Using Rental Real Estate to Fund Your Retirement

“You know more of a road by having travelled it than by all the conjectures and descriptions in the world.” – William Hazlitt (“On the Conduct of Life,” Literary Remains, 1836)

In past messages, I’ve told you why I think real estate is such a good “second business.” It’s something you can learn relatively fast. It doesn’t take a lot of money to get started. And it’s definitely something you can do on a part-time basis.
Although I stumbled at first (see Message #395), I’ve had a good run with real estate. Starting with a down payment of $10,000 on a $50,000 condo, I’ve managed to acquire more than a million dollars’ worth of equity in houses and buildings within two miles of my home in Delray Beach.

My goal is to have enough rental-real-estate income to retire on. Admittedly, my retirement income needs are probably higher than they need to be, but if I can acquire enough rental property to meet my targets, I won’t have to worry about living nicely, even if all my stocks collapse and my businesses go broke.

Is this something you might want to do?

Wouldn’t it be nice to wake up one day and realize you don’t need to work anymore? Imagine how good it would feel to get checks sent to you each month that, in total, were enough to pay all your bills?

It’s an attractive prospect.

Maybe that’s why so many people get into real estate. I know dozens of people who are trying to do what I’m doing, and most of them feel the same way about it that I do.

Problem is, most of them are struggling. And some of them are on the verge of going belly up.

Why? Because if you don’t have a lot of cash — enough to carry you through tough markets — real estate can turn against you.

As is the case with every investment, prices don’t always go up. When they drop — and they do drop, even if only temporarily — you can get hurt, especially if you are “leveraged out” with loans.

The best way to avoid this trap is to buy right. If you can buy property truly below market value, you have a much-better-than-average chance of surviving a downturn.

The people I know who are trying but failing in real estate are, for the most part, paying too much for what they are getting. Instead of getting out there and looking for really good buys, they rely on the help of a few busy (busy getting listings, usually) brokers and scanning (now and then) the homes-for-sale ads.

That’s a very rough road. To buy real estate “right,” you can’t rely on random brokers and the MLS. What you have to do is:

(a) Get at least one local broker to work hard for you and give you his best deals (a strategy I’ll discuss in a future message), and/or

(b) Do a lot of looking around yourself — which is the main point of today’s message.

My brother JJF and I are doing some deals together. So, this past Saturday we spent a few hours driving around.

First, we looked in his neighborhood, an up-and-coming community of sub-$200,000 homes about a mile from downtown Delray Beach. Everything we looked at was priced at the market or above.

Next, we looked along the so-so streets off Swinton Avenue. A few of the homes there looked interesting, but further inquiry (calling to check out square footage, number of rooms, etc.) proved disappointing.

Then, we looked around the Haitian neighborhood south of Atlantic Avenue. Although a few of these sub-$100,000 homes looked good, nothing panned out.

You might be wondering how you determine what is above or below market value. That is the critical question.

In my view, a good value in this neck of the woods has to meet certain requirements:

1. I must be able to buy it and renovate it for a certain amount. In the neighborhoods mentioned above, that figure ranges from $120 to $150 per square foot.

2. I want to make sure that the rent I’ll get for the property will be in excess of 10% of my finished costs (purchase price plus upgrades).

3. It must cost no more than $125,000 per unit. That’s because I’ve found that when you ask for more than $1,200 a month in rent, the market of renters shrinks to a dangerously small population.

Tomorrow, I’ll tell you more about what I look for in a rental property.

[Ed. Note.  Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]