Building Rental Income for Retirement

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It’s time to ditch the concept that you have to retire at a certain age and start thinking about retirement purely in terms of finances. 

You don’t have to wait until the traditional age of 65 to leave the workforce. It’s possible to build a plan that enables you to “retire” well before then. And one of the best ways to do so is with real estate.

How to build rental income for retirement

  1. Start a side hustle
  2. Stick to a budget
  3. Learn real estate investing
  4. Make your first rental property count
  5. Grow and diversify your properties

1. Start a side hustle 

Most people save for retirement purely by allocating money from their full-time job into tax-friendly retirement accounts. 

This approach can work. But it usually takes decades to pan out. 

You can fast-track retirement by starting a side hustle and taking everything you make to the bank. Babysit, walk dogs, and manage social media accounts for businesses, for starters. 

Keep banking your side hustle money until you reach a threshold of at least $30,000 to $50,000 and try not to spend it. You’re going to need this money to fund your first real estate investment and absorb closing costs. 

Plus, your side hustle can also help you cover property taxes and even pay for a property manager to look after your investment on your behalf. 

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2. Stick to a budget 

The more your money accumulates, the more tempted you’ll be to spend it. Avoid this at all costs. Form a budget using a program like You Need a Budget and set firm guidelines governing how much you can spend on necessities over the course of a month. 

For the best results, put your side hustle money and any additional funds you scrape together into high-yield savings accounts (HYSAs), money market accounts, or certificates of deposit (CDs) to maximize interest rates and sit back while your money accumulates. 

Make sure to avoid locking all your money up in CDs so you can access it when it’s time to put a down payment on a property.

3. Learn everything you can about real estate investing 

Here’s a disclaimer: Saving for a property could feel draining, especially if you’re working nights and weekends to make it happen and paying another mortgage in the process. Depending on how hard you work, it can take anywhere from three to five years to save up enough money to make a splash in real estate. 

Use this time to your advantage and learn everything you can about real estate. Start with “The Millionaire Real Estate Investor” by Gary Keller and “The Book on Rental Property Investing” by Brandon Turner. You should also consider “The Remote Real Estate Investor” podcast hosted Roofstock.

It’s critical to have a foundation of knowledge before getting started in the market. The more you learn, the better off you’ll be. 

Investing in REITs

It’s also a good idea to start investing in real estate by putting money into real estate investment trusts (REITs), which you can purchase through most online brokers. This will let you get your feet wet in the real estate market without having to purchase properties directly. 

These funds are required by law to pay out dividends, which can give you steady cash flow. Some of the top REITs for 2021 include American Tower ($AMT) and AmeriCold Realty Trust ($COLD). 

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4. Make your first rental property count 

At a certain point, you’re going to have a large reserve of cash on hand, and a wealth of knowledge about real estate investing. You may even have some REITs growing in a brokerage account, enabling you to profit off commercial properties. 

Next, you’ll want to consider buying a direct rental property of your own, so you can start collecting a steady residual cash flow.

Your first rental property purchase is critical because it’ll set you up for your next one—and the one after that. As such, it’s vital to purchase a property that can help you get ahead instead of holding you back and pushing you into debt.

Here are some tips to help you get started on the right foot.

Location is everything

Location is critical when buying a rental property. This holds true whether you’re buying a place to house short-term vacationers and travelers or long-term tenants.

Spend some time scoping out areas that have heavy tourism or in popular areas that can house tenants. Your property should be in a neighborhood that’s crime-free, with solid property values and long-term growth potential. 

It’s also beneficial to find a place that has plenty of jobs, public transportation, and nearby amenities like bars, restaurants, and stores. 

Do your due diligence when selecting a property

Information is critical when buying a rental property. Make it a point to find out everything you possibly can about your property before you make a purchase.

Consult with your real estate agent and try to collect information about the property and surrounding area. Speak with neighbors, lenders, town officials, and anyone who can give you an inside scoop on what it’s like in the area. The more informed you are about your investment, the better off you’ll be. 

It’s also a good idea to try and get a sense as to why the seller is getting rid of their rental property. Most people don’t walk away from great retirement properties without a reason. Request documents like disclosure forms and insurance claim histories and see if you can uncover any hidden information. 

Negotiate 

Don’t be afraid to play hardball when it comes to pricing. You want to get the best purchase price possible and avoid overpaying at all costs. 

Hire a savvy agent who can negotiate and knock the price down. And if you can’t get the price to a reasonable level, don’t be afraid to walk away and pursue alternative options. 

Close a property

When the time is right and you find a great investment property at a reasonable price, take a leap of faith and close the deal. 

Closing a rental property may seem intimidating, especially if you already have a mortgage for your home. However, it’s something you’ll need to do if you want to make strides as a real estate investor. 

5. Grow and diversify your properties

After you close your first investment property, your goal should be to at least make enough every month to cover your mortgage payments.

If you buy a decent place in a popular area, you shouldn’t have trouble finding renters. Focus on paying your mortgage down and building equity in your investment home over time. 

Then, when the time is right, consider buying a third investment property—and then a fourth. Or consolidate your properties into an apartment building, multi-family house, or portfolio of smaller properties. You might be a real estate tycoon just yet!

Why rental income is great for retirement 

Here are some of the top reasons why investors should look into buying rental properties for retirement.

Security 

Investors are typically advised to reduce their reliance on stocks as they approach retirement age. This is because the stock market is highly volatile. Older investors don’t have quite as much leeway to take risks in the stock market. 

Rental properties are one of the most secure investment categories. Buildings are tangible assets, giving you something with clear value. At the same time, the real estate market is much less volatile than the stock market. 

Passive income 

Another reason why rental properties are so valuable for retirees is because they can generate money instead of depleting a bank account or living off the stock market and Social Security.

Rental properties produce passive income, meaning you’ll receive monthly payments as long as your units aren’t vacant. 

If you buy a property when you’re in your twenties or thirties, you’ll have decades to collect rent and pay off your mortgage. By the time you reach traditional retirement age, you’ll have a cash cow—and no mortgage to pay every month. 

This means you can pocket what you don’t put into maintenance and repairs. You’ll just have to pay income tax on your gains.

Tax deductions 

There are a number of tax benefits you can leverage when buying rental properties. 

For example, you’ll have 27.5 years to write off depreciation credits. In other words, you can claim tax credits on certain upgrades and repairs on your properties. 

You can also write off a variety of additional expenses like interest and insurance, to name just a few.

How a 1031 exchange works

If your rental property is successful, you may reach a point where the amount you bring in from annual rent is far less than the value of the property. When this happens, you should consider a 1031 exchange.

A 1031 exchange involves trading a property for one of equal or lesser value. In doing so, you can potentially defer tax credits on capital gains for life. This is a savvy move to help diversify your portfolio.

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Frequently Asked Questions 

Does Social Security provide enough retirement income?

The average monthly Social Security payment in 2021 is only $1,543, which is not a lot of money. Social Security is meant to be a supplementary source of income for people to help make retirement easier. If you have to live on Social Security alone, you could be in for a rough go of it during your golden years.

What is rental income?

Rental income is a positive cash flow resulting from a rental property. This money is produced from paying tenants on a short-term or long-term basis. It can be one of the best income streams for retirees. It can potentially help pay for living expenses and prevent you from consistently tapping into additional retirement savings.

Is real estate diversification a good idea?

Real estate diversification is an excellent idea for serious real estate investors. Focus on building a robust retirement portfolio with numerous real estate investments. Buying different properties is a great way to increase your net worth and maximize tax advantages. 

Is a multi-family home better than a single-family home?

If you can afford a multi-family home, this may be the better option from an income perspective. 

A multi-family home can produce more income on a monthly basis, enabling you to pay your mortgage down faster and generate more revenue. You’ll have more tenants in one building, which can make things easier to manage, too. 

Should I hire a property management company?

Landlords are strongly advised to hire management companies to look after their properties. Management companies act as a buffer between landlords and tenants, and they handle a lot of work like maintenance, repairs, and collecting payments.

Once you reach retirement age and don’t have to work, you may be tempted to stop working with management companies and work as a landlord full-time to save money. However, you may discover it’s easier and less risky to work with a management company. 

Keep in mind that these companies aren’t cheap. Still, they play a very important role in the rental management process.

The Bottom Line

Rental properties can be a great source of retirement income. 

If you’re interested in becoming a real estate investor, consider exploring the real estate market while you’re young and build a long-term retirement plan centered around real estate. This is a great way to build a nest egg and generate a positive cash flow in retirement.

Whatever you do, your ultimate goal should be reaching financial independence. 

By prioritizing financial freedom as a top personal finance goal and using real estate as a core vehicle to help get you there, you’ll be well on your way to a secure financial future before you know it.

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