By G. Brian Davis
Are planning on investing in rental properties to create retirement income? If so, you’ve come to the right place!
Here are eight ways rental properties can be used to create income that you can use for your retirement.
1. Ongoing Income with No Loss of Assets
The 20th century model involved gradually selling off stocks and bonds from your nest egg. It made sense: Why force yourself to live only on the dividend and interest income, when you were only going to live for another decade or two after retiring anyway? Whatever was left over when you died would go to the kids, end of story.
I don’t know about you, but I’d like to reach financial independence by 40—or at worst, by my early 40s. But that means being able to live on my investments for a half century or more—a daunting task if your plan involves gradually selling off your assets.
You don’t need to sell your rental properties to produce high-yield income. They’re the golden goose: they lay another golden egg every month, until you slaughter them by selling. You can earn 6 to 15 percent cash-on-cash returns on your rental income, depending on your investing strategy and market. But finding reliable stocks, funds, or bonds that pay 6 to 15 percent yield proves a lot more challenging.
Plus, you have to subtract for inflation from stock and bond returns. More on that momentarily.
It boils down to one massive advantage: When you don’t have to sell off your assets to produce strong monthly income, you don’t have to worry about things like sequence of returns risk or safe withdrawal rates. Because you’re not selling off assets, you don’t have to worry about running out of money.
2. Inflation-Adjusted Returns
Rents not only go up with inflation, they’re a primary driver of inflation. That means your returns inherently adjust to keep pace with inflation, rather than being watered down by it.
In contrast, imagine a one-year bond that pays 4 percent. You earn interest payments all year, then get your initial bond investment back when it matures, so after a year, you have your cash back plus 4 percent.
Except that your money is worth less today than it was a year ago. If inflation ran 2.5 percent that year, then your real return is only 1.5 percent—which is pretty hard to get excited about.
But you raised your rent by 3 percent, meaning that you’re actually earning 0.5 percent higher returns than you did the year before. That makes it far easier to live on your returns from rental properties.
3. Predictable Returns
I’ve written a lot about forecasting cash flow and predicting rental returns, so I won’t belabor the point here. But it’s true: With even modest education and experience, investors can learn how to accurately forecast their returns.
Sure, your take-home profit from each unit bounces around month to month. You might go five months with no irregular expenses, then suddenly have a $500 repair or a month’s vacancy while you advertise the unit for rent.
But in the long-term, these expenses average in extremely predictable ways. So at the end of each year, your returns will look similar. It simply involves discipline—discipline to not put on rose-colored glasses when forecasting returns before buying, and discipline to actually put aside the money for future expenses each month rather than pocketing it all.
Source – Bigger Pockets