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How to Retire Early Through Real Estate Investing

Renters Warehouse Blog

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For many people in their 20's and 30's -retirement may seem like a vague and distant concept -something that's perhaps looming on the distant horizon, but not something that you'd think about every day.

But perhaps you should be! Retirement isn't something that has to happen in your 60's -for those who are smart, savvy, and extremely hard-working, retirement could be sooner than you might think -especially if income property investments are involved!

According to Social Security, a shocking 90 percent of Americans are retiring at or below poverty income levels. One of the main reasons for this is the fact that most people are saving cash for retirement, adding small sums here and there where they can, rather than working to build passive streams of income -one of the best ways to create and grow wealth.

If you like the idea of being able to retire early -or, at least -would like to retire with enough reserves to keep you well-stocked into your golden years, then you'll want to consider using income properties as your vehicle to get there. There's a reason that investment properties are by and large the investment of choice for many; over time these assets tend to perform quite well. And with rental property, you'll be able to experience both immediate cash flow, as well as the long-term rewards of appreciation and tax benefits.

Sound good? If early retirement is your goal, here's a look at some tips that will help you to make that dream a solid reality.

What's Your Goal?

Before you get started, you'll want to sit down and think closely about what you'd like your future to look like. This means determining how much money you'll need to live each month. The average annual household income in the U.S. is approximately $53,000 per year, or $4416 per month. Is your goal to have a monthly income similar to this? For many, the idea of a happy retirement doesn't involve fancy cars and swimming pools full of cash -it simply means having enough money for a comfortable lifestyle. Your financial goals may be different, so choose a number that you'll realistically be happy with. Next, you'll want to decide how many years you'll need to reach your goals. Multifamily real estate investor, Jimmy Moncrief, over at Landlordology outlines a great plan to retire with income property in just five years. Your plan may look different -maybe ten years is a more realistic goal for you. But it's important to have a timeframe to work with in order to keep yourself on track.

Break It Down

Once you have your big-picture plan in mind, it's time to break it up into smaller, manageable goals. Working backward is a great place to start -and something that many successful real estate investors recommend doing.

"I think in real estate if you chose to go that route, all you have to do is work it backwards from if you need $5,000 a month to pay for your expenses, work it out," real estate investor Chad Carson advises, "How many properties do you need to own free and clear to pay for $5,000?"

You'll also want to determine what rate of return you'll need from your properties in order to reach your goals. For instance, if your goal is $4,000 per month, you could have 20 rental properties generating $200 profit each month. Or, look for properties that produce an even higher rate of return. You could even get away with investing in just ten properties, provided that they generate $400 each, in order to reach your quota. If you invest in duplexes or triplexes -you may even require fewer properties to reach your objectives. No matter what type of income properties you decide to invest in, your goals will help to guide your decisions, allowing you to ensure that you only invest in properties that will generate a certain yield.

Check Your Finances

You can get started with relatively little money down, but you'll still want to ensure that you're at a good place financially before you make the leap. Banks will also want to verify that you have enough for a downpayment, as well as reserves to fall back on. You'll also want to check into financing options. While favorable loans with relatively low interest rates are often available for first-time buyers, more experienced investors may want to look into alternative sources of funding such as partnerships, seller financing, commercial financing, portfolio loans, HELOC, and other creative financing options.

Start Small

Now the real work begins: making your first purchase. Obviously, you can't set out on day one and buy the desired number of rentals that you need for an early retirement, but don't let that discourage you. Everyone has to start somewhere, and slow and steady is always a good approach when it comes to investment properties. Brandon Turner of Bigger Pockets outlines a plan for retirement in three years with income property, and suggests dividing your goal of purchases up into reasonable mini-goals. For instance, if your goal is 30 units for three years, consider buying just five units the first year, 10 units the second, and 15 the final year. Give yourself a chance to ease into it, start small, and gradually work your way up. It's also a good idea to keep your current job while you're working on growing your real estate portfolio -to give yourself the financial means to reach your goals even faster.

Buying Right, Management, and Taxes

"There are three steps in successful income property ownership," says accountant and real estate investor Keith Schroeder, "--buying right, management and taxes."

Before you buy your first property, you'll want to ensure that you conduct careful and extensive research first. Don't be alarmed if you have to weed through hundreds of listings, and have multiple deals fall through before you finally find one that fits your criteria. Don't settle for anything less and don't compromise. Keeping your numbers in mind -be sure to research the location, house, and neighborhood to see if this property fits the bill. Is the house located in a good school district? Is it in good condition, or will it require repairs to get it into shape? While finding a property that is in need of repairs may allow you to secure a better deal, keep in mind that these costs can eat into your initial profits considerably.

You'll also want to make sure that you're not purchasing during a bubble -or paying market value -or higher for a property. Buying below market value is always key to maximizing your returns. Next, make sure you have a plan for management -are you going to invest in units that are close to you, and manage them yourself? Or will you enlist the services of a property manager to take over this job for you? And finally, taxes -what are the property taxes like on the property that you're considering? States differ considerably on property taxes, so make sure you do your research carefully so you know what to expect.

Run the Numbers

Once you have a property in mind, you'll want to run the numbers to find out if the returns will fit into your investment strategy. This means adding up all of your projected expenses -including taxes, insurance, utilities, HOA fees, maintenance and repairs, property management costs, as well as vacancies, and subtracting them from your estimated annual income. To make it easier, you can use a calculator to find your property's estimated projected cash flow, and then take it a step further and determine what your cash on cash return will be. This figure can be found by dividing your projected annual cash flow by the amount that you directly invested to buy the property. Many investors look for cash on cash returns of at least 5 to 10 percent.

Seek Outside Help

Property investing requires a lot of hard work and diligence -especially in the beginning, but it's important to recognize that often, it pays to bring in professional help. Assembling your real estate team before you even embark your investment property search will help you to get off to the best start possible. It will help to make life easier, and will also allow you to avoid many potential pitfalls that are common for first-time investors. For instance, finding an experienced investor-friendly accountant will alert you to potential expenses that you could have easily overlooked on your own, and will be able to give you a good idea of whether a property is a solid investment. They will also be able to inform you about deductions that you can take as a landlord. Having a team will also enable you to move quickly when you're ready to purchase a property.

Finally, once you've found a property that meets your criteria, it's time to take the plunge! Remember, the sooner you begin your investment journey the sooner you'll be able to start creating streams of passive income -and will be that much closer to reaching your goals. With income property, early retirement can be yours -one that you'll be able to enjoy!

Have you considered investment properties for retirement? For more information on building passive streams of income through rental property, have a look at How Regular Investments Compare to Owning an Income Property, and The Insider's Guide to Rent Estate(tm) -and start adding income property to your portfolio.

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