Should You Solely Rely on Rental Properties for Retirement Income?

by Alexa Mason · 9 comments

Even though I’m contributing money to an IRA on a monthly basis, and even investing in some dividend stocks in my individual investing account, I’ve always felt like real estate could be a better investment option for retirement income.

The idea started with a family member who’s doing just that: relying on a portfolio of rental properties, and one small business, for retirement income. This relative also has plenty of money in savings but hardly anything in the stock market.

He’s quickly approaching retirement age without having to think about where his income will come from. He’s already set for a comfortable retirement.

Does it make sense to heavily rely on rental properties for retirement income?

A Portfolio of Rental Properties for Retirement

Houses are cheap to buy where I live. You can easily purchase rental properties for $50,000 – $60,000, that easily rent out for $600 – $700 a month. And that’s just what my relative has done.

Over the past few decades he’s amassed six rental properties that rent for an average of $600 each month. These homes are now all paid off, so the only expense he has to cover are property taxes, insurance, maintenance and repairs, and of course the occasional vacant month.

As a conservative estimate, let’s say he brings in $350 per month per property after expenses. That’s $2,100 per month in rental income from investments he made years ago. The total purchase prices of these houses are collectively $360,000.

Even if he didn’t want to manage these rental properties for the rest of his life, he could hire a management company for 10% of the rent received — still netting him a good profit. Or, he could wait until homes in our area appreciate, sell the rentals, and reinvest the proceeds in something else, or cash out.

Either way he’s making out pretty good when it comes to securing himself income during retirement.

Is Relying Solely on Rental Properties a Good Strategy?

I know the common advice is to not put all of your eggs in one basket — and I agree. But isn’t spreading out your risk through several rental properties meeting this rule? Although, you’re still putting money in the same type of investment (real estate property) you’re spreading out the risk of not having income from one property alone.

Sure, there are things that can go seriously wrong with rental properties, like a horrible tenant, vacancies, leaky roofs, and a myriad of other problems. But there are also plenty of things that go wrong with the stock market.

The truth is, you just never know. Which is why it’s important to create multiple types of portfolios, with rental properties as one of them.

While I’m not trying to dissuade anyone from investing in the stock market (after all that’s what I’m doing), I do think it’s nice to stop every once in a while, reassess your financial goals, and look at other vehicles that drive you to where you need to be.

Are you thinking of using rental properties for retirement income? What’s your plan for having enough income to retire comfortably?

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  • Frank says:

    in Australia, I believe about 8% of people have rental properties, with 6% owning only 1, but only 1.4% have 2, 0.4% have 3, less than 0.2% own 4, less than 0.1% own 5, and a similar number own 6 or more investment properties.
    http://onproperty.com.au/percentage-of-australians-own-property/

    I bought my first investment property in 1979, have bought and sold a few, and now (I’m ready to retire) I have 3 worth a total of about $2.4M with mortgages totalling about $700k, say equity about $1.7M not counting my paid-off home.

    Most of this has been built up over years of passive investing – condos/units show better rental yields (higher income tax) but lower capital gain (taxable on eventual sale – can be reduced if I sell after I retire with lower tax rate when I’m not working) – best growth has been an old house in a walk-to-city-centre location where the value is about 7 times what I paid 24 years ago or about 8.4%pa growth not counting rental income. Given I borrowed 80% of the purchase price, my net return on investment (IRR) including net rent has averaged about 21%pa.

    So – it may not suit US folk where bad tenants may burn/smash up your house or shoot you dead when you come to collect the rent – but in Australia for the last 35 years or more it has been a strong avenue for growth.

  • I have multiple income streams, but my rental property, with a 6-figure profit, will be key. Once I get to SS age, I will phase in that income along with my small pension. And my other investment income.

    There are many ways to use and profit from rental property.

  • Argh, it’s so hard to invest in other things when you have a mortgage that you can put money into and get a guaranteed 6% (that’s my interest rate) ROI. But I completely agree, something could go wrong with the market and suddenly people can’t afford to pay rent and you have no income stream!

    I try to mitigate this by buying in different area’s of the country and city. But I think it’s also important to have a nest egg that you know is tangible. My strategy may be to buy an extra house and sell upon retirement for the nest egg.

    Thanks for giving me food for thought!

  • Jim says:

    I’m Canadian and I retired in my late 30s on rental income. Unlikely most RE investors, I’m also fortunate to be good at investing in stocks as well. But my method for investing in stocks is focused on capital gains, not cash flow.

    I knew that I needed “grocery money” so co-incidentally the US real estate downturn was ideal timing for me. I purchased condos and detached homes between 2009 and 2012 across a few US cities that generate ~$7000/mo in rent.

  • Cyrus says:

    It seems like your family member isn’t getting very good returns on his investment properties. At $350/month net income for a $60,000 purchase, that’s only a 7% return. While 7% isn’t bad for a conservative mutual fund, rental properties should be at least twice that, because of all the extra hassle involved in being a landlord. If someone wants to have investment properties as part or all of a retirement portfolio, the only ways to get good returns are to make improvements so you can charge higher rents, or even better, look for really good deals to start with. Remember the old saying, “Money in real estate is made at the buy.” If you wait for a good deal and buy a house worth $60,000 for $40,000, make $5,000 worth of repairs so you can charge $900 in rent, now your return on a $550/month net is almost 15%.

    • Paul says:

      …and sometimes you can’t rent at higher levels because of the market. If 90+% of rentals are at $350 a month then you’re shovelling brown stuff uphill to get more money.

      Where I live $350 a week is normal. Then again, house prices are in the $350k to $420k range. So, even less return percentage wise.

      But, a lot of people invest in rentals for a very good reason, and it’s not for the amount of money that they can get, it’s for the amount of money they won’t lose.

      Being 61, I recall vividly the 1987 stock market crash, the Asian crisis in the 90’s and of course the GFC of 2008. I also know many people who had money in the stock market who now have nothing. All gone, thanks to the Enrons, Lehman Bros. etc of this world.

      I also know those who chose to invest in bricks and mortar and who are still smiling brightly.

      No brainer for me.

  • jp says:

    We have 2 rental properties we plan to use as part of our retirement income. One is paid off and more than covers our current mortgage (it’s our previous home). The other will pay off in a couple of years. We also have 401k’s and I am eligible for a fairly good pension. We are considering a third rental. My advice is for this to be just part of your retirement income. I’m sure 30 years ago Detroit and Youngstown looked like buyer’s markets with great returns. There are many places where houses are rented because there are no buyers. That said we only look at good properties that rent for top dollar. Low quality properties have better returns but more risk. I also pay a management company to stay in compliance with fair housing laws and keep the units rented. I have a full time job so it’s a small price to pay. I also carry $1million umbrella liability policy.

  • Michelle says:

    We have been definitely thinking about adding rental properties to our life. Not sure when it will happen, but I am sure it will happen one day.

  • I’ve definitely considered rental properties as part of our retirement plan. We don’t have a great market for rentals here, so we’d be planning to buy elsewhere and pay to have the properties managed. That’s a few years off yet though, and so we’ll assess our options then.

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