actually lose much more than they anticipated. Follow these tips if you are dead set on buying for appreciation.

    • Calculate the cash flow correctly.
    • Make sure you have a large emergency fund just for that rental property. The emergency fund will be losing money over time thanks to the negative cash flow.
    • Be prepared to hold the home longer than you expect too. Many investors in the last housing crisis went bankrupt because they could not carry the negative cash flow long enough.
    • Buy below market value so you start ahead of the game and are not betting only on appreciation!

    Heres How Each Column Is Calculated:

    • Timeline: This is showing the number of years that I am actively investing in my real estate portfolio .
    • Principal Investment: This is the amount of new principal I am investing in new properties each year.
    • Annual Profit: This is the annual net income I am earning from my real estate investments by the end of each year .
    • Withdraw for Living Expenses: This is the amount I am pulling from my annual profit to cover my living expenses .
    • Total Investment: This accounts for my annual principal investment PLUS the sum of my prior years annual net profit minus my withdraw for living expenses .

    The challenge with creating a retirement calculator for real estate is that its not always feasible to buy rental properties in precise, predictable chunks of $20K each year . Mutual funds DO allow for this kind of flexibility, but rental properties have many more factors and variables involved, like:

    • Am I able to find the right properties, in the right areas, at the right prices?
    • Is the real estate market going in the right direction, or do I need to discover a new market?
    • Is my property manager doing their job to keep the cash on cash return at 12% or above?
    • Are there any other external factors that might skew these numbers in some other way?

    In order to create this kind of calculator, you really have to make some big assumptions but even so, it doesnt necessarily mean the calculations are unrealistic.

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