Using Rental Properties to Create Retirement Income

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A few months ago, I crossed paths with real estate investor G. Brian Davis who asked if he could write a guest post for Can I Retire Yet? Using rental real estate to create retirement income is a topic of interest for many readers, and a topic Darrow and I have little personal experience to share. So I said yes. (We have no financial relationship with Brian or his company SparkRental.)

This is also a topic of personal interest for my wife and I. After a successful one year experiment as landlords, we recently started studying different real estate markets as we decide whether we want to pick up a few properties and get into real estate investing for the long term.

Brian does a nice job of summing up the pros and cons of investing in real estate for others pondering whether to diversify their portfolios. So I’ll let him take it away . . .

I love to interview people who reached financial independence and retired using rental properties. 

One of my favorite such stories? The story of Ashley and Kevin Thompson, who retired last winter. 

Ashley was 29 years old. Kevin was slightly older in his thirties. 

Among the many reasons their story resonated with me is that Ashley is a teacher, who spent several years working abroad at international schools (like my wife). Neither Ashley nor Kevin ever made six-figure incomes, won the lottery, inherited money, or had any other “unfair advantages.” 

They just lived frugally and funneled as much money as possible into income-producing investments. In their case, rental properties. 

But even they would be the first to tell you that, like any other investment, rental properties have pros and cons as a source of retirement income. Here are those pros and cons, to help you decide if rentals are the right fit for your retirement income portfolio.

Pro 1: Ongoing Income with No Withdrawals or Selloff 

Any discussion of equities as a source of retirement income quickly veers toward safe withdrawal rates

Heard of the “4% Rule”? That’s the classic safe withdrawal rate, based on a study by financial advisor William Bengen back in the ‘90s. The theory goes like this: if retirees pull out no more than 4% of their nest egg each year, the nest egg should last at least 30 years, based on historical stock market data.

Notice how the core concept revolves around a dwindling net worth. Around making sure that you expire before your wealth does. 

That entire notion, of gradually selling off my assets, sits badly with me. I want wealth that will keep growing indefinitely. An elevator that only goes up. I want income that will keep on coming, month after month after month. 

Rental properties fit that bill. 

You don’t need to sell off any assets to rake in rental income. You can sell off properties of course, but the income generated by rental properties doesn’t cost you anything, beyond predictable expenses like repairs and maintenance. 

Editor’s note

Brian hits the nail on the head here. Building the assets that enable early retirement requires you to be a very good saver. Traditional retirement planning utilizing paper assets requires either a.) selling off a portion of your assets to meet retirement spending needs or b.) saving far more money to live on only the income produced by dividends and interest without spending down principal. Many people (including my wife and I) don’t give this enough thought until we approach retirement. 

It is a huge psychological shift to go from saver to spender. This can be scary and uncomfortable. It’s the primary reason we’re considering diversifying into real estate.

Spending income from a job, business, or a rental property just feels different than selling off assets to produce income. Don’t underestimate your psychology!

Pro 2: Appreciation

Not only does your portfolio of rental properties not decline in value as you cash in on the income, it nearly always appreciates in value. 

In fact, you build equity over time, from two directions. The value of your properties rises from appreciation, even as your principal balance drops from paying down your mortgage. Or more accurately, your tenants paying down your mortgage.

There are exceptions of course. Your local town could decide to build a freeway right through your backyard. But no investment is without its risk, and that risk is lower than most. 

In most cases, your net worth continues to rise in value, rather than shrink.

Editor’s note

This is my one point of contention with Brain’s article. To be fair, Brian is not alone among real estate professionals over-selling the idea of appreciation.

Much of the appreciation in real estate prices is simply inflation. And while land tends to appreciate, homes and apartment buildings actually depreciate. Depreciation provides a tax benefit to real estate investors who can deduct the depreciation on their taxes. But that is because they are incurring real expenses over time as roofs, furnaces, flooring, etc wear out.

Housing markets vary considerably with regards to increases in prices. I’ve witnessed the extremes first hand. Houses in our current home town of Ogden, UT have been increasing by 10+% annually for years, while in our former hometown of Johnstown, PA we experienced no appreciation in our home value in over a decade.

Counting on appreciation is speculation, which is generally unwise for investors. I would consider any appreciation above inflation to be icing on an already sweet cake.

Pro 3: Income Adjusts for Inflation

Remember Matthew McConaughey’s sleazy character in Dazed and Confused, and his famous line? “That’s what I love about high school girls: I get older, they stay the same age.”

Rental cash flow is kinda like that. Except, you know, without the sleaziness. 

Rents go up over time, in nearly all cities. In some cases, they can rise staggeringly fast, as San Francisco saw earlier this decade. If a property’s rent is $1,500 today, it may be $4,000 in 25 years from now.

But your mortgage payment? That stays the same. If you borrow a 30-year fixed mortgage, with a $1,000 monthly payment, you’ll still be paying $1,000/month in 25 years from now, when $1,000 is likely worth half as much as it is today. 

Not only do rents rise with inflation, rising rents are a leading cause of inflation. And they often rise much, much faster than other costs.

Editor’s note

Regular inflation adjusted income is a great benefit of paid off real estate, without the risk of leverage.

This benefit can be magnified through the use of leverage, but it is worth emphasizing that this assumes using fixed rate fully amortizing loans. If the numbers on a property work at the beginning of the term, they should only get better over time as rents should rise regularly and equity will build. This gives you progressively increasing cash flow and/or equity, while having less of your loan payment going to interest over time. Win-win.

Pro 4: Diversification from Other Financial Markets

Stock markets go through corrections, even crashes, quite regularly. It’s far less common for housing markets to dip.

And when housing markets do dip, it’s often independent of what’s happening in the stock market.

In other words, every investor’s favorite concept, diversification, plays out beautifully with rentals.

If you own both a portfolio of rental properties and a portfolio of equities, you can lean on one portfolio more when the other is struggling. Bad month for your stock prices or dividends? Keep more of your rental income. Good month for your dividends? Put more of your rental income aside for repairs, or invest it in more equities.

Editor’s note

Improving risk management through diversification is another motivator for us to expand into real estate in these times of high stock valuations and low interest rates. Unfortunately, in many local markets (including ours) real estate prices are becoming overvalued for the rents they will produce as well, making it hard to find good deals to buy.

This is a challenging time for all investors. I think Brian makes a good point here regarding diversification, but we’re being careful not to reach on a real estate purchase, just to add an overvalued property to our overvalued paper portfolio.

Con 1: Rentals Take Work to Buy & Manage

One of my favorite things about buying equities? I can just park money directly in a low-cost index fund. Or many funds, as the case may be, but it takes almost no work to buy and none at all to manage. 

Unfortunately, that’s not true of rental properties.

Finding good deals on rental properties is not trivial. It takes work. And once you’ve found a good deal and put it under contract, the work is just beginning. 

You have to find financing (unless you’re buying in cash). Then come the appraisal, the home inspection, stressful settlements, perhaps coordinating repairs with contractors. 

Once you own the property and it’s ready to rent, you need to price it out, advertise it, show it, collect a rental application from every prospect, run tenant screening reports, call employers to verify income and employment, call former landlords. You need to sign a lease agreement, collect rent, enforce the lease, make inspections, file evictions.

And do it all over again when the tenants move. 

A far cry from clicking a few buttons to buy shares in an index fund, eh?

For all that, there are ways around the work. You can buy turnkey rental properties from trusted sellers. You can hire a property manager or bring on an active partner, so you can sit back as the silent partner. 

Still, the work can’t be ignored, and you need a plan for how you (or someone else) will oversee it.

Editor’s note

I appreciate Brian pointing out that increased returns and income that come with real estate are not a free lunch. 

My wife and I frequently discuss the desire for more income than our paper portfolio provides. But as is the case with many pondering the early retirement decision, we don’t need a lot of income.

So the question becomes, do the benefits real estate provides justify the efforts required to be a real estate investor. I think the answer depends on how great those benefits are and what other income alternatives you have available, such as part-time work, consulting, or a hobby business or job.

For now, my wife’s part-time work, my forthcoming book and working on this blog are more appealing and have more upside potential with less financial risk and undesirable work than buying rental properties, which is keeping us in window shopping mode for now.

Con 2: High Barriers to Entry

Those index funds I mentioned a few sentences ago? You can invest in one with $100. 

Investing in rental properties with $100 isn’t quite so easy.

It takes a significant amount of cash to invest in real estate, even if you’re financing the deal. Most rental property mortgages require at least 20% down, plus you’ll have closing costs to boot.

And that’s just the financial barrier. It also takes some knowledge and skill to invest in rental properties – at least if you want to actually make money. 

That means investing not just capital but also time in learning the ropes of investing in and managing rentals.

Lastly, it’s worth noting that diversification cuts both ways, with rentals. Yes, they are a great alternative to stocks or bonds. But if you have to invest tens of thousands of dollars in a single property, that’s a heavy concentration of funds in a single investment.

Editor’s note

This produces a considerable challenge for early retirees looking to diversify into real estate. Darrow has written about the challenges of getting a mortgage when you have assets but no income. While I haven’t gone too far down this road yet, getting a mortgage for a rental property is generally harder and with less favorable terms than a primary mortgage.

Early retirees with considerable assets could use some of those assets to pay cash for a rental property, but selling off enough assets to buy a property will likely come with tax consequences and this eliminates the benefits of using leverage. And as Brian points out, having a large chunk of your capital tied up in a single property or two actually decreases diversification.

Con 3: Expenses

Your index fund won’t call you up at 3:00 AM to tell you “The furnace broke and will need to be replaced. It’ll be $5,000. Thanks.”

That happens sometimes with rentals. 

Landlords need to keep a thick cash cushion available at all times because large, irregular expenses do come along. The good news? You can budget for them and forecast them. 

Knowing exactly when a major repair or vacancy will come along is not possible, but you can know the long-term average of those expenses. You can set aside 5% of the rent each month for vacancies, 10% for repairs, etc. 

Veteran landlords know this and plan accordingly. Which circles back to the necessity of education for successful rental investing!

Editor’s note

This is another challenge that I appreciate Brian pointing out as it is often overlooked by real estate investors. Do you really want a large sum of money sitting in savings accounts where you’ll be lucky to earn 2%? You may, but that cash drag needs to be factored in when calculating the benefits of owning rental properties.

Do Rental Properties Make Good Sources of Retirement Income?

Yes. But.

Rental properties offer unique advantages for anyone looking to retire young. In many ways, they are the passive income gift that keeps on giving forever. 

But they are not simple to buy and manage, unlike many other types of investments. A friend asked me a few months back about buying rentals, and the first question I asked him was: “Are you just looking for a high-ROI place to park your money, or are you actually interested in real estate investing itself?”

There are plenty of alternative investments, even real estate-related investments, where you can park money without the work required for rental properties. You can invest in REITs, in private notes, in real estate syndication. All have their own pros and cons. None perform as predictably as rental properties. 

But they don’t require nearly as much education, skill, or work, either.

If you’re genuinely interested in learning about real estate investing, rental properties come with incredible benefits you won’t find anywhere else. You truly can retire after a few years of successful rental investing, like Ashley and Kevin Thompson did. 

Just be prepared to work for it in the meantime.

How about you? Do you own any rental properties in your portfolio? Are you thinking about buying any to accelerate your path to early retirement or build more income in retirement? If not, what’s stopping you? Share your thoughts, plans, and experiences below.

G. Brian Davis is a real estate investor, landlord, personal finance writer, and co-founder of Check out SparkRental’s free landlord tools, which include a free video series for beginner rental investors, a comparison chart for rental property lenders, free webinars and more. 

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[Contributing Editor Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris' writing has been featured in MarketWatch, Doughroller, Business Insider and RockStar Finance. He is also the primary author of the forthcoming book Choose FI: Your Blueprint to Financial Independence. You can reach him at]

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  1. Interesting article, but it didn’t touch on the issue of capital gains when selling the rental property. Having an exit plan is important.

    • Chris Mamula says

      That’s a fair criticism. Selling an investment property could generate a large capital gain. Real estate transactions also tend to come with a lot of other friction costs, most of which fall to the seller.

      On the flip side of that, if you hold a property forever it is very tax efficient. As the law currently is written, you could get income from a property forever while shielding a portion from taxes by deducting the depreciation. You could then pass the property on to an heir who would get it with a stepped up basis and sell it with little to no tax consequences or keep it as a form of tax friendly generational wealth.

      • Dede St. Gemme says

        I also understand that you could invest the proceeds in an RIT and then capital gains will not apply.
        We own 20 rentals and our ROI model is not something many would want, we buy 60-year-old 900-1,000 square foot homes in St. Louis MO, manage them ourselves, do the rehab work ourselves (except connections for plumbing and electric). A 50K investment yields a payback in the equity of 5-6 years with a $850-month rent. We rent to bankrupt, low income, 1 felon and a few HUD – people that need a nice place to live and a good landlord – apparently those are few and far between for this client base. Turnover is minimal with this model when you choose the right tenants and at times we have not. Not for the faint of heart, people would be surprised at what we have encountered both the bad and the good. Income after expenses, including taxes, is about $110K net. While I did not retire early I plan to retire in two years at 62, with all 20 homes 100% paid for and my husband will be 50 and my son 14…..going to enjoy some US travel.

        • Chris Mamula says

          Interesting approach Dede and agree it’s “not for the faint of heart.” This clearly demonstrates that real estate provides unique risks and opportunities to investing in a fairly efficient stock market. Kudos to you for having the courage and conviction to take this path and I hope you enjoy the freedom to travel it will provide.


  2. What if you buy a rental property for $100K, and after 15 or 20 years, there is no appreciation. Is it worth keeping the rental OR simply get rid of it, and invest the equity to by index funds? There is no appreciation, but maintenance issues continue to climb due to age. There is cash flow, but we tend to look for appreciation over time with real estate.

    • Chris Mamula says

      In general, real estate prices and rents will increase over time as a function of inflation. As demographics change, there could come a time where housing supply exceeds demand and this could change, but it has never happened yet (at least on the national level, it has in places like Detroit and my hometown in western PA where populations decreased).

      We’re probably fairly safe (how’s that for being non-committal!) banking on real estate keeping up with inflation, but banking on appreciation in excess of the general rate of inflation is a lot riskier.

  3. Do you own any rental properties in your portfolio?


    Are you thinking about buying any to accelerate your path to early retirement or build more income in retirement?


    In my case, I’ve analyzed my situation, and found that I can retire whenever I like, without needing to add the “fiddle factor” of real estate to the mix.

    If not, what’s stopping you?

    Insurance and property taxes come due whether you have a paying tenant or not, and the transaction costs seem pretty high relative to equity or bond funds. And as pointed out in the article, it is a pretty non-diversified asset with a very high miniumum.

    With all the “real estate investor radio programs” on the air these days, it just smells like a bubble to me.

    • Did you experience 2000 or 2008? The stock market is the bubble right now, not rental real estate, even though I agree values are high right now.

      • I’ve been an equity investor since about 1979, so I’ve experienced a few crashes as well as subsequent bull markets. My first “big one” was Black Monday in 1987, and I didn’t do anything, so in the end, it worked out okay.

        Whether rental real estate is in a “bubble” or not, we can only know in hindsight.

    • Chris Mamula says

      I think we’re in agreement that the “fiddle factor” of real estate investing is keeping us from investing in RE, particularly with the run up in RE prices. However, it is pretty easy to make the case that everything (stocks, bonds, RE) is in a bubble, thus the challenge all investors face in these times and the reason so many are considering different options to deal with the feeling of uneasiness and anxiety.

  4. It seems to me that the author’s take on the 4% rule is incorrect. The idea is that 4% withdrawals should maintain principal over 30 years, not that it steadily depletes assets to zero. While one could argue about the 4% being the right number, the underlying concept is to maintain principal, is it not?

    • Chris Mamula says

      Whether or not the VALUE of your assets grows or shrinks is dependent on the future direction of the market. But if you are following the 4% rule, you will be required to sell off shares to meet your spending needs. The yield on the S&P 500 today is 1.89%. The yield on the 10 year treasury is 2.04%. So if you are taking 4% from your portfolio, you would have to sell shares to generate the other (roughly) 50% of your income, or as I noted in the post save significantly (approximately double) the amount to live on only income.

      You are correct that in many cases, the size of your portfolio will grow when following the 4% rule, but that is dependent on market performance. And with valuations being so high and interest rates being so low, this may well be one of those times when this is not the case.

      • You have willfully misread what I wrote, or you think you are replying to some other post, or you are selling something that I am not buying..

        • The 4% rule does assume you are depleting principle down to zero so the authors’ take is correct.

          • The 4% rule assumes it’s ok to deplete principle to zero by the end of the (varying based on the plan) designated term. Most of the successful outcomes result in retained portfolio value though often below the inflation adjusted starting point. If the real estate (rent) nets 4% after expenses (either based on an all-cash purchase or related to the amount of cash invested) or more it’s likely the core investment value will not be depleted as real estate values tend to at least keep up with inflation.

            Net net, I also think the author’s premise is accurate.

          • Chris Mamula says

            Agree Kimber.

    • Jim Linnehan says

      No, the idea is that 4 percent (now 4.5 percent) as a withdrawal rate, adjusted for inflation after the first year, is safe in that it will likely result in the retiree not outliving his/her retirement assets.

  5. My 2 cents from two decades’ experience with rentals:

    Chris’ note above is so true, “Spending income from a job, business, or a rental property just feels different than selling off assets to produce income. Don’t underestimate your psychology!”

    I’m kind of an anxious guy anyway, more so when it comes to finances.
    Rental properties do allow you to NOT obsess about your stock portfolio and rest a little easier when there is a market correction. Besides the income produced, for me this is the other primary benefit of owning rental properties, especially for those of us old enough to have experienced 2000 and 2008.

    A couple other points: It’s very hard to find what feels like a “good deal” unless you happen across a seller that doesn’t know the market and you are ready to act that DAY. This is more important in the larger markets with more active buyers . If you’re not able to tie up that property with an accepted offer another buyer will. I still think about the one that got away 20 years ago because I thought about it over night; the other guy made a full price offer the night before.

    Also, it takes time to see a good return, again, especially in the larger more active markets. Right now in So. California desirable multi-family properties are selling with Cap Rates of 3-4. The cap rate is your return IF you pay cash and have no mortgage. Throw in the mortgage 95% of us are going to have and you can see the patience it takes to see good returns. In smaller markets it is easier to buy and see a more immediate return but increased rents and appreciation will be slower.

    Finally, keep in mind we have been in a ten year bull market for both stocks and real estate so the investment success stories for new real estate investors you hear about have had the wind at their back the whole time.

    • Chris Mamula says


      Greatly appreciate your insights and sharing your experiences as we weigh our options.


  6. I’m dithering over this very question. I sold my 100+ year old flat in San Francisco and have $600k in bank CDs. I retired from full time job and work part-time (25k)..I plan to work a few more years.
    My original thinking was using this new egg to live off of until I’m 70 (6 years from now). At 70 take social security and start to spend 401k (currently 2 million). But I’ve been thinking I would feel better with some income – rental income.
    I rent now ( which I like) and my annual living expenses is 120k (ugh San Francisco- is expensive but it’s home and I love it).

    Should I try and find a condo to rent out and start withdrawing on 401k earlier… or should I stick with my original plan.

    • I think you should buy a condo in Santa Cruz and retire instead of paying rent in SF. Sounds like you’re set.

      • Chris Mamula says

        I certainly can’t give you any specific advice Cis, but based on the limited information you’ve given I’d consider something like Mitch said that would slow your burn rate and allow you to cut back on the part-time work sooner. It seems simpler and easier than trying to become a landlord at this point, unless you’re actually interested in real estate and looking for a new challenge. Best wishes to you.

  7. If future capital returns are only in line with inflation, how good are the current income returns, both gross and net of expenses? How good do they need to be in order to follow this approach? From the article I would assume you would need to be looking at a 4% net yield as a minimum.

  8. Michaele Noah says

    Sounds more like Kevin and Ashley resigned from one job and continue working as landlords. In fact, in Con 1, he even states, “It takes work.” Finding good deals, evaluating the rental vs. purchase market (rental income vs. PITI payment), negotiating sales, obtaining financing, bank appraisals, inspections, settlements, repairs, pricing, advertising, appointments to show, collection of rental applications, tenant screening, calling employers to verify income and employment, calling former landlords, negotiating lease agreements, rent collection, lease enforcement, more inspections, filing for evictions in often renter-friendly courts (watch Michael Keaton in Pacific Heights). Sorry, I think I’ll stick with equities, and sit on my porch watching the grass grow. 🙂

    • Chris Mamula says

      Just curious, but are you retired and actually living on a portfolio of equities? It sounds simple in theory, but as Mitch noted above, I’ve heard from many others, and experienced myself it is hard for people who are natural savers to spend down principle from a portfolio. Most early retirees who I’ve met either have some form of income floor such as a military pension, income from a hobby job or business, or rental income to supplement a paper portfolio.

  9. I would challenge the idea of real estate as a form of diversification. While it may diversify from financial markets, it could result in your assets being in a much smaller basket. Many small investors own a single or possibly a few rental units in a specific area. Is the smaller investors prepared to be without the income (or worse the added expense) due to natural disasters, dwelling fires, actions of a bad renter, tenant lawsuit or possibly the tanking of the local economy? Yes there is insurance or possibly having a cash cushion to cover such events, but are these accounted for in the financial plan? Do the investors plan take into account how long recovery from one of these events really takes?

    This is not meant to be a gloom and doom response, but these issues are rarely discussed when investing in real estate. Too often those pushing the investment paint a too rosy picture. Real estate can and does work for some, but not everyone. Any potential investor really needs to do their homework.

    If I feel the stock market or my situation is changing, a few clicks on the computer shuffle my assets, trying to rebalance real estate is a bit more complicated.

    • Chris Mamula says

      I agree, but Brian did point this out and I reinforced it in this post. See Con #2.

  10. Mick Geary says

    Nice article, thanks for posting it. I’ll toss my two cents in, but with a wrinkle. I “retired” 6 years ago from a large medical device company with about seven rental properties (mostly townhomes to help limit maintenance cost and work). All cash flowed well enough and they added diversification to my stock and bond portfolio. This steady stream of income helped me sleep better at night knowing I was not dependent on the ups and downs of the stock market over the near, and long, term. I was young enough (55) that I was not quite ready to sit around the house and watch the grass grow as another had commented.

    I dove into looking at passive income investments (or close to it anyway) so I could work some, hang out at home and travel south of the US border during the Minnesota winters. After a bit of research, I landed on mobile home parks (much to the surprise of my wife) as the investment of choice. For those not familiar with the ownership of parks, the return far exceeds that of traditional rental properties. There is infrastructure to deal with, and there can be problems, but I agree with those in the industry that say owners are essentially “renting dirt, and not much goes wrong with dirt.” From an early retiree perspective, it can be a part time job that can add some satisfaction to your life as you meet people, improve on the park, add tenants, and increase your ROI. Or, you can farm out the management to an onsite manager and just wait for the mailbox money to come in every month. Big money has rolled into mobile home parks over the past few years due to the return parks provide, but there are deals to be found that provide 8-11 CAP returns. I have since sold many of the rentals I owned and rolled the money into mobile home parks.

    I used to shake my head and laugh when people would toss out the adage of “find something you love, and you’ll never work another day in your life”. That may work if you’re playing second base for the Dodgers or are head beer taster at Guinness but rarely in the real world. I have found that mobile home park ownership, for me, makes me feel like I haven’t worked a day in years. Mowing grass on a riding mower with a beverage beats corporate meetings any day of the week.

    • Chris Mamula says

      Thanks for sharing your experience Mick and as noted above, your experience is the type I hear and see often among early retirees, as opposed to being content and comfortable spending down a portfolio, particularly without saving substantially more than the “4% rule” would suggest you need to retire.

  11. David Williams says

    When selling a rental property, you hope for capital gains from appreciation, but you also have recapture of depreciation at regular income rates. That said, my wife and I own four rental condos on Maui that are now providing us about $25K/year each after all expenses (no mortgages). No maintenance issues as they are in rental programs where there is a full time interior maintenance staff, front desk staff and daily housekeeping for guests.

    • Chris Mamula says


      While real estate is not passive in the same way that an index fund is, you can put systems in place to minimize the work involved and income produced from a RE portfolio can be substantially greater than income that a similar portfolio of paper assets. Thanks for sharing your experience.


  12. You always need to be prepared for the unexpected. I have a portfolio of single family homes in the Dallas/Ft. Worth area. In general, rents have roughly tracked inflation. But (good news) market values have risen sharply over the last five years – much faster than rents. This means that (bad news) property taxes have increased much faster than rents. Insurance has also increased a great deal. Bottom line: my net cash flow has actually decreased.

    (Obviously I can sell properties if I need additional cash, but it remains true this is a wrinkle I did not expect.,)

    • Chris Mamula says

      Interesting, and something I would assume is similar in my local market. Thanks for sharing your experience.

  13. Great article! You could expend on this by covering passive investments in multifamily properties. The returns are as good or better than single family properties, the tax advantages are FAR superior with multifamily, and you don’t have to do any work. Minimum investment is $50,000. Do yourself a favor and look into this asset class.

    • Chris Mamula says

      I think most if not all of Brian’s post would apply to multi-family properties. Not sure why you wouldn’t have to do any work with multi-family homes?

      Multi-family homes are just one subclass of real estate as are single family homes, residential real estate, vacation rentals, investing in land, etc. All have unique benefits and drawbacks.

      • If you are investing in commercial multifamily assets you are most likely a passive investor, hence, no work on your part. The deal sponsor does all of the work for you. S/he sends you 4 quarterly distributions/year and a K-1 at the end of the year. I’m not talking about REITs. Commercial multifamily qualifies for massive tax deductions (accelerated depreciation and bonus depreciation) that single family does not. Granted, single family CAN qualify for accelerated depreciation, but it’s cost prohibitive and not typically done. So if the multifamily returns are equal or better, the tax advantages are far superior, and the investor doesn’t have to do any work, why would you invest in single family? I wish I had learned this earlier in my investing career. I have 25+ single family investments and I now have a 5 year goal to liquidate all of them and roll the proceeds into multifamily — and I can do all of that with no capital gains tax using a 1031 exchange.

  14. I am Barista FI (I’ve got a basic retirement covered, now only work ‘fun’ jobs to cover my monthly bills) and age 50. Looking to create rental income from my paid off Primary Residence. Looking at the options to monetize my house (roommates, separate entrance rental as part of the existing house, ADU rental in backyard, etc) but have never had rentals or rental income before.
    I’m wondering how depreciation, and tax rules would work on rental income that is part of my Primary Residence. Since I’ll be living on property (either in the main house or in the ADU in back yard) does that make my house a ‘rental’ and negate the Capital Gains Exclusion upon future sale? Could I take away depreciation on the ADU only? Thoughts on pitfalls or best methods for creating rental income from partial use of primary residence or the property it’s on?

    • Dede St. Gemme says

      I have found good advice in the textbooks from a landlord perspective While the reading is dry, doing your own taxes and understanding the laws to me is the difference in making 20+% ROI or 10% ROI. We once thought flipping as well as renting would be cost effective but due to capital gains, not an option for us.

    • Chris Mamula says


      Good questions. This isn’t something I’m an expert on, but have been considering myself. Our current home has a MIL suite which is some low hanging fruit for us to do some more experimentation with RE investing, but we just celebrated our one year anniversary of living in the house, so still getting ourselves settled and haven’t decided to take the plunge yet. I’ll certainly write more about it if/when we do. Here is some background on it from the first post I ever wrote on CIRY?

      Agree with Dede that is a great resource. It’s also probably worth consulting with an accountant to get clarity on the tax laws surrounding this strategy. If you pull the trigger before me, I’d love to hear about it. Drop me a line.


  15. I’ve been a LL going on 40 years for supplemental income. The post and comments have covered the general business principles. I believe to many under appreciate the cons and get into the business because of not wanting to sell primary home. True, rentals will diversify your investments, but the business is very demanding. It is cut throat competitive with large influx of new money looking to make “easy” income per the seminar circuit. Once you invest you are locked into this business and must live with your decisions. So, the best of the group have full time businesses and enjoy the economies of scale. Second generation has huge advantage. Home town advantage is big as one must know the marketplace, well. This is extremely long term decision planning, meaning lifetime holdings. Only invest if really knowing the market and plan to live in the area period. Your success is determined by purchase and not always by cheapest deal. A big advantage is cash purchase. You need your spouse to be supportive and part of the technology/business team. One has to have a diverse capability. Most will have to be DIYs to enjoy a ROI. In my opinion the business is getting more demanding over time. Customers, regulations, liability, legal, and business profession. Customers want perfection and they want their demands met now. I think the REIT marketplace have figured out the tax and liability of rental marketplace. Their business have grown and magnified the science of this market. My college town used to be a deep well of Mom and Pop rentals. That’s almost gone now as the larger companies have taken over the profession and basically run the small time operators out. Politically, this force has managed to foster regulations that work to put small business to the curbside. I believe that was intentional. So many get into the business and later drop out. Most have grossly underestimated the requirements and pitfalls. To much TV time with easy money gurus. Also, I’ve noticed many experts have short history of success. They get out of the business and prefer to publish and let others work their secret plan.

    • Chris Mamula says

      Thanks for sharing your insights and experiences Forrest. Agree that too many jump in to RE investing with a house they can’t sell, inherit, etc and don’t do their homework. I do think this is a viable investing strategy that is applicable to a normal person, but it’s not as easy as some like to make it sound.

  16. Ray Sienkiewicz says

    We own our home outright (paid off, Yay!), so if we move and decide to rent out the old homestead we won’t have to worry about mortgage payments – just taxes, insurance, HOA fees, repairs, etc. (as if that weren’t enough). OTOH, we would likely be moving four time zones away so we would need to use a property manager.

    What are other reader’s experiences with being an absentee landlord and using a property manager?

  17. I’ve been early retired (at 50 yrs old) for just over 4 years, entirely utilizing rental properties as my income for the past two plus years. I worked a corporate job for over 25 years, investing in the stock market and purchasing rentals along the way. I mortgaged every rental purchase and now have all but three remaining mortgages paid off. I now own over fifty rental units, so it is absolutely possible to retire early with rental properties. I now have a high six figure income from my rentals, that is nearly 50% tax sheltered by depreciation, allowing me to do Roth conversions on my traditional retirement (stock market) investments. I spend less that five hours per month on my rentals. I manage to do this by utilizing a good 3rd party management company. My annual returns have exceeded an average of 11% ROI per year since I started owning rentals. This level of ROI was achieved by locating good properties and conservatively leveraging those properties to improve returns. As all properties eventually pay off, my future projected return will still exceed 8% per year even without mortgages. As for depreciation recapture…it will never happen to me, unless the IRS significantly rewrites current tax laws (it won’t likely happen in our life time because too many Senators and Congressmen utilize real estate for the same reasons we do!) You can utilize the tax laws to sell and “buy up” and continue to defer depreciation recapture indefinitely. I will likely continue to hold rentals until the properties eventually pass on to my heirs, and they will inherit them on a stepped up basis, avoiding depreciation recapture indefinitely. If you avoid rentals because it’s too much work, taxes are too expensive, you hate being a landlord, depreciation recapture, or just a belief in a lack of diversification. It’s likely you haven’t done your homework or you are simply deflecting because of a lack of knowledge. It’s very possible to retire early using rentals, and you can do it while holding a high level corporate job. Quit making excuses and find your own FIRE opportunities.

    • Chris Mamula says

      I agree with you up to the last sentence. Don’t believe there is any one “right” way to do it, but RE is absolutely a viable path for all the reasons you share.

      • Thanks Chris. Just to be clear, in case my comment was misstated or misread. I never said there was a “right” way to do it. Just said it’s “very possible” with rentals while working (for a lot of examples provided). Last sentence only said (primarily to naysayers…) “Quit making excuses and find your own FIRE Opportunities”. I never said it had to be with rentals or that it was the “right” way. There are many ways to achieve FIRE, but rentals can certainly be a great one for all the reasons provided. I think we are on the same page. Just wanted to clarify, in case it was misinterpreted. Cheers!

  18. Rentals can work well within high tax bracket earners, but how to keep a high salary position at the same time? High income would probably lower the risk of financial leverage, but most will not have that much luxury. If your looking at supplemental income, cash flow is all important for your financial health and quality of life. The LLs that I’ve known that planned on never selling to avoid taxes, all have regretted the decision of not selling before late stage of life concerns and needs. You would think your kids would jump at chance to take over, but most would prefer you to cash out and save them the hassle. It’s not good to leave the next generation a boat-load of money anyway.

  19. Yea – I am interested in Real Estate. I’ve been a landlord in Berkeley and enjoyed it. I love San Francisco and don’t want to leave. And I have a dream part time job I’d like to keep as long as I can. Would like some income to offset my expensive apt… I’ll keep looking and see if something pencils!