How Investing in Rental Properties Can Help You Retire Early
A lot of people save and invest to reach retirement earlier.
While there are many different financial avenues with which to achieve this faster, turning to rental real estate can turbo-charge this process. When we say turbo, we mean it – it could be from zero to retire in just a few years. And the best thing is that it doesn’t require so much planning and speculation as for the stock market, for example.
You may think you’d need to be a real estate professional to make it work but the fact is that there are many perfectly ordinary people who make more money with real estate than lawyers or doctors. The road to successful income property ownership contains three steps – buying, management, and taxes. So let’s see how accomplishing them could help you retire early.
Right Property at The Right Price
This seems like obvious buying advice, but what does it actually mean? It means that you’ve bought an income property only if it cash flows from day one. In other words, going for the lowest price is sometimes a bad idea, especially if you’re buying a property only with the hope of future appreciation. It is about math, but also research. When checking the property value via available online tools, make sure you use the one which will provide you not only with price estimate guide but also additional information such as the property sales and rental history. Careful research will bring you positive cash flow from day one, before any tax advantages.
It’s equally important to have a capable accountant with experience in real estate. It’s easy to get caught up in the hype of buying a piece of property and you need someone who’ll review the facts with brutal honesty and point out what could go wrong. Many buyers make the mistake of using inflated rental rates in their analysis because sellers have told them that rents are low and can be raised. But by raising them you could lose tenants, so you should always stick with current ones.
You can hire a property manager or you can manage the properties yourself. Both methods work, but the second one will obviously keep more money in your pocket. On the other hand, hiring a good manager will certainly pay off since you’ll have much less time invested in your rentals – they’ll handle non-paying tenants, list your property, subtract expenses such as maintenance, insurance, property taxes, mortgage, etc., and collect the rent. You can still choose to handle the part of the job yourself, such as repairs and maintenance, saving money and providing yourself with a hobby while retired. Just know your limits and stick to the minor repairs while leaving the bigger projects to professionals.
Dealing With Taxes
When it comes to rental, real estate tax issues can be significant, but if you understand what you can deduct and account for depreciation you’ll be able to pay down the mortgage much faster and therefore increase your cash flow after tax. Utilities, mileage, mortgage interest, property taxes are all deductible in the year they’re paid. Additionally, depreciation of your property will result in showing the lower profit than your cash flow in your tax return. This means that you’ll be able to deduct a certain amount of money from taxes each year, and you can depreciate each property over 26.5 years. So if the value of the structure is let’s say $90,000, you’ll be able to deduct $3,396 (90,000/26.5) per year from taxes. This means you could be making $6,000 a year but on your taxes, only $2,604 will be shown as gain.
If you go over the steps as explained above, you can expect a reduction on your mortgage (or even complete elimination of it) and your investment properties will throw off a pretty generous stream of income. Having a capable property manager handling the work, there’s nothing stopping you from enjoying your retirement. Complications may appear only if you decide to sell since you’ll probably have to recapture the depreciation and pay taxes on it. But who’d want to kill off the goose that lays the golden egg? Keeping the property you’ll continue to harvest the income and someday your children can easily take over.
Bethany Seton is a recent economics graduate. Before settling in an office, she decided to follow her passion for writing and traveling. Currently, she travels with her laptop and writes for various blogs, hoping one day she will gather all the experience she gets in one book.