Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

How To Develop Passive Income Investments For Retirement

Written by Paul Esajian

Retirement is one of the most important stages in our life. It symbolizes divergence from the workforce, as well as a transition into our new life; it’s a rite of passage that should be met with open arms and a full wallet. The idea when riding off into the sunset is to be financially secure for the long ride, with experts recommending a savings of around $1 million for retirement. For those considering exiting their 9-5 early, that number needs to be much, much larger. One solution for those without an established nest egg or current plan in place is developing passive income investments for retirement.

What Are Passive Income Investments For Retirement?

The best way to explain passive income investments is to consider their counterpart: long-term savings. Conventional wisdom on retirement has taught us to set aside a percentage of our paycheck each month, usually anywhere from five to 15 percent, and to do so early on in our careers. According to US News And World Report, a future retiree will need to abide by the following:

  • Save 10 percent to 15 percent starting in your early 20s.
  • Save until you can replace 80 percent of your preretirement income.
  • Draw down 4 percent annually.

Although solid advice, the other concept is passive income investments for retirement. This strategy ditches the notion of a mountainous savings account and instead focuses on generating monthly income from real estate investments such rental properties and REITs (Real Estate Investment Trusts). Done right, these assets can fetch monthly dividends and build equity for investors, including boosting their real estate investment portfolio, by simply carrying on with their retirement plans like normal (here’s your excuse to play golf all day).

In terms of retirement strategy, the following outlines the most common passive income real estate investments:

Rental Property: Generally comprised of single-family homes, this investment will produce monthly income by renting to tenants. Turn-key properties are another option, as these investments have a built-in network of both tenants and property management firm. In addition, rental properties in high profile areas will have typically generated a large and uninterrupted demand for housing, helping to ensure a consistent flow of income.

Multifamily Property: One of the more unique opportunities to passive income retirement investing are multifamily properties. This type of residential housing generally offers two or more units, with the most common configurations being duplexes, townhouses, and some types of condos.. It provides several compelling benefits for retirement with real estate, including owner-occupancy, which provides would-be retirees a roof over their head and income coming in from the other rental.

REIT Portfolio: REIT stands for Real Estate Investment Trusts, and it’s an investment option that allows small and large investors to purchase ownership in income-producing real estate, mainly commercial real estate. REITs are typically traded on major stock exchanges and they pay in the form of dividends, working in a very similar fashion to mutual funds.

The benefits of passive income investments for retirement are second to none. The right passive income investments can provide a consistent stream of income for investors, helping to fund the best years of their life with someone else’s money. That’s not to dispel the notion saving for retirement is a bad idea. Learning how to manage finances and effectively budgeting and saving is an important life skill. Having a considerable nest egg is never a bad idea either.

Getting Started: Passive Income Investment Rules:

Passive income real estate investments

The rules of retirement are pretty straightforward: have enough money to cover your expenses. For passive income opportunities, the value of a rental property is discovered when first acquired as the mortgage represents your break-even costs. To be successful, the rental price will need to be higher than the monthly mortgage, including taxes. The difference between these two numbers — monthly mortgage and rental rate — represents your profit margins.

Many investors hire a property management service to oversee the property, which dips further into the profit margin, but it provides one thing: cash flow. The key is knowing your exit strategy beforehand, which should help to alleviate possible roadblocks and/or hiccups down the road.

When considering passive income investments, the following is a good starting point for beginner investors:

Location, Location, Location: Desirable locations will always be a major selling point in real estate. For investors with rental properties, the key is finding an area with a consistent demand for housing. The best places? College towns. The continual cycle of new students every year helps to keep demand high, which in return drives higher rents and higher yields for homeowners.

All About The Benjamins: It’s all about the profit margins when it comes to investing in rental properties. This surplus of funds is the equivalent of passive income because the mortgage was paid, you earned some money, and it was all achieved without you lifting a finger. It’s not money for nothing, but rather a calculated risk — one that pays as long as tenants keep coming in.

Having More Than One: Having more than one rental property is ideal for investors because they provide additional revenue streams, helping to produce larger earnings. With enough properties, investors can enjoy retirement on their terms — and with the help of a property management company, investors can focus their attention solely on looking for more real estate deals.

Tax Implications: Having rental properties can also provide some valuable tax benefits for investors. This includes writing off depreciation, which can account for upwards of $25,000 a year in losses for deductions. However, some additional requirements will need to be met. Also, rental properties with HOA (Homeowner Association) fees can be written off on taxes unlike primary residences where HOA fees are not deductible.

The first step to developing passive income investments for retirement is a combination of due diligence, and learning how to start a real estate portfolio. As a potential investor, this is the stage where research is initiated, options are considered, and strategy is born. Great real estate deals don’t fall from the sky, they’re sniffed out with due diligence. For beginners looking to get started with passive income investments for retirement, the trick is to plan your work; and work your plan. Understanding the various components of passive income and its role in retirement will only sharpen your desire to succeed.