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?