Personal Finance

8 Ways to Use Rental Properties to Create Retirement Income

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
133 Articles Written

In the 20th century, retirement worked like this: You worked for 40 years, saved five to 10 percent of your paycheck, and then retired on a combination of a pension, Social Security, and spending down the small nest egg you’d set aside.

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That’s not how retirement works anymore.

Today, pensions have all but disappeared from the private sector. The purchasing power of Social Security benefits has been shrinking since 2000—30 percent by one report—and there’s no reason to believe that trend won’t continue, given that Social Security is now running a deficit. (1)

All this means that Americans are increasingly on their own for saving, investing, and planning their retirement. That’s daunting enough for someone like me, who gets paid to teach early retirement planning and FIRE tactics. But for the average American, it seems a near impossible task.

Fortunately, saving a nest egg in stocks and bonds and then spending it down in retirement isn't the only game in town anymore. Americans are increasingly turning to real estate to help with their retirement income.

Here are eight reasons why, and how you can use real estate to not only supplement your retirement income, but also use it to help you retire young.

How Rental Properties Can Supplement Your Retirement Income

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.

Related: How to Prosper in Retirement Through Purposeful Investing

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.

4. Leverage

You can leverage other people's money to build your own portfolio of rental properties. Their money, your assets, and with each one you add to your passive rental income.

New investors tend to take this concept too far, looking for get-rich-quick plans. In my Facebook group for landlords and real estate investors, a woman asked last week how she could buy a rental property with no money down, then added as an afterthought, “Oh, and I’m a mom, so I don’t have any time to put into this—what’s my best option?”

So you don’t have any money to invest, and you don’t have any time to invest. What do you have to invest then?

Rental properties aren’t a free lunch. You do have to invest something, usually both some money and some time. But you don’t have to invest the full purchase price—or even most of it. You can let others cover most of your costs and still come out ahead with positive cash flow.

With each month that goes by, you earn income and you gain equity.


5. Your Net Worth Rises Over Time Rather than Ebbing

Earlier, I touched on the fact that you don't have to sell off any assets to generate income with rental properties, unlike stocks and bonds. So instead of gradually selling off your nest egg, your net worth actually grows over time.

It grows because your equity in each property grows. That happens through two forces: appreciation and mortgage repayment.

You can’t take appreciation for granted, of course. A sleazy local developer could grease the palms of an equally sleazy local politician to get the road to their new development built—right through your property’s backyard. But most properties do appreciate in value over time.

And your mortgage balance always drops over time, assuming you make your payments. In fact, your tenants actually pay off your mortgages for you. You earn a paycheck every month, your mortgage balance drops, and your property value goes up—win, win, win.

6. Diversification of Asset Types

I love stocks, don’t get me wrong. I invest in a series of index funds every single month, automated through a robo-advisor. (I use Schwab’s Intelligent Portfolio service, which is free with a minimum balance of $5,000.)

But stocks are volatile, which makes it hard to trust them for month-to-month income. One nice thing about real estate markets is they rarely move in sync with the stock market—the housing crisis and subsequent Great Recession proved a particularly salient exception.

Usually, however, housing markets aren’t troubled by stock market corrections. And housing market dips tend to be local events, not the nationwide catastrophe we saw in 2008.

Even when housing prices do dip, rents almost never do (at least on a nationwide level). In the Great Recession, rents simply leveled out for a couple years:

And if you’re living off both rental income and dividends from stocks, you can lean more heavily on one or the other if one has a tough month. If you have a major rental expense that month, you can sell off a few stocks. If the stock market slips, you can hold off for a few extra months on that property upgrade you were thinking about making.

Related: The Big Advantage Real Estate Investing Has Over Stocks

7. Tax Advantages

Every rental property expense is either deductible or depreciable.

Maintenance, property management costs, travel, legal forms, tenant screening reports, insurance, property taxes—all deductible. Mortgage interest, that your tenants are paying anyway, is deductible.

Not just if you itemize, either. The expenses all occur above the line, so you can take the standard deduction and still deduct all these expenses from your taxable rental income.

8. You Can Mitigate the Risks

The three major risks that landlords face are property damage, rent defaults, and vacancies. And you can mitigate every single one.

You mitigate property damage with tenant screening and security deposits. Rent defaults you mitigate with tenant screening and possibly rent default insurance. And vacancies you can minimize with a combination of tenant screening and proactive property management, maintenance, and advertising.

And, of course, you mitigate all three of those risks by buying properties in desirable markets, rather than high-crime, high-vacancy, lower-end markets that look good on paper.

Final Thoughts

Rental properties shouldn’t be your only retirement plan. But they can certainly help you reach financial independence faster and make an excellent supplementary source of income for retirement, especially early retirement.

They do require more work and education than stocks, both to buy and to manage. But if you’re willing to put in that work, to scale that barrier to entry, you can enjoy high yields, predictable returns, and ongoing income that keeps coming even as your net worth rises rather than erodes.



How do rental properties fit into your retirement plans? Are you using them to reach financial independence and retire early (FIRE)?

Share your thoughts below!

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their ...
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    Mark Reiland from Iowa City, IA
    Replied 10 months ago
    Thanks for the article. Great points.
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Thanks Mark! Much appreciated :-)
    Ivan Terrero Investor from Naples, Florida
    Replied 10 months ago
    Great article,thanks!
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Thanks Ivan, much appreciated!
    James Braun Investor from Pittsburgh, Pennsylvania
    Replied 10 months ago
    Great article
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Thanks James! I appreciate it.
    Fred Cannon Rental Property Investor from St Augustine, FL
    Replied 10 months ago
    Great information. I started investing in real estate properties in 2009. A friend of mind was going into bank default and had a short sale listing. Just before the bank foreclosed on the property (1 bedroom condo) I bailed her and the bank out. Since then I have purchased 6 more rentals. Best thing I have ever done. I use my 401k to finance the purchases. I am over 59 so I don’t get penalized. Basic transfer of money. The only cost is tax but that comes back in deductions over a period of a few years. What a deal. My company gives me 100% match up to 8,000. I save an additional 25% and the mArkets goes up and as long as I leave it there it’s not taxed. When I find a deal I go for it. Pay the tax and rebuild my account. Also I can take out a loan from the 401K that is tax free if needed . It almost seems like a scam but it’s all legal. When I retire next year my RE holdings will be 6-7 times more that the stocks and as you pointed out the value increases every month. Wish I had started earlier but 2009 was the perfect storm for RE investing. If my friend hadn’t needed help I would have never discovered what has now become a passion.
    Kevin McGinnis Investor from Glen Carbon, Illinois
    Replied 10 months ago
    Fred, Do you use your 401K to purchase with cash, or do you use leverage? I've been looking for ways to deploy substantial amount I have in 401K from previous employer.
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Awesome Fred! Glad to hear you've had such great success with real estate, especially using your retirement accounts to maximize the tax savings!
    Karen Lindstrom from Monroe, Connecticut
    Replied 10 months ago
    Brian. Can you comment on the pros and cons of buying rentals within a Solo 401K. Without depreciation, rentals don’t seem like as great of an investment
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Hi Karen, I personally don't invest using a solo 401k, because I also invest in stocks and retirement accounts are an easy way to invest in stocks with tax benefits. Rental properties already come with so many tax advantages that I invest in them outside my retirement accounts.
    Daniel Dietz Rental Property Investor from Reedsburg, WI
    Replied 10 months ago
    Karen, my partners and I do quite a bit of rentals in our SOL401Ks (and a bit in our SDIRAs too). The way we look at it is when we started we ALREADY had the funds in there, so how can we make the highest and best use of it. In rough #s say we have 100K to put as a down payment on 250K rental. The cash flow from that might be 7K per year or 7%, the appreciation another 6K or 6%, and loan paydown averages 5.5K over the first ten years for another 5.5% ROI. So even WITHOUT deducting depreciation, that still is an 18%+ return. Can we get that return year after year with VERY little risk or fluctuation (compared to stocks)? Not that I have ever seen. Even if you paid cash from your SOLO401K for that property, you might cashflow about 19K or 7%, and have appreciation 2.5% per year for say 7.5K or 3% for a total of a 10% return. In that scenario you take a 10% return yearly, your asset would keep up with inflation (as rents go up) and you dont need to dip into your 'principal' that way you might with stocks. Dan Dietz
    Jimmy Epolito Investor from Clermont Florida
    Replied 10 months ago
    Excellent article! My wife and I are closing on our first SFR next Thursday! I'm 45 with 4 little kids so I'm looking at real estate investing as a chance to create stability and get financially free hopefully by the time I'm 60 years old
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Congratulations Jimmy! That's fantastic. Best of luck with it!
    Gerald Harris
    Replied 10 months ago
    Jimmy, CONGRATS!!! My wife and I just purchased our first sfr (it closed day before thanksgiving)... We are ready for more... Wish you the best of luck and great tenants
    Greg Rookstool
    Replied 10 months ago
    Looking to buy our first rental property. I have done some research and in our area I don't think the rent will cover our entire payment. Probably within a few hundred dollars. We could afford the extra per month. Both of us are w2 employees and need some tax write offs. Would you recommend us buying? Thanks,
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Hi Greg, no I would not recommend buying any property with negative cash flow. You can also expect around 50% of the rent in non-mortgage expenses. I'd look in markets with better cash flow.
    Marija Sparano Accountant from White Plains, NY
    Replied 10 months ago
    This is an amazing article Brian. You touched many useful points. For instance the example you gave about the mortgage payments is great. My husband and I are not investors (not yet), but we own an apartment. Each month we pay extra $100 towards the principal which will lower down the mortgage life by couple of years. We are looking to either invest out of state (currently researching couple of markets), or buy a duplex and do the house hacking strategy. Any tips on how to do detailed research on a potential market? Thank you, Marija
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Hi Marija, we actually did a great deal of research on some of the best markets in the US for rental investing a month or two back. You can see the cities and data here:
    Porter Linton Anderson Rental Property Investor from North Salt Lake, UT
    Replied 10 months ago
    Great article that sums up a lot of the benefits of adding rental properties into your portfolio. Thanks so much for bringing more motivation for me to continue my investment journey.
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Thanks Porter, glad you found it useful!
    Mark Stedman Investor from Nashua, NH
    Replied 10 months ago
    Thanks for a great read. Well done, but you discuss only “stocks and bonds” as alternative passive retirement sources of income. I diversified recently by investing in REIT type investments. In particular, NYSE-listed NLY, which has a current annual yield of 11%, and the Senior Living Fund V, which I’m sure you have heard of, and expects to deliver similar returns from its closed-end funds. These are more passive, rather than adding more units to manage (currently I manage my 17 debt-free units myself ). What are your thoughts on using such investments as sources for retirement income?
    Mark Stedman Investor from Nashua, NH
    Replied 10 months ago
    Feel free to contact me to discuss if you like . Thanks!
    Bobby Ewan from Naperville, Illinois
    Replied 21 days ago
    Tax free distributions from a cash value life insurance policy built for accumulation is great way to supplement retirement income and so much more!