top of page

Real Estate Investing Series: How to Retire off Rental Cashflow The Smart Way & Be Financially

How Retire off Rental Cashflow: The Smart Way & Feel Financially Free

I never planned to quit my secure government job in 2015; it just happened. I always had a goal of early retirement and, during a recent one-year sabbatical, I decided to accelerate this plan and turn it into reality. Finally, my real estate portfolio was generating cash flow that theoretically exceeded my basic living expenses. Many real estate gurus out there aggressively market that you can retire early if you acquire enough properties in so many years. I ran a quick Google search and found these interesting headlines:

”How to Retire Rich and Early with Real Estate”

“How Rental Properties Can Help You Retire Early”

“Retiring Rich with Rent-to-Own Properties”

I decided to pretend to ‘retire’ for one year, relying completely on rental cashflow. My experiment was to see if I could reliably live off rental cash flow without dipping into my reserve funds.

Real Estate Investing Background

To understand me better, this is the state I was in when I decided to pretend to retire for one year:

• I had been acquiring at least one property per year since 2007; • My real estate strategy was to buy and hold (or buy, fix and hold); • All of my properties had mortgages; • My real estate portfolio was generating enough cash flow (i.e., rental income minus ALL expenses, including mortgage) to cover my housing and living expenses; • I had reserve funds for expensive repairs and maintenance.

My Year Off

The first three months were quite boring. Nothing happened in my real estate properties. No one bothered me and there weren’t any big repairs. A few paycheques from my rental cashflow went towards basic housing expenses and savings: no problem.

After 6 months, I received a few pay cheques and other times, I had to return my pay cheque.  Then, I experienced my worst string of vacancies in over 8 years. Moreover, the Canadian economy was affected by the global oil crash and the rental market changed overnight. I had to drastically reduce rent to two of my largest cash flowing properties to remain competitive. This really hurt my rental income. I lost at least a thousand dollars of monthly rental income.

I had a string of bad luck. Or maybe it’s normal when you have a larger portfolio to have more frequent and larger expenses. During this time, I had to pay for a new roof, furnace repairs, two tree crownings, paint jobs, and normal wear-and-tear repairs.

The plus side was that I never had to dip into my reserve funds. The minus was that all of my rental income for that year was all gone.

In the end, I was finding it incredibly hard to have a sustainable and significant amount of rental cashflow. This level of uncertainty can be unbearable if you have never gone without a steady pay check AND you need the rental cashflow to pay for life expenses. Every month had a level of uncertainty on whether I was paid or not.

This level of uncertainty is probably why so many people who have left their full time job trade it in for something else related to real estate, for financial stability. Very common paths include becoming a property manager, house flipper, turning into a real estate agent, real estate investment coach and/or running real estate investment workshops. However, unless you have a few of your properties mortgages paid off, it is very difficult to ‘retire early’ relying solely on rental cashflow.

How Do I Recommend Retiring Early and Relying on Cashflow through Real Estate Investing?

If you ever decide to quit your job and retire using real estate, you need a risk management strategy. Here are strategies to help protect yourself:

1) The safest way to retire early through real estate investing is to have serious coin for contingency funds and completely pay off your mortgages so that you have minimal expenses and to reach a number that you are comfortable living off of.

2) Build a large reserve fund covering all of your known unknowns. Known unknowns are events that are known to happen but you don’t know when. The key is to assign budgets for these individual events.

Here is a simple example:

A vacancy is likely to happen once every two years, costing $1000/2years/property=$500/year/property.

A roof repair is likely to happen once every 10 years, costing $5000/10 years/property=$500/year/property.

Tree maintenance is likely to happen once every five years $1000/5years/property=$200/year/property.

If these are the only known unknown events for your one property, you add up all of the above for a total of $1200 per year for your one property. This is your contingency fund.

3) Build a reserve fund to cover two months of expenses for every property and commit to replenishing when you draw from it. The problem is that it won’t cover large expenses like replacing a roof, removing trees, or repairing exterior work if all your repairs and vacancies come at the same time.

For example, if your mortgage payments are $1000 dollars per property and repairs cost is $500/year for every property and you have ten properties. Your reserve fund would be ($1000 *10 properties + $500 * 10 properties) *2 months = $30,000. Not everyone has $30K just lying around and I personally do not like holding that much cash in a separate account.

4) Build supplemental plans for increasing your rental income. Some creative ways to boost your income include: renting out parking spots, renting out storage space, charging for laundry, adding a secondary dwelling suite to your unit or turning the units into short term furnished rentals. Be creative.

5) Have a secured line of credit for each property based on the equity you’ve built up. This is your lifeline to each property. This provides security and access to fast cash for unexpected large expenses, i.e. the unknowns unknowns.

6) Be proactive with your repairs and maintenance. It sounds counterintuitive to spend money upfront but if you ignore it, it can turn ugly later. This is why I routinely maintain my trees: to avoid damaging roofs, for safety reasons, and to prevent the larger expense of removing a dead tree. Routinely check your furnaces and conduct tune-ups to your air conditioner to increase the longevity of the units.

7) Hustle, hustle, hustle to reduce vacancies. If you personally manage your properties, you have to be very proactive with marketing your property. If you have property managers, you also need to be very proactive in overseeing your tenant turnovers to mitigate vacancies.

8) Have good relationships with your tenants. Treat them with respect and be a good landlord. They are paying down your mortgage and living in your units and you rely on the cashflow they are providing. That money keeps coming in as long as you own the property and have good relationships with your tenants.

What are your risk management strategies? Were you successful at retiring early through real estate investing and staying retired?  Send me your feedback:)

22 views0 comments


bottom of page