We find that almost every new real estate investor wants to know:
Is it possible to live off rental income?
Investing in single family homes to rent for long or short term can be an excellent source of cash flow. While some investors choose to use rental income as one part of a larger investment portfolio, many investors are living off rental income by focusing solely on single family rentals.
Creating positive cash flow is the obvious key to creating profit, but how do you know when you’ll be ready to live off rental income.
There are 5 questions you must answer to determine if living off rental income is possible for you now or in the future.
1. What is my current buying power?
Whether or not you can begin living off rental income is determined on your exact situation. This is good news because you only need to consider your goals, your numbers, your strategy for evaluating deals, and your money. You don’t need to follow someone else’s plan—you can develop your own.
What is buying power?
It’s your access to personal capital coupled with your borrowing power. To truly understand your buying power, you need to consider all available sources.
Evaluate your options for capital.
- How much cash do you have?
- Can you take a loan against a 401k?
- Do you have a credit line?
- Can you partner with friends or family?
What is this personal capital used for?
- Down payments
- Closing costs
- Improvements on the property
- Permits
- Furniture
- Set up costs
NEXT…
Evaluate your ability to get a loan.
Finding and qualifying for a loan on your rental property is not as hard as you may think, it just takes a bit of research and time to weigh your options.
What are some of the ways to get a loan for your rental property investment?
- Use equity in your existing home
- Consider a portfolio lender
- Work with a local bank
- Work with a mortgage broker
- Look into a landlord/rental loan
- An unsecured personal loan
- A hard money loan
- Private money loans
Keep in mind the short term and long term costs of each of these borrowing options and how they might affect your bottom line before you make a choice. With a plan, you can purchase multiple properties.
2. How much money do I need to pay my bills and support my lifestyle?
Your financial situation is personal. This is good news, again, because you can easily look at your bills, money needs and lifestyle to determine how much money you need to make monthly and annually to begin living off rental income. This number is unique to you.
Evaluate the current state of your financial needs.
- Do you want to replace your existing income from a full time job?
- Do you know what your actual after tax income is that you’re wanting to replace?
- Do you have other sources of money coming in?
- Examples:
- A spouse’s income
- A side hustle
- Other investments
- Retirement accounts
- Do you want to replace income for basic living expenses?
- Are you willing to make initial lifestyle sacrifices?
- Do you need to support a spouse, child or parent?
- Are you looking to upgrade your lifestyle maybe with a new car or vacation?
You have to determine the dollar amount you need to generate each month and each year before deciding how many rental income properties to own. The more detailed you are in evaluating your own financial needs, the better chances you have of achieving your income goals and success.
3. What rental strategy should I choose?
Consider all of the possibilities when it comes to renting a single family home to generate income. You may find that a certain strategy works well with your personality while another strategy might feel too risky or uncomfortable. And you may just determine that a combination of several strategies is best for you.
Evaluate your rental strategy options.
The three most common rental strategies are:
- Long term with one tenant and a 12 month lease
- Short term vacation rental usually through Airbnb or VRBO
- Owner occupied or what’s commonly referred to as house hacking
Which situation will get you to your goals faster?
What is your comfort level with each?
If you don’t mind living next to or with tenants, you could reach your financial goals quicker with an owner-occupied property. You won’t be paying a separate mortgage for your personal home and expenses like utilities and internet are shared.
A long term rental can feel more stable and reliable but could take you longer to reach your financial goals. The reasons being that profit is lower after paying mortgage, insurance, taxes, repairs and considering vacancy rates. You will also still be paying for your primary residence.
You could make more money from a short term rental because you can charge more per night and host more people with an Airbnb, but there is faster turnover, more involvement and upfront costs (furniture, decor, amenities).
4. How many rental properties do I need to reach my personal income goal?
You’ve determined your buying power, the exact number you’ll personally need to live on monthly and annually, and what rental strategy you’re willing to take on. Now it’s time to do some calculations. And it’s much easier and significantly more rewarding to crunch your own, exact numbers.
A simple calculation you can use to determine how many properties you’ll require to begin living off rental income:
Take the monthly amount you need to live on ÷ cash flow from a rental property =
the number of rental properties you’ll need to reach your goal.
An example:
If you’ve determined you need $4000 per month, which is equal to $48,000 per year, and the cash flow on your rental is $300…
$4000 ÷ $300 = 13 properties
13 properties x $300 cash flow = $3900 per month
These numbers are more typical for a long term rental house. If you’ve got a short term rental that is bringing in $1000 in cash flow each month, the number of rentals needed changes rather dramatically.
$4000 ÷ $1000 = 4 properties
This is a very simple formula to get your process started. Obviously you can have properties with different cash flows and also you can factor in the appreciation and eventual sale of your rental property into your numbers.
What factors into cash flow?
Monthly rent minus expenses = cash flow
Determining monthly rent is pretty straight forward but let’s look at expenses in detail. There are several points to consider and you definitely do not want to overlook.
- Vacancy rate
- Repairs
- Property Management fee
- Property tax
- Insurance
- HOA
- Income tax on the money you make from your rental
- Landlord tax deductions when you file with the IRS
- Your mortgage payment
Every one of these can affect your final cash flow number. You may choose to property manage yourself and that expense ends up being $0. You may not have an HOA and low vacancy rates. You could also experience unexpected repairs or downturns in the market. The benefit to owning multiple properties and using a combination of rental strategies is that you can offset any unexpected costs and determine what produces the most profit.
5. How do I find the rental real estate deals?
Now you know your numbers, your rental strategy and are beginning to understand how many rental properties you’ll need to make a living off rental income. It’s time to find a deal, but where and how?
You can start the research on your own:
- Look at desirable neighborhoods near you.
- Look for cities with job opportunities or that are attractive to potential renters.
- Look for areas with low vacancy rates and low evictions.
- Network with other investors.
- Join and participate in Facebook groups.
You can also work with an industry professional.
If this is your first investment or you’re still fairly new to investing, partnering with an expert is a crucial step. Not only will they help you reach your financial goals faster, an industry partner will also have access to deals, educate you along the way, and protect your best interest.
With the right team, you can scale faster, grow larger and make more money. Plus it’s nice to have someone on your side to share your ideas and strategies.
New Western has local, licensed agents with access to exclusive, off-market properties to meet your investment goals. We’ve helped investors just like you, achieve their goal of financial independence. Why not you?
Reach out now. We’d love to be part of your team.
