How to Retire Rich With Rental Properties

Dear Rich Lifer,

How does $200,000 sitting in a 401(k) help you pay your bills each month?

The answer is, it doesn’t.

Consider the fact that the average family in the US spends around $5,000 a month. What if you had $8,000 a month (tax free) in passive income, could you quit your job?

For most people the answer is yes.

As soon as your passive income meets and exceeds your bills, you are retired.

But so many of us follow the traditional path to retirement that prescribes saving a portion of our paycheck each month and investing it in a 401(k).

Sadly, this model is failing us. A recent study found that 40% of Americans are at risk of retiring near the poverty level.

Furthermore, four out of five working Americans have less than one year’s income saved in retirement accounts.

Instead of retiring at age 65, many Americans are choosing to work longer. If you consider the average life expectancy is 79, this doesn’t leave much time to enjoy retirement.

There has to be a better way…

Bridge the Retirement Income Gap With Rental Properties

If you’re nearing retirement and worried your nest egg will come up short, consider adding real estate to your investment portfolio.

While there are all kinds of ways you can invest in real estate, today we’re sharing seven reasons why rental real estate makes for a great alternative to buying more stocks.

1. Income With No Loss of Assets

Your rental property is like a golden goose that lays a golden egg every month, until you decide to sell it.

This is the beauty of owning rentals. And depending on your market and investment strategy, you can usually earn 5-15 percent returns on your money, after tax.

Finding stocks and bonds that return 5-15 percent reliably is not easy. Plus, you have to factor in inflation which eats away a significant portion of your returns. Not the case for real estate, as you’ll see in a second.

The bottom line: when you don’t have to sell your assets to produce monthly income, you don’t have to worry about safe withdrawal rates and sequence of returns risk. When you do finally sell, you’ll likely make a decent size profit if your property appreciates.

2. Rent Rises With Inflation

Another key benefit to owning cash-flowing rental properties is they provide inflation-adjusted returns. Not only do rents typically go up with inflation, but they’re often the primary driver of inflation.

Which means your returns keep pace with the rising cost of living instead of being eroded by it. Compare this to a one-year bond that pays you back 4 percent. You earn interest payments all year long, then get your principal back when the bond finally matures.

If inflation was 2 percent that year, your real return is only 2 percent. Compare that to raising your rent by 3 percent, now you’ve earned 1 percent higher returns than the year before, while everyone else is losing money.

3. Steady Returns

The predictability of cash flow from rental real estate is another huge benefit. Yes, your profit from each property will vary month to month. You might have a few consistent months without any issues and then a $500 repair rears its ugly head.

However, in the long run, expenses like these will average out in surprisingly predictable ways. After each year, you’ll notice similar returns from your properties. But, it’s not always easy going. You have to be disciplined in setting aside money to anticipate these unanticipated expenses.

4. Leverage Is On Your Side

Taking out a line of credit to invest (speculate) in stocks is never a good idea. However, leveraging other people’s money to buy rental properties can be a smart move if you know what you’re doing.

Before you go seeking out no-money down deals, realize that you still have to put in some work if you expect a return. Finding lenders is relatively easy but you need to bring something else to the table, if you’re not willing to put up some money. Usually lenders expect you to track down deals or be the one managing the property and fixing minor repairs.

Either way, leverage is on your side and you can typically offset most if not all the purchase price of the property and still make steady income if the numbers are right.

5. Your Net Worth Increases Over Time

Like we said at the beginning, four out of five working Americans have less than one year’s income saved in retirement accounts.

When you finally do retire, your net worth will start to decrease as you begin selling off stocks and bonds for income. If you’re not careful, you could risk running out of money.

With rental properties, it’s different. Your net worth actually grows over time. It grows because your equity in each property gets bigger as your tenants pay down your mortgage and the property value appreciates.

You can’t guarantee a property will appreciate. But if you do your homework and work with a good real estate agent who knows the neighborhood you’re buying in, you can mitigate a lot of risk.

6. Hedge Against Market Chaos

Besides the housing crisis and the Great Recession, real estate tends not to correlate with the stock market. Which makes it a great hedge against market volatility.

There’s nothing wrong with owning stocks, but you should diversify your wealth by including assets like rental real estate to ensure you’re protected.

Housing market dips tend to be local events, rather than nationwide catastrophes. If housing prices were to fall in your area, your rent likely wouldn’t be affected. But having some money invested in stocks gives you the flexibility to lean on one source of income when another is down.

7. Slash Your Tax Bill

Probably one of the biggest advantages of investing in rental properties is every expense is either deductible or depreciable.

Property management fees, maintenance, tenant screening reports, travel, legal forms, insurance, property taxes – all deductible. Mortgage interest, that your tenants are paying, is deductible.

And the best part is you don’t have to itemize, either. These expenses all occur above the line, so you can take the standard deduction and deduct all these expenses from your taxable rental income.

Hopefully these seven points open your eyes to the potential of investing in rental real estate. While real estate shouldn’t be your only retirement plan, it can close a significant gap in retirement income, allowing you to enjoy your golden years stress-free.

To a richer life,
The Rich Life Roadmap Team

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