Financial Independence With Rental Real Estate

beach-641548_1280-PDFinancial Independence with Rental Real Estate.  I often get asked by my co-workers at my ‘regular’ job, the ones who know I am a landlord, why I keep going in. Why not just retire now?  Why do I put up with the mega-corp meetings, frustrations and red tape just to bring in a few dollars.

I put in a lot of hours, and a lot of investment capital to get this far, what does it takes to be financially independent?

Anyone can be financially independent with rental property, or any investment property, if you know how to manage them.  This is my situation, but I am not unique.  It doesn’t take too many properties to be able to live on, IF you get great tenants.

I am 55 years old now.  I will be 56 in November.  I am already financially independent.  I have plenty of income from my rentals to live on, better than I live now.  My house is paid off, as four of my rentals properties are.  I also will have some investment income.  I am not a 30-something person, thinking that somehow I can support a 4-person family it on $3,000 per month for the next 40-50 years, although my spending is probably less than that.

Rental Income

I have 12 rental units, in four buildings that are free and clear, plus my home that is paid off.  The total monthly rent for these 12 units alone is approximately $1,000 per unit.  If you look at most real estate investment formulas, expenses should be about half of that, and that would include 10% for maintenance, 5% for vacancy and 7% for management.  These rentals throw off about $6,000 of passive income, every month.  Some people would say that is enough to retire.  Real estate is a bit riskier than a pension, so you have to mitigate risk.

I manage the properties myself, you can add back in another 7% per month or so, to my ‘take home’ pay.  So I have a decent total amount of higher passive income on these four properties alone.  I also have 12 other units.

Tax Savings

Anyone with rental property can do this.  It is not unique to me.

Of course, Uncle Sam and the Governor need just a bit too.  You have to remember, with passive income there is no self-employment tax.  That saves 15.3% right off the top.  Much of the income is sheltered by depreciation, so that saves even more.

If you are going to be financially independent, you need to mitigate your risk.  You need to have multiple streams of income.  This is how I do it.

I want a three+ legged approach to my retirement income.  The three legs are rental income, pension and Social Security, and investment income.  I want any one of the three to be able to support me in the lifestyle I have now.  I live pretty frugally, so I only need ~$3,500 per month, if that.  Realistically, I barely spend $2,000 per month now as I have NO DEBT and no kids.  And I do what I want to do, when I want to do it.  I will probably buy a 5th wheel travel trailer and tour the winter months away from Minnesota for a few winters, then settle on a warmer climate in my later years.

Retirement Spending

Retirement Needs.  The first thing I do is assume that I really do not know how much I need in retirement, so I take the $3,500 spending estimate and double it just to account for any expenses I have not counted on.  That’s $7K per month or $84K per year in today’s dollars.  The average family of four lives on quite a bit less.  I also need to pay some of the $84K to Uncle Sam and the Minnesota governor.   I assume I will live to be 100 and need that amount every year, with a 3% inflation figure.  I use a the highest probability factor (95%+) in every retirement planner I have access to, to make sure the plan will work.  I plan on needing double, and only receiving half of what I expect.  A four times margin of error.

Multiple Income Streams

First Leg – Passive Income.  My rentals should easily cover the amount I need.  That is one leg covering my entire retirement needs, right now; even if I have overestimated my needs.  If I am managing the rentals, they should bring in almost double that amount.  I need to plan on rents dropping a bit, hiring out more maintenance, and even hiring out the property management.  I may even need to figure out a selling price at some point, after taxes and selling expenses, and factor in how much that amount would bring in terms of a fixed income somewhere.

Second Leg – Fixed Payments.  The second leg I am counting is this.  I have a small VA Disability payment every month; tax free, with COLA, for the rest of my life.  That includes free health care, at any VA hospital.  I still need insurance, in case I get brought to a non-VA hospital and wake up $100K later.  So I need a high-deductible insurance plan, at a minimum.  But that extra plan is an option, as I am covered enough for any health care requirements that are part of Obama-care.  If I was broke, and did not have insurance, I am still covered by the VA.

My work pension will be starting at age 65, if I retire from work at 56 or slightly lower if I would retire now.   Social security income will be close to the maximum at age FRA, or higher at age 70.  So at 67, I am assured of a decent sum every month.  That leg by itself almost covers my minimum expenses.  It is better than many people retire on.  I should be able to make it on that leg alone if I have to, albeit at a minimal level of income.

Other options to generate additional income if needed would be reverse mortgage, add a roommate, sub-divide my property, or get a job (yuck).

Third Leg – Investment Income.  The third leg is investment income.  Assuming I do a 4% withdrawal rate, that covers my basic needs easily right now.  If I continue to save for another 9 years after I leave my real job, and do not touch the investment money until I am 65, it will be well over what I need on the higher estimate of expenses.  I can live on rental income for the first nine years of retirement.  If I sell the rentals, there is considerable more, but I lose rental income.

Future Income Considerations

Going Forward.  I am working another year to prove out the plan (maybe…).  It will allow me to save quite a bit more money, and be a bit less in debt than I am now.  That means less mortgages.  I am debt free, but I have mortgages on three rentals.  I paid off one mortgage, looking it as a 5.5% annuity, guaranteed by real estate, with 100% of my principal returned after 25 years.  Not a bad annuity.  If I buy another property while I am still working, W2 income is hard to beat for qualifying for a mortgage.

If all goes well, in the Summer of 2016, after incentive and annual bonuses, maxing out my 401K, getting my 401K match from the previous year, getting my July 2016 benefits and getting paid for the 4th of July holiday, I am hanging up the spurs.  I should have a six figure retirement income.  I will still manage my rentals, as that is not a lot of work with great tenants.

Be sure to look at my “Coming Attractions” page and see what I have in store for upcoming articles.

What are your plans for financial independence?  Does it include rental property?

25 Replies to “Financial Independence With Rental Real Estate”

  1. This sounds like a great plan. Thank you for laying it out in detail like this. It definitely gives me some ideas on how to structure a plan like this for myself and my family. I am currently a rehabber, but I am looking to invest some money into rentals. Thanks again for sharing.

    1. Thank you for your comment.

      My rentals have performed way better than I ever expected. Maybe I was so busy rehabbing that I did not notice how great they were. Now that the rental market is strong, and things are going well, it is hard to believe.

  2. One of the keys is definitely being debt free. It just allows an easier life and not having to worry so much. Congrats on achieving your plan. My plan is in motion but you are very inspiring.

    1. Thank you for the comment and compliments. It comes fast, once you get a solid plan in place. keep up the great work! Being debt free is a HUGE key. All that interest money goes in your own pocket, not some rich fat cat.

  3. Looks like you’re all set and good to go! You could easily pull it off now, but even another year isn’t that much time. I wish I could do the same, but right now I don’t think I could handle the stress of another year in corporate.

  4. Hi NNL,

    I really like your plan for retirement. You have allowed for a high margin of error with the three stool system. However, it seems to me that you could have been “retired” earlier and maybe you worked for too long. This is the first time I am commenting, and I have lurked around before, so if you have already covered it somewhere, please point me to it 😉

    Good luck!

    Dividend Growth Investor

    1. Thank you for the comment and visiting my blog!

      You are correct about being able to leave earlier. The only things is, I want it to be a one-way trip. I never want to have to go back to a job again. There are a lot of uncertainties, inflation, stagflation, longevity, etc. And retiring while my GF is still working will dampen my traveling lifestyle. I do want to ramp up the spending a bit too.

      I decided a couple of years ago I would not go back to work if I ever got laid off. Now I am laying myself off.

  5. Steps 3 and 4 in a Total Wealth Management plan are:

    A plant to distribute your wealth during your lifetime

    A plant to distribute your wealth after your lifetime

    I mention these as Eric, you have a good solid, written plan to accumulate your wealth and plan for tapping that wealth while you are alive, but what happens if you visit the warmer climates in your Fifth Wheel and decide to stay? What happens if you become mostly incapacitated and can no longer manage the properties? What happens to your properties (and wealth) after you pass away?

    I bring up these issue as “food for thought.” Many smart business owners have plans in place where a colleague will purchase their shares of the business that they own …. at a preset price. How many messages on BP discuss buying properties out of probate? Are these buyers seeking to pay full value for the properties they consider? Many business buyers look to buy distressed businesses now being operated by an in attentive widow or untrained heirs (children). These business buyers often provide low ball offers.

    Eric, I’d bet that you can plan out a number of worthwhile charities that you would rather see receiving your wealth after your passing rather than your estate settling for a low ball offer.

    My $0.02

    1. Thank you for the comment!

      I have started to think about those things, and have a trust started. The attorney still needs to get back to me on that, so I can fine tune it. My plan is to sell them all before I go, starting at ~age 62. One every other year.

  6. Your plan is remarkably like mine. Multiple streams of income to minimize the chance of the plan failing.

    I retired early and collect two relatively small cola’d pensions out of which I have to pay a nosebleed amount for pre-Medicare retiree health insurance. More than ACA insurance would cost me, but much better insurance. I have income from RMD’s from an inherited IRA plus I have my own IRA’s still growing untouched. I also have taxable savings and investments.

    I own a number of rental houses of which a little fewer than half are free and clear. The others have varying mortgages remaining. My house is mortgaged, as I live in earthquake and fire country plus I extracted equity to buy more houses in 2009. I’m probably not going to pay it off, as the interest rate is very low. I will be making the Social Security decision relatively soon, as I am a few years ahead of you.

    I also intend to start selling properties around the time I am eligible for Social Security, maybe sooner to minimize taxes. I have some unused depreciation that needs to be used up, so I may start this year. One every other year is what I was thinking as well. Pay off a mortgage on a stronger property, reserve some cash, or throw the proceeds into the market.

    It’s odd how we think of having a job as secure, but we think living on our assets is risky. If the economy goes down the tubes, our jobs might be a lot less secure than our dividends and our rent checks. That’s certainly how things panned out in 2008-2011.

    1. Thank you for the comment! Great job on your plan!

      The most secure thing you can have is working for yourself. Unfortunately, it also seems like the most un-secure source of income. When you can make the self employment thing work, it is the fastest wealth creator that there is.

      I am seriously considering how best to leave my current full time job, whether it should be this year in the next few months, or next year. I have a lot of tings to do, and only 30 years to accomplish them. That is the $64,000 question, how long do you have.

  7. If I had only the pensions and the IRA’s to rely on, I think I would be very stressed about finances, even with the same net worth. Like the folks over at, I would run all the retirement income guesser programs several times a month and worry about whether I had “enough.” The relative stability of the rental income over many years plus the ability to sell a house for a reasonably quick infusion of cash if needed reduce the financial stress. I have plenty of stress with the real estate, but I never worry about “losing it all.”

    Looks to me like you have OMY syndrome. In your shoes, I would retire ASAP. As you say, you have lots of things to do. Tomorrow is not guaranteed, and you have set yourself up with the best possible plan to avoid failure. No camping under a bridge and eating cat food in your future, no matter what happens.

    1. Thank you again! Don’t tempt me to retire early, it’s very appealing… I was having lunch with a friend yesterday and advised him the same thing, go now.

      I run many of the same retirement planners, often several times a day. Changing different variables, making different assumptions, checking the what-ifs. All seem to be good. I have a solid savings goal for 2015, I am curious to see if I can achieve it. I should be able to based upon last year and my progress so far. (hint: It is well over 6-figures) After that, it’s just six month’s left.

  8. That is a very impressive real estate portfolio. Congrats on that and on being FI. My wife and I plan to have some sort of rental property as part of our FI plan. We have a rental now but the future state might switch to a rental investment in the Caribbean to tourists.

    1. Thank you for the comment!

      I started not that long ago, and really ramped up since 2008. I can definitely leave my job, but I want to put one final nail in the coffin on my cubicle career with another year.

  9. We definitely want to include rental properties in our plan and working on acquiring our first property within the next year. We aim to have several rental properties.

    Enjoy reading your blog because you give great detail.

  10. I love the multiple stream retirement philosophy. Rental income is certainly a part of our long term strategy, although we probably won’t have as many properties as you. We have 5 units currently. I’d like to add a few more before it’s all said and done, but we should also be able to support ourselves from investments and my husband’s pension if need be. I’d rather have too much than not enough.

    1. Thank you for the comment Kim!

      Great job on your multiple income streams as well! It never hurts to have a back-up plan, or at least an income stream that can take over if a different one goes sour.

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