Retire By Owning Rental Properties

With the rising cost of living and inflation, more people worry that their retirement savings won’t last them through their golden years. Some are choosing to delay retirement while others look for ways to generate passive income. However, real estate has become a popular investment option to supplement savings since it brings in a steady income from month to month. So, if you think owning rental properties could be the key to a comfortable lifestyle, here’s how collecting rent could be the key to your retirement.

Can You Collect Rent to Support Your Retirement?

1. Owning rental properties generates passive income.

Owning a rental property brings several benefits. First, it provides a steady source of cash flow, even if you have a full-time job. Secondly, it diversifies your sources of income. And if you do it right, the rent from tenants should be more than enough to cover the home expenses and still leave you with some extra cash.

So, you can see how owning and selecting commercial properties as rental investments is a decisive move to grow and sustain your lifestyle after you retire. In addition to any social security, pensions, and other retirement accounts you have, it provides more supplemental income to cover your expenses. Best of all, it preserves the money you’ve saved in other retirement and brokerage accounts. The more you collect rent each month, the easier your retirement years will be.

2. One property can supplement your income, but several could provide a comfortable retirement.

Maintaining one rental property can add more diversity to your portfolio and income in your monthly budget. However, you could earn more than enough to live on if you own several properties. Those who collect rent from several properties find that they can afford a very comfortable lifestyle during retirement. So, if prefer a more active lifestyle, you may discover that owning several properties is both personally and financially satisfying as well.

3. Property and home values appreciate over time.

If you have been watching the housing market over the last year or two, you can see how much property values have increased. While this isn’t the norm, real estate generally appreciates over time. While some markets appreciate faster than others, you can usually expect about 4% annually. When compared to other assets, real estate is usually a safe bet for investors.

4. Rental properties provide tax benefits.

Another benefit of owning rental properties is the tax benefits that come with it. Any expenses associated with the rental property will get you a tax deduction.

For example, you can reduce the annual tax burden by claiming depreciation of the property to reflect the effects of time. And, you can claim deductions for the management and ownership of the property. So, anything you spend on property insurance, rental repairs, improvements, management fees, screening costs for tenants, marketing fees, or mortgage interest will lower the amount you owe.

5. You can adjust for inflation.

When you own a rental, your monthly income doesn’t need to stay static. If the general costs of living and inflation are rising, you can raise rent prices to reflect that. Meanwhile, your mortgage payments will remain the same. But if you are bringing in more income, you can pay down your debt faster and pocket more profit. Those who raise the rent each year will see a widening gap between their income and mortgage payments.

6. Your net worth will continue to grow over time.

Investing in real estate means that your net worth will continue to grow. Since you have rent money coming in, you don’t need to sell assets to generate income. And as your rental property continues to appreciate, tenants’ rent covers the mortgage. Therefore, building equity causes your net worth to increase, not decrease. Once the mortgage is fully paid, it creates even more potential to generate profits.

7. Rental properties offer predictable returns.

There are no performance guarantees when you invest in stocks and mutual funds. Fund managers can mitigate risks and losses, but there is no crystal ball to predict the future.

However, investing in real estate offers more predictable returns. You can precisely calculate your returns since you know the purchase price and the average market rent on comparable properties, and you can accurately account for expenses (tax rates, insurance, property management fees, average repair and maintenance costs, etc.) All of this information will give you a clearer picture of what to expect from your annual earnings.

8. You have more control over your risk mitigation and returns.

Since you own the property, you make the major decisions on how to mitigate risks and improve your returns. One way you can increase income is to renovate to force equity and boost rental rates. You also have control over the screening process and can decide who will live there. And as an added layer of protection, you can purchase default insurance to protect against tenants who fail to make rent. All of these factors give your greater control over your retirement income.

9. There are no restrictions on this income.

Unlike other retirement accounts, the income you earn from real estate has no restrictions or fees. You don’t need to meet a minimum age to take withdrawals. And, there are no caps on how much of it you can invest annually. The money you earn from rent is yours to spend any way you see fit.

10. You have the option to be active or passive.

However, one of the greatest advantages of investing in real estate is that it provides you with options. You also have a choice in how you manage the property.

Active management is a lot of work. It takes considerable time and effort to list and show the property, sign leasing, collect the rent, deal with complaints, and evict when necessary. Fortunately, you can minimize your time investment by hiring a professional property manager or team to handle things for you. For around a 10% fee, they will take care of the day-to-day operations while you collect rent to supplement your retirement.

Are There Any Drawbacks of Using Properties to Retire?

Like all investments, there are drawbacks to consider before you get into real estate.

It requires a high cash investment up front. Buying real estate requires a large down payment which isn’t an option for all investors. If you are looking at rental properties, expect to pay 20-30% of the total cost at the time of purchase.
You’ll need some specialized knowledge and skills. If you want to be successful, you’ll need to invest the time and energy to learn how to do things right. This includes understanding how to handle the cash flow, finance properties, screen applications, manage the property and tenants, file for eviction, and general home maintenance and repair. You can lose money if you don’t know what you’re getting into.
There are issues of liquidity. If something happens and you need cash fast, real estate probably isn’t the best option for you. When your money is tied up in a property, there’s a lack of liquidity since you need time to find a buyer and complete the paperwork.

Although owning rental properties can be a great way to generate passive income during retirement, there are many factors you need to consider before diving in. While it comes with many advantages, it shouldn’t be your sole source of income for retirement.

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Jenny Smedra

Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.