Should You Solely Rely on Rental Properties for Retirement Income?

by Alexa Mason · 15 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 now and he doesn’t have a financial care in the world because he doesn’t have to think about where his income will come from. He’s already set for a comfortable life and I want that for my own retirement too.

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 $80,000 – $100,000 where I live that easily rent out for $800 – $1,200 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 $900 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 $500 per month per property after expenses. That’s $3,000 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. It will still netting him a good profit and he could live anywhere in the world. Or, he could sell the rentals whenever he feels like he could fetch a good price 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? You’re still putting money in the same type of investment (real estate property), but 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. That’s why people always say 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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  • Rob says:

    I think physical real estate can be a great investment and has many advantages over a traditional stock/bond portfolio (e.g., depreciation, appreciation and tax advantages). I have both investments as well as physical rental real estate. As a new / small-time real estate investor, I struggle with sourcing quality properties and finding the right deal. It took me 3 years to find one property that met all my criteria. Additionally, in today’s interest environment, there’s opportunity cost with your capital and you can’t make any money using a mortgage when mortgage rates are at 7-8%. For example, I live in NY and with Treasuries and MMF yielding 5%+, its hard for me to deploy capital towards properties that only have cash-on-cash returns between 3-4%.

  • Damon Stratton says:

    Thanks for this insight! Using rental property to supplement or fund retirement is a great idea, but only if you do it right. I would also like to add that it is most likely going to take more than one rental property to generate the right amount of income for you to retire comfortably, unless you have other income sources. That said, it’s important to approach rental properties as a business and evaluate all the details, including expenses. After all, whether you have tenants paying rent or not, you’re responsible for the expenses like the mortgage, insurance, HOA fees, and more.

  • No Nonsense Landlord says:

    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.

  • 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.

  • Emily says:

    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.

  • Making Retirement Happen says:

    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!

  • 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.

    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.

  • Patrick Freeze says:

    Thank you for sharing your personal insight on an issue that crosses many people’s minds over the course of their lifetime. Rental properties can offer a steady flow of positive cash flow, even into your retirement, whereas other investments do not offer benefits in the form of cash and have the potential to do very poorly. That being said, there are some definite reasons for not using rental properties as a way to retire – age until retirement is too close, no cash flow to fund a property and all of its expenses, and the fact you must become a landlord to do this. Thanks for offering some information that may be helpful for those who are struggling with whether to use rentals as a form of retirement income.

  • 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%.

    • Arminius Aurelius says:

      I agree , it is best to wait to buy a rental property when the market crashes . When you buy at TOP dollar and the market crashes within a year or two , you may have to drop your rent or have a vacant apartment . Another CRASH is on the horizon , be patient . Buy when everyone else is selling for 40 % to 50 % less.

    • 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.

  • Damon Stratton says:

    Thank you for your unique perspective on relying on rental properties for retirement. I agree that having multiple properties may be the way to “diversify” your retirement sources. Of course, if landlords have pensions, stock holdings, or other retirement savings in place, that’s even better. After all, you never know what the market is going to throw your way, what kind of tenants may land in your property, or what kind of emergencies you might end up having to pay for when it comes to your investment properties. The last thing you want to do is to hurt your chances of retiring because of something unexpected that popped up with one of your rentals.

    • Arminius Aurelius says:

      ” What kind of tenant might land on your property ” ….. As I wrote before in a previous post , I would have an open house to show the apartment on a Saturday and a Sunday , about 4 hours each day [ put ad in the local newspaper Friday , Saturday and Sunday . I might get 6 to 8 interested parties but I explain to them that I will run a credit check on them and let them know within 2 days . Considering that people do sometimes lie or exaggerate about their back round , it is well worth the cost of a back round credit check and criminal check.
      Do not trust a realtor to do this for you.

  • 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.

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