The average American will retire in their 60s, but you may hope to leave your full-time job and retire much sooner. Retiring early requires planning, investing, and taking steps to fast track your financial freedom.
Investing in real estate is one of the most reliable ways to build long-term wealth. Playing the stock market might yield larger results more quickly, but it’s also more risky. On the other hand, savings accounts and mutual funds are lower risk, but they’re slow to grow.
If you want to get started investing in real estate, there are a variety of options based on your level of interest and commitment. You can pursue more hands-on investment opportunities, such as owning rental properties or buying and flipping houses. You can also invest in real estate investment trusts and limited partnerships, which require less daily maintenance.
Here’s an overview of how you can retire early as a real estate investor.
Buying rental property is one of the most popular ways to earn extra income that can help you achieve your early retirement goals. Whether it’s individual homes, multifamily homes, or vacation rentals, residential properties provide monthly income from rental fees. If you need help determining a monthly rate, use a rental property calculator to get the best return on your investment.
As with all investments, there is some risk. As the owner, you are responsible for updating and maintaining the property, which could be costly. To avoid expensive surprises, set aside money to use for upkeep. This will keep you from having to take out another loan on the property or rack up credit card debt. Consider putting your emergency maintenance funds in a high-yield savings account so you can earn interest on that money over time.
You should also plan accordingly for tenant turnover. You can’t make money when your property is empty, and there may be months when you don’t have an interest. Make sure your lease requires renters to give sufficient notice of their intent to vacate so you have time to find a new tenant.
Rental properties are a good long-term investment because most real estate increases in value over time. That means you’ll not only earn money from monthly rental fees, you’ll also make a profit when you decide to sell the property. Maximize your savings by learning how to save on Realtor fees, giving you an even bigger return on your investment.
Land and Home Flipping
You can also earn real estate income by buying property and selling it for a profit — known as flipping. Thanks to home-improvement shows, you’re probably familiar with buying rundown properties to repair — yourself or with the help of a contractor — and selling quickly for a profit.
This may require a lot of cash upfront, but you can save money using a low-commission real estate broker on your purchase. Earn additional savings by using credit cards for real estate investments. Charge expenses to a cash-back card to lower the overall project cost or earn savings to reinvest in the renovation.
You can also buy parcels of land to develop or sell at a profit. If you decide to invest in land, do your homework because land is typically zoned for commercial, residential, or agricultural use.
Buying an investment property in a hot real estate market might seem daunting. Give yourself an advantage by having your financing approved before making an offer. Real estate investors are eligible for loans beyond the scope of a traditional home mortgage.
You can also stand out from competitors by making a cash offer. You still have options if you don’t have the money on hand thanks to companies, such as Knock, that specialize in cash offers.
Real Estate Investment Trusts and Limited Partnerships
Not all real estate investments require hands-on work. Through real estate investment trusts and limited partnerships, you can earn money from real estate without having to manage the properties or act as the primary decision-maker.
Real estate investment trusts give you the opportunity to buy shares of a portfolio. Like with mutual funds, you earn shares based on how the overall portfolio performs. By having a large portfolio, you’re less dependent on the performance of one property. That means you can continue to earn dividends even when a property is vacant or in transition.
Similarly, limited partnerships allow you to be a shareholder in a real estate investment, often a commercial venture or multifamily property. You earn returns based on the number of shares you have or the amount you invested in the overall project. With other investors involved, your risk of loss is lower.
Take Advantage of Tax Breaks
As with other forms of income, real estate investors are required to pay taxes on their earnings. Plan to save between 20% and 30% of your earnings each month for state and federal taxes.
Keep thorough records of all earnings and expenses because real estate investments come with additional tax breaks. Over time, these breaks yield savings that generate wealth more quickly.
If you own rental properties, you can benefit from writing off expenses related to running your business. That includes the cost of yard services, renovations, appliance maintenance, and more.
You may also be eligible for tax benefits if you provide low-income housing. Benefits can vary from city to city or state to state, so check with a local tax and real estate expert to learn about options in your community.
Real estate investors can also benefit from a 1031 exchange, which allows them to defer capital gains taxes from the sale of a property as long as they roll over the earnings into the purchase of a like-kind property within six months. Savvy investors can continue to roll over profits indefinitely, buying increasingly more valuable properties and building wealth over time.
Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more. Education: BA with Honors, Political Science — Stanford University