How to Consider Rental Income When Determining Your Retirement Goal

August 18, 2023

In this highlight, we discuss how you should approach rental income when determining your retirement goals. Do you want to learn more about how to make sure you are on track for retirement? Check out our Know Your Number Course.


G has a question; he says, “How do you factor in the uncertainty of future rental income when planning for retirement?” We have investment property, but we’re unsure how to factor that into knowing our number.

Yeah, this is a hard one, right? Because again, you’ve got to kind of turn yourself into a bit of a real estate expert, and you’ve got to make some assumptions, and we all know what assumptions can do if done incorrectly, right? And so you ought to be conservative.

So, one of the things we tell our folks, especially if you have a single property, right? Because most folks, when they have a rental property, they have a single rental, they don’t have multiple rentals, is you want to assume, okay, in the best-case scenario, I’m going to put on my 3D glasses, in my dream scenario, this is what’s going to happen: I’m going to have rent coming in, the place is going to be paid off, I’m going to be able to count on this much income.

But then there’s your down-to-earth and I think you have to, yeah, I think, in my opinion, Brian, I want you to speak to this, you have to apply some sort of capture ratio to it. So, if my dream plan is, I’m going to, it’s going to generate for me twenty thousand dollars a year, I’m going to say my down-to-earth plan, I can count at about 60% of that because what that’s going to account for is different types of vacancies, different types of maintenance, yeah, rental rates can go up and you can have rent accelerations built in. But if I assume sixty percent of kind of what my dream is or 50%, I think that’s going to allow me to be conservative.

And then you do need to go down the track of, okay, well, what if, or answer the question, is me being able to retire solely and exclusively dependent on that rental income? And if that’s the case, I’d argue that maybe your plan is designed a little too, with not enough margin in it, unless you’re in a position where you could sell the house and liquidate the property. Because you have to assume, what if this whole rental thing doesn’t work? Or what if something changes in my area? What if I have a short-term rental and then all of a sudden the community changes rules where I can’t have short terms? I would think about assigning some sort of limiting factor to account for that income and use that.

So, again, if it was twenty thousand dollars a year of income I was counting on, I would apply a 50% to 60% factor to it and consider that as I’m backing it. And I know your number. I love that you talked about the planning components, but I want to put an umbrella on top of this, some other things I would, you know, just like we talk about risk tolerance versus risk capacity with your asset allocation.

It’s because even though you might be a risk taker naturally, as you get older, you just can’t handle the risk of certain situations just because you don’t have the years to recover. If you’re a person who’s looking and you’re going to do your retirement plan completely off single-family housing, you either need to do enough of it that it spreads out your risk or you need to look at what is the risk of the rent compared to all my other income sources in retirement. Because planning is important, and hear me out on this, it’s because, but there’s also the implementation that has to be done well.

What I saw coming through the pandemic that scared me a little bit, and I know a lot of you, and you need to be careful about this, is the rules changed. Because realize, I’ve told you guys all the negative things of investing, they’re all extroverts, they like to hang out together. So, in the pandemic highlighted this perfectly, and the fact that you had market volatility, you had people losing their jobs or having a lot of uncertainty, and then, you know, just a lot of things were going. So, the government took some crazy steps, they took some steps and said, “You know what? If you rent, you can’t get kicked out right now. No more evictions.”

So, you can imagine that created this weird market thing where some people just quit paying rent, and a lot of landlords got squeezed because they couldn’t kick out the people. They still had to make the mortgage payments. This is a disaster. So, that’s why I’m telling you, you better do implementation well. What do I mean by doing implementation well? Go look at that tenant, you, but I mean your due diligence when you take on any tenant on any of your single-family residences ought to look like they’re applying for the job of a lifetime.

I mean, I had somebody who does this for a living, and they were telling me about how thick their application is, and they do it on purpose because they’re like, if my tenant will not fill out this and let me do all the background checks and all the other stuff, I probably don’t want to have them because I’m essentially forming a business with this person. Because I’m counting on their income and their rent payments to pay off the debt on this thing, and you can’t be assured about this anymore because it’s starting to get to be like, um, you know, because I, I’ve been traveling a lot with my daughter graduating, we’ve started going and it’s fascinating for me to travel like in Europe, travel to Africa and other places because I’m getting to talk to these tour guides about how does their economy work.

And one of the things I noticed when I was in France, they’re like, you see all these beautiful buildings? They’re like, you realize the majority of those buildings are empty. And I was like, what do you mean that building is empty? And they’re like, well, it will take a landlord probably close to a year to find a tenant for now. Like, why? And they’re like, because it’s such a hard process because they can’t kick people out of any of the buildings. So, they have actually created a due diligence process where it is so hard to get in that they’d rather just sit empty until they find the right tenant that they can feel good.

And I hate to give you that due diligence or even that pessimistic outlook, but it is one of those things. It’s back to those 3D glasses. You need to make sure that your retirement plan is bulletproof. And I want to make sure the next market volatility, because now that we’ve pulled that lever to where we can protect landlords and all the tenants and the landlords are still left on the hook, you better make sure that your plan takes that variable into account as well. Because I don’t want you to get caught with something that wasn’t in the brochure. Now you’re having to deal with and it’s blowing up your retirement plan. So, the implementation is important. Put on the 3D glasses, but also make sure you do implementation well and you really do go through the efforts of protecting yourself. For more information, check out our free resources.



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