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Living on rental income
Old 02-04-2013, 07:34 PM   #1
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Living on rental income

Hi
Is anyone out there FIRED on rental income mostly.

I earn $52k net of expenses on 4 residential properties. Also have $300k in my 401k.
I'm 52 and thinking of giving up work altogether. My principal residence is also mortgage free (like my investment properties).

My concern is if property goes bust or if I have long term vacancies. Should I work a few more years to build up some surplus cash?

What have others in my shoes done?

Thanks
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Old 02-04-2013, 08:24 PM   #2
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When I FIRE later this year (), we intend to rely on a combination of rental income and dividends. We could have gone all property but were uncomfortable having all of our eggs in one basket - I sleep easier knowing that we have multiple streams of cash flow. We will also have DW's part time income (for however long she chooses to keep working) which helps even though we do not need it.

We will be carrying floating rate mortgages on most of the properties (including our home) into retirement which will fall away over time as they are paid off. Gearing is low so I am not concerned about fluctuations in values. Cash flow is a different matter. Having been a landlord last time the local market had a prolonged slump, the possibility of a combination of vacancies, falling rents and rising interest rates killing our cash flow exists. If that starts happening, we will accelerate repayments as needed - there is enough slack in the budget to enable us to do this.
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Old 02-04-2013, 08:38 PM   #3
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Australia has been in a resource boom for 15 - 20 years or so if I recall. You are quite concentrated, and I would be thinking hard about how to diversify as I would guess property would get soft fast if Aus went into recession for any period over a year.

You do seem to be well set, and that cash flow must be nice to bank each month. We enjoyed a long boom here in the US in the recent past as you know; I am property concentrated as well, and wish I had acted like a stock trader a bit back in 2007 <g> Just means I wait longer to sell.

Anyway, kudos to you, you are set up nicely, just don't forget to listen for the canary in the coal mine..
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Old 02-04-2013, 08:41 PM   #4
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I am in a similar situation. I'm almost 51 and currently have 7 rental properties with 2 more under contract. I project $65k in income once the other 2 come online. I'm not really that worried about long-term vacancies as I have built in vacancy into my plan and with 9 of them it spreads the risk more. I'd like to get one more and stop at 10 of them which should bring in about 80% of what I project to need in retirement. That will be the majority of our needs when we hope to retire within 3-5 years.
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Old 02-05-2013, 11:56 AM   #5
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I fired 7 years ago with 6 properties at 45 yo ... stay active by schrounging thru the auction listings. Flipped one foreclosure last year for a small (20k) profit.

Vacancies hurt ... you're right to think about minimizing them. I had a 17 year tenant vacate last June. Took 5 months to rehab and re-rent. Ouch!
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Old 02-05-2013, 12:14 PM   #6
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Originally Posted by jags View Post
Hi
Is anyone out there FIRED on rental income mostly.

I earn $52k net of expenses on 4 residential properties. Also have $300k in my 401k.
I'm 52 and thinking of giving up work altogether. My principal residence is also mortgage free (like my investment properties).

My concern is if property goes bust or if I have long term vacancies. Should I work a few more years to build up some surplus cash?

What have others in my shoes done?

Thanks

If you can live on $52k, then your plans should not be a problem. Make sure the $52K is net of all expenses including worst case vacancy scenario, repairs, maintenance, expenses to turnover the property when a tenant moves out, taxes (if any) and reserves for future capital expenditures.
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Old 02-05-2013, 01:49 PM   #7
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Had one very long-term rental unit and found that I wasn't very good at being a land lord (too nice). Turning over the management to a management company MADE us money rather than costing us money. Having said that, I would never count on only rental income for ER expenses - maybe for "fun stuff", but not for essentials. Too many things can go wrong (and did - though nothing catastrophic in our case).

I'm not saying it couldn't work, but diversification has always been the watch-word of investment. As someone mentioned "spread the eggs to several baskets" or risk a major set back if your only basket has a problem. Naturally, YMMV.
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Old 02-05-2013, 03:34 PM   #8
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Australia has been in a resource boom for 15 - 20 years or so if I recall. You are quite concentrated, and I would be thinking hard about how to diversify as I would guess property would get soft fast if Aus went into recession for any period over a year.

You do seem to be well set, and that cash flow must be nice to bank each month. We enjoyed a long boom here in the US in the recent past as you know; I am property concentrated as well, and wish I had acted like a stock trader a bit back in 2007 <g> Just means I wait longer to sell.

Anyway, kudos to you, you are set up nicely, just don't forget to listen for the canary in the coal mine..
Thanks. Yes Aus has been riding a resource boom for years now. But property market has been soft for 2 years. The of my portfolio is down between 10 and 15%. Overall I've still made substantial capital gains.
Am thinking of selling one or 2 properties and investing that in equities in order to diversify. The other alternative is to keep working for 3 years and invest the rental income and salary savings into equity.
With my and DW's salary and rental income, we are able to put away a significant amount.
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Old 02-05-2013, 04:05 PM   #9
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I think that if someone has built up a good income based on rents from well chosen properties the last thing they need to do is pay attention to advice from passive buy and hold securities investors.

Experienced successful property investors have provem to themselves that their methods work, and basically residential property investments have always worked, given that they are chosen and managed with skill.

They have a skill, their best plan is to use that skill, unless there are big changes in their home markets that make them no longer viable.

Ha
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Old 02-05-2013, 04:19 PM   #10
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"unless there are big changes in their home markets that make them no longer viable."

Ha[/QUOTE]

That's it... add to that transaction friction and liquidity issues, and houses can be a big weight to get out from under. But when it works well, it's a beautiful thing.
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Old 02-05-2013, 05:09 PM   #11
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But if he owns the houses free and clear, which I thought he posted, and he has $300K set aside, and his wife has an income...why does he need to di-worsify into stocks of which he exercises no control? If he's wanting cash flow vs capital gains, why does he care about selling his houses--he can sit tight and rent to people who can't afford to buy like in the US, right? His $300K provides a cushion against vacancies, I would think.

Warren Buffet said, "Put all your eggs in one basket, then watch it like crazy." I think I'd follow his advice.
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Old 02-05-2013, 05:27 PM   #12
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We are certainly FI via rental property. Whether we are RE is open to some argument.

We have been able to run for a SoCal home and out of gloomy Oregon for 1/2 the year for the last three years and our net worth continues to rise, but there is a bit of looking after the rental management during the winter and some serious looking after the rentals in the Oregon summer. Think it's a fair enough trade for feeling like I know what our rentals are doing and why they are profitable.
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Old 02-05-2013, 05:45 PM   #13
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Jags, this was essentially my dad's plan, and he was making about the same ~$52K a year. He died in November 2007, right before the mortgage crisis erupted. I always said it was good he passed then, because watching his "retirement plan" melt would have broken his heart.

His plan was a little different than yours: he held the mortgage, which alleviated the need for maintenance and repairs and taxes. A couple of the occupants literally walked away from the houses - they were so upside down on their mortgages they couldn't see any way out other than to abandon the houses.

By the time I actually foreclosed and got possession again, I was so sick of dealing with the other people in the remaining houses that I just sold the abandoned ones at a >50% loss. I am NOT cut out to be a landlord in any way, shape or form. Nor am I cut out to hold subprime mortgages.

You, on the other hand, are already dealing with renters and all the fun that entails. If you have to kick someone out, you'll just fix it up and rent it again.
So, I can't see where there's a downside for you like there was for me. Only thing I can think of is that when you get more advanced in years, you may not have the wits or energy to deal with non-paying tenants, or nasty tenants who need to be evicted.

People will always need a place to live, and if you own these houses free and clear, a vacancy shouldn't mean much more than paying utilities. However, that also means that rent isn't landing in your hands each month. Personally, I'd probably want a little more than $300K to fall back on.

I admire landlords - I didn't get that gene.
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Old 02-05-2013, 06:17 PM   #14
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Jags, this was essentially my dad's plan, and he was making about the same ~$52K a year. He died in November 2007, right before the mortgage crisis erupted. I always said it was good he passed then, because watching his "retirement plan" melt would have broken his heart.

His plan was a little different than yours: he held the mortgage, which alleviated the need for maintenance and repairs and taxes. A couple of the occupants literally walked away from the houses - they were so upside down on their mortgages they couldn't see any way out other than to abandon the houses.

By the time I actually foreclosed and got possession again, I was so sick of dealing with the other people in the remaining houses that I just sold the abandoned ones at a >50% loss. I am NOT cut out to be a landlord in any way, shape or form. Nor am I cut out to hold subprime mortgages.

You, on the other hand, are already dealing with renters and all the fun that entails. If you have to kick someone out, you'll just fix it up and rent it again.
So, I can't see where there's a downside for you like there was for me. Only thing I can think of is that when you get more advanced in years, you may not have the wits or energy to deal with non-paying tenants, or nasty tenants who need to be evicted.

People will always need a place to live, and if you own these houses free and clear, a vacancy shouldn't mean much more than paying utilities. However, that also means that rent isn't landing in your hands each month. Personally, I'd probably want a little more than $300K to fall back on.

I admire landlords - I didn't get that gene.
Landlording isn't for everyone. You need the skills and temperament and off course patience but the payoff is huge if you buy right. Landlording has moved us from middle class to upper middle class and arguably rich (all due to cash flow). I've used leverage to take every dime and more I invested into the properties and they still generate a cash flow that would allow me to RE. I chose to send my children to elite private school and do a lot of traveling plus I now enjoy my job quite a bit and don't see the need to quit.
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Old 02-05-2013, 06:43 PM   #15
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I have a few rental units and they produce a very nice income stream. The income covers more than our barebones budget. We're a family of 4 with no mortgage or car payments, so life in general is good.

But, I will say as a landlord, it is work and while I'm a landlord, even tho hours might range from 1 hour (doing the books and depositing the rent) to 40 hours a month (tenant screening/turning unit), it's a responsibility I have. It's worth to us.

I still keep a full time contract job, but much less stress knowing cash flow is there.
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Old 02-05-2013, 06:47 PM   #16
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But if he owns the houses free and clear, which I thought he posted, and he has $300K set aside,.
Thanks for the feedback. BTW I should clarify that in accordance with Australian legislation, I can only access my defined contribution (the $300k) when I attain the ripe old age of 56 (in 2016). Hence my apprehension about chucking it in now rather than spend 3 and a bit more years w*rking and increasing that next egg just a little bit more.
I am lucky that I get to access it at 56. Legislation has changed so that those born after 1963 have to wait till 60.
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Old 02-05-2013, 08:28 PM   #17
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jags,

Your strategy is similar to mine. We are happy landlords with 8 properties. While we can't retire strictly on the rental income, it will certainly be a major part of ER strategy. We are currently 40,43 and want to see how these next 5 years turn out. We should have all but one investment mortgage paid off, but will only be about half way through our 15 year primary mortgage.

We have also done something similar to you in that we keep pouring funds into retirement accounts as well. I know the returns I am getting with my rentals and feel very comfortable with the risk I am taking. So the next question is, Why would you keep funding retirement accounts if you can get more or less steady double digit returns on rentals?

We keep throwing around the idea, should we just go full blown into rentals?...but I still can't stop funding an account that puts money in before taxes. Ultimately we are blessed in that we can do some of both, and I think the diversification couldn't hurt.

Either way, rentals are great if you have that passion. Several other posters hit it... Some can adjust to being a landlord and some will just never like it.
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Good for You!
Old 02-05-2013, 09:56 PM   #18
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Good for You!

Well done to you Jags!A shining example of what can be achieved with plenty of backbone.
Im in a very similar situation.ER since 43,but now 49.Small portfolio of 8 rentals,with home and hol home all free and clear.
My concern for you would be,as has been pointed out,that IF all your props are in one spot,you are not really diversified enough,plus at the mercy of one Govt to tax you to death!Second,your ability to work is your greatest asset,even at age 52 and you only need wait 4 yrs to draw pension.Do you have adequate liquid assets too,meaning as a minimum 12 months income equivalent?4 years could mean a big difference in this respect to bulk up on cash savings and lose any consumer debt too.
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Old 02-05-2013, 11:04 PM   #19
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Do you have adequate liquid assets too,meaning as a minimum 12 months income equivalent?4 years could mean a big difference in this respect to bulk up on cash savings and lose any consumer debt too.
Have $100k in shares. I have credit card debts, but these are paid in full every month. Use the card to get airline miles .
You're right , if I can put up with w*rk for another few years, I can bulk up savings as well as get my hands on my defined contribution assets. With our combined salaries and rental income, we put away close to $100k a year.

I just need to make up my mind when enough is enough to RE with minimal downside financial risk. To me - that's a Firecalc result with no failures at an income level that allows me to still put money away for a rainy day (eg tenancy issues, unforeseen maintenance etc)
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Old 02-05-2013, 11:43 PM   #20
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I have 11 rentals, one is a duplex so 12 tenants. Since the stock market tanked, I started buying stocks instead of real estate (in 401K and Roth). I will soon have one mortgage left (paying off the other for my 55th next month). Home and lake cabin are mortgage-free.

I'm sure of at least $60K per year and I think I can get up to $85 or 90K after I have time to oversee/make improvements while retired.

I also have some taxable account stock dividend income, but I'm dedicating that to health insurance.

Net worth 1/3 stocks, 2/3 real estate. If I tap the 401K at 59 1/2, it should provide about $24K at
3% withdrawal. I hope not to touch it but as a single guy I'm going for the SS at 62.

I am planing to w*rk another year or two to possibly pay off the last mortgage and/or build cash reserves. That is what I would do if I were you.
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