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July 30, 2018

How to Retire Early with Real Estate Investments

With growing uncertainty about the future of Social Security and young adults concerned about having enough money for retirement, real estate can be the key not only to help you retire comfortably but also early. Many people start off with a single rental property, catch the real estate bug, accumulate more properties and end up retiring early because they can afford to. It isn’t just a matter of getting lucky--you can plan ahead with real estate investments to make early retirement viable. With planning and motivation, you can afford to retire early with real estate investments. Some great ways to invest in real estate for retirement include:

Rental Properties

Investing in rental properties is an excellent way to earn passive income that can be re-invested and help you retire early. The notion of coming up with enough money for down payments and mortgages for multiple properties may seem overwhelming, but as with many other pursuits, you have to start small and build from there. As with any other preparation for retirement, you have to figure out how much you need to live on. Multiply the amount per year by the number of years you expect your retirement to last. Obviously, if you want to retire early with real estate investments, you should take into account a larger number of years.

One reason why real estate investments are ideal for retirement, particularly rental property, is they generate passive income streams. This means that you do not necessarily need to have all the money you need prior to retirement but can put the foundation in place to provide you with a steady stream of money without your having to work. This means you can calculate your yearly or monthly expenses now and gradually build up enough rental income to cover that amount.

House Flipping

Many real estate investors start out with flipping homes to make dramatic returns. This can be a good first step and a way to generate income for down payments for additional properties. However, if you want to retire early with real estate investment, longer-term investments and making rental income are sound strategies. For a long-term real estate strategy, you flipped homes can be the focus for the first few years but work toward the goal of buying and holding rental properties.

The one advantage of starting with house flipping is the low down payment. You can find a home that needs refurbishment in an up and coming area and sell it for a good deal more than you paid for it (also known as a fix and flip). Make sure you have some cash ready to take advantage of deals as you see them. Have the names of real estate agents, potential lenders, and contractors who can help you with every stage of the house flipping. Look for auctions and foreclosures, as well as sellers who are particularly keen to get rid of a house because of having to move, financial challenges or divorce.

Trying to get a bank loan for a down payment may be too time-consuming and can cause you to miss out on a good deal. For house flipping, you may want to try hard money loans from private lenders. These are short-term loans that can carry high-interest rates, but since you will be selling the house right after it is renovated, you won’t need to hold on to the loan for long. The one drawback of this kind of financing is that it involves significant risk, as does house flipping generally. You can make a lot of money house flipping, but not every deal may turn out the way you planned.

With the returns you make on house flipping, you can then make a down payment on rental property. These rental properties can provide you with opportunities to retire early with real estate investments. The income from the first rental property you buy may be used to pay off debt, but with additional properties, you will be able to live off of the income. This income is the key to your retiring early, either through reinvesting it into more real estate deals or allowing you to support yourself without additional work.

Live-in House Flipping

Another way to retire early with real estate investments is through live-in house flipping. This means moving into a house that needs significant improvements, making renovations, and selling it at a much higher value. It may mean that you will need to move into a new house every couple of years, but at least you will be making a substantial return on your investment instead of passively holding onto it. This tactic provides significant tax benefits. Living in the house you are flipping may mean that you will qualify for special tax advantages and that the return on your investments can be earned tax-free. These kinds of investments provide similar benefits to tax advantages of certain IRAs.

Self-Directed IRAs

Self-Directed IRAs can be an effective and relatively low-cost way to retire early with real estate investments. A Self-Directed IRA is an IRA that allows you to lever your IRA to investments other than stocks. Just as people who use traditional IRAs invest in stocks through their retirement account, those with Self-Directed IRAs can make real estate investments. Self-Directed IRAs provide a number of advantages including flexibility with investment options, but they have different rules from traditional IRAs. A Self-Directed IRA with Checkbook Control is the most cost-effective way to invest in real estate with a retirement account, as the owner won’t be charged for custodial transaction fees.

Using a Self-Directed IRA to invest in real estate provides significant tax benefits, since you will owe no taxes if your property accumulates in value until there is a transaction. You can even be involved in a variety of real estate deals such as flipping and rentals and move your funds, in some case, from one deal to another without facing high taxes. With a Self-Directed Roth IRA, you can withdraw your money without owing tax, provided that you wait until the age of 59.5. Although this may not seem like a very early retirement, it is still a good 5 to 7 year earlier than many people retire, and you will be able to do so without a large tax penalty. However, you can also choose to retire even earlier if you are fine with the taxes.

Patience Is the Key

There is no doubt that real estate investing leads to more real estate investing and the extra money you make from a rental property can encourage you to buy others. If you want to retire early with real estate investments, you will need more than one rental property to provide an income. The amount of debt required may seem daunting, but the rent you charge your tenants will pay off the mortgage. However, it takes a great deal of patience to wait until your real estate investments actually put money in your pocket. In the first years, you may feel as if all of the rental income is going to pay off the debt and other expenses.

It is important to keep in mind that this phase will pass and in a few years, you will have more of the mortgage paid off and will have more money to live on and to use for retirement. There are ways to make this wait time go faster. This is where owning multiple properties helps. Flipping a house can provide relatively fast cash to help you pay down existing mortgages or invest in new property.

Some real estate investors prefer to concentrate on attacking one mortgage and eliminating it rather than patiently spreading funds out to pay all of them off gradually. Finding ways to raise money or generate cash can help you to get rid of one mortgage and means that you will have a free flow of money from at least one of your real estate investments. As you pay off the mortgages and release funds from your other investments, you may use the income for early retirement.

Paying Cash

Avoiding debt altogether means that you can benefit right away from your real estate investments. Another way to retire early with real estate investments is to pay cash for properties. While many people may rule out this option, it may not be impossible, even if you don’t feel you have loads of money lying around. You may want to use part of your nest egg to buy a cheap property that will appreciate in value.

It is possible to find houses that may be a bit run down or may need some work that you can purchase at a significant discount. You may be able to purchase these properties entirely in cash or get a small loan. This is a situation in which it pays to know an affordable contractor who can fix up home inexpensively. It may be a good idea to establish a partnership with a reliable contractor to jointly invest in homes and flip them. Without years of debt to pay off, you can free up more money and retire early with real estate investments.

Make the Most of Your Space

If you don’t mind sharing some of your space to make extra money, consider purchasing a duplex or a house with even more units and rent them long-term or for vacation space. This may mean putting up with certain annoyances, but you may feel reassured that you can keep an eye on your investment. Tenants who live with the owner close by tend to take care of their residences better and may cause fewer disruptions.

Even if you don’t feel like living with just a wall dividing you from your tenants and guests, you can increase your rental income by purchasing rental properties with multiple units. Contact a seasoned contractor about adding units to your current rental property so you can make more rental income. You may have to deal with the fact that the property will be empty while the renovations are going on, but with this kind of rental property management, you can maximize your profit from your rental investments by having multiple units.

Becoming an early retiree is a dream of many people, and real estate is one of the best ways to accomplish this goal. Aside from the brief period of the housing crisis, real estate has been among the most profitable investment vehicles in recent history. While some prefer more liquid investments, such as stocks, real estate provides the benefit of stability and keeping your money where it can accumulate in value. Owning property as an investment also means you are spared the high capital gains taxes stock holders need to pay, and you can roll over money from one type of real estate investment to another with minimal tax penalty. If you use a Self-Directed IRA to invest in real estate, you will reap even greater tax benefits and can focus on investing and preparing for retirement at the same time.


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