What Does It Take To Retire Young & Travel With Rental Income?
Familiar with the acronym “FIRE”?
It stands for financial independence, retire early. Not a few years early, but decades early – think retiring in your 30s or 40s.
And it is absolutely, 100% possible. I routinely interview normal, middle-class people who retired in their 30s on rental income, and now spend most of their time with their family, often while traveling the world. A surprising number decide to continue working, often in a new career doing something they love. Many write, or volunteer, or keep investing in real estate for fun.
How do they do it?
Consider the following a crash course on how to replace your 9-5 income, automate your property management from rental applications and tenant screening to rent collection, and untether yourself from your job and location.
It Starts with a Target Income
The average American only saves around 2.5% of their income. As they earn more, they spend more, and don’t think much about how long they plan to work or when they want to retire. Which is why most Americans work for 40-50 years, retiring in their 60s or 70s.
If you want to retire young, you’re going to need to change your spending, in a dramatic way.
How little could you live on? Spending less attacks the problem from two sides. First, it helps you invest far more of your money into real estate or other investments. Second, it gives you a much easier target for replacement income.
If you only have to generate $36,000 in income from your rental properties, you’ll be able to retire much faster than if you have to generate $75,000 in annual income.
Remember, upon retiring you can live anywhere. You can move to a low cost-of-living city or town, either domestically or abroad. Or you can stay right where you are.
Set a target for retirement income, so you have a goal to work towards.
High Savings Rate & Budgeting
When do you want to retire?
If you want to retire within ten years, you’re going to need a high savings rate in the 40-50% range. If you want to retire within five years, aim for a 70+% savings rate.
Most people shake their head at this point and dismiss the notion as impossible. It’s quite possible, but not the way you’re living right now.
If you’re interested in retiring young, you’ll need to make some lifestyle changes.
You’ll likely need to find a way to have some or all of your housing paid for by someone else. That could mean buying a multifamily, moving into one unit, and renting out the others. Or it could mean bringing in a housemate or two, or occasionally renting part of your property on Airbnb, or renting out storage space in your garage. Personally, my wife and I searched out ways for her employer to cover our housing.
My co-founder Deni and her husband approached this even more creatively: they brought in a foreign exchange student. The placement service pays over half their mortgage!
You may need to get rid of a car. To go out to eat less and cook more. To get rid of cable TV. Buy fewer new shoes and clothes, buy used furniture instead of new, and a hundred other ways to spend less and save more.
If early retirement were easy, everyone would be doing it, right?
Growing Your Rental Income
The upside is that as you put more of your money aside to invest in rental properties, your income will grow with each new property you buy.
In other words, your income snowballs, even as your expenses stay low.
Imagine the Denisons earn $72,000 after taxes. They cut their spending to half of that, $36,000/year, or $3,000/month, and invest the other half.
In their first year they use their $36,000 of savings to buy a duplex for $150,000. They finance it at 6% interest with 20% down ($30,000), and put the other $6,000 toward closing costs and cosmetic updates.
Gross rents for the duplex are $2,000/month. We’ll assume that 40% of that ($800) goes to expenses, from vacancy rate to insurance to taxes to repairs. For now, they manage the property themselves, and avoid paying 10-12% in property management fees.
They also owe around $720 in principal and interest, leaving them a monthly cash flow of $480.
That boosts their annual income by around $5,760 after their first year. In their second year they’ll have that much more money to invest in their next property, and perhaps bump their rental income by another $7,000 that year. In their third year, they add another $9,000 in income.
All the while, their rents and property values rise, even as their mortgage balances drop.
Rental Management as You Scale
Traditional logic dictates that landlords should outsource their property management once they reach a certain number of doors.
And that’s a viable option. Let’s say the Denisons have 12 doors after investing for five years, generating $36,000 in annual net income. The Denisons could hire a property manager, and pay around 12% of their gross rental income, between ongoing rent collection fees and new tenant leasing fees. It would likely require them to work for another year or so, and buy another property to generate enough extra rental income to cover the new set of expenses.
But that’s not their only option.
The Denisons could instead quit their full-time jobs, and continue managing the rentals on their own. With the help of today’s landlord apps, automating everything from rental listings to combined rental application and tenant screening reports to rent collection, it’s easier than ever manage rentals from anywhere. Our own online landlord app offers all of these and more – try our rental application and free tenant screening report out to kick the tires with a free account.
Alternatively, the Denisons could hire a leasing agent only to place new tenants. They skip the most labor-intensive part of the tenancy cycle, so their only responsibilities are collecting rent and fielding the occasional maintenance call.
Which they can do from anywhere. I can attest to that personally, as I’ve spent the last three years managing my US rentals from Abu Dhabi.
Transitioning from Full-Time Work to FIRE
One of the surprises I’ve found in interviewing young retirees is that their biggest FIRE challenges often have little to do with their rental income.
Many list health insurance as a major concern. They have enough rental income to cover their living expenses, but worry about health insurance premiums.
Even if they have enough money to pay for the premiums, they worry that rates will rise unexpectedly on them.
Some solve this problem by continuing to work part-time, for the insurance coverage. Others buy policies on the health insurance exchanges. Some move abroad, where insurance is often far cheaper but the medical care is equally strong.
As many people reach financial independence, they start thinking about their purpose in life. For so many years, the daily demands of clocking into work every day let them avoid these questions.
But if you no longer need to go to work to earn money, then what should you do with the rest of your life?
It’s a question worth answering before you embark on the FIRE journey. Whether you plan to write novels or join the Peace Corps, to run for political office or build handmade furniture, your life opens up when you no longer need to clock into a 9-5 job.
The truth is that all of us, whether we’ve reached FIRE or not, are responsible for creating a life that fulfills us. The beauty of FIRE is that it makes that responsibility crystal clear, since we can no longer point to money and work as the reasons for our unfulfillment.
Landlords can live anywhere.
I moved abroad in 2015 with 15 properties in Baltimore. I can post rental listings from anywhere in the world, collect rental applications and run tenant screening reports. Sign lease agreements digitally. Collect rent electronically. I can even have rent deducted from my tenants’ paychecks.
All with a few clicks of a mouse.
I’ve spent the last three years splitting my time between sun-soaked Abu Dhabi, my hometown of Baltimore, and Europe. My wife and I are preparing to move to Brazil in the coming months.
One couple I interviewed retired recently and bought a houseboat, to meander the rivers of Europe. A high-end European health insurance policy cost them 23% of what a comparable package was costing them in the US.
Another couple I know spends their winters in Thailand, and their summers in the US expanding their rental portfolio.
The world gets smaller and easier to navigate every day. And one of the perks of being a landlord is that you can do it from anywhere in the world, from the expensive avenues of Paris to the beautiful and affordable streets of Cuenca, Ecuador.
Pursue Your Dreams While You’re Young and Healthy Enough to Enjoy Them
Anyone can reach FIRE while young. But most people won’t.
Why? Because it’s easier to spend all of your paycheck on a bigger house, a faster car, trendier clothes.
Living on a fraction of your income takes discipline, deferred gratification. Buying rental properties takes both money and work. Screening rental applications and serving late rent notices on tenants is less fun than going out for drinks with friends.
But for the minority of people who have dreams bigger than punching a clock, who want to retire while they’re young enough to be fully present for their children, who want to see the world, consider aiming for FIRE from real estate.
While I’m not retired, I get to do what I love, as a landlord and real estate investing educator. I get to visit ten countries every year, to work from anywhere.
It’s a good life, and I hope you’ll join me.