Investors can accelerate their path to retirement with cash-flow-producing assets. If your cash flow from investments exceeds your cost of living, you can retire. Even if you enjoy your career, having this reassurance provides a cushion and gives you more flexibility. You can get more selective about the work you pursue and how you spend your time.
Real estate’s high barrier to entry has deterred many aspiring investors from entering the space. High down payments, property issues and other barriers can make real estate seem challenging. But you don’t need to own properties to generate cash flow from real estate and retire early. This article covers some assets to consider and how to retire early by investing in real estate.
How to Get into Real Estate Without Owning Property
Real estate investing has become more accessible in recent years if you don’t focus on the traditional model. Most people view real estate investing as saving for a down payment, buying your first property, generating cash flow and repeating the process. You can also gain exposure to real estate through real estate investment trusts (REITs) and real estate crowdfunding platforms.
These assets make real estate more accessible by letting investors pool their money. When working together, investors create more opportunities for themselves. You can buy exposure to commercial properties and other real estate asset classes that are out of reach for new investors following the traditional route. These assets also tend to be more liquid than real estate. You can enter and exit a REIT in a few minutes, just like any stock.
Creating Supplemental Real Estate Investments
Long term real estate investments let you save time and costly investing mistakes. Long term wealth and retirement is the ultimate objective for many investors, and these assets can get you closer to your goal.
Calculate Your Cost of Living
Your cost of living reflects your monthly expenses. It covers necessities like food and shelter, but you should also include the nonessentials. Trimming these costs by removing unused subscriptions and exponentially grow investments, but it’s important to know this number. Say you have a $5,000 per month cost of living, or $60,000 per year. The annual number helps with calculations.
Set a Dividend Yield Goal
Many investors use dividend yield as a parameter for their assets. Some investors won’t invest in real estate that yields below 5%. REIT investors tend to find higher yields than dividend stock investors, making a 5% yield more attainable. Using a 6.5% yield as an example, investors can determine how much they will receive each year. If you invest $100, you will receive $6.50 every year, assuming you don’t invest another penny, and the dividend payout remains the same.
Calculate How Much Capital You Need
After establishing a dividend yield goal and your annual cost of living, you can calculate how much capital you need. Using the 6.5% yield and the $60,000 annual cost of living from earlier, investors can identify the required capital to retire. All you have to do is divide the annual cost by the yield:
$60,000 / 6.5% yield = $923,077
You would need $923,077 invested in real estate assets producing a 6.5% yield to generate $60,000 per year in passive income. You can modify the dividend yield goal and your annual cost of living to determine your new capital target. It’s better to overestimate how much capital you will need because it can inspire you to save money and build your career faster.
Hidden Factors That Work in Your Favor
Building up to a $923,077 retirement portfolio sounds intimidating at first glance. It’s a substantial amount of money to reach $60,000 in annual cash flow. However, a few hidden factors work in your favor to make this goal easier to achieve.
You don’t need the $923,077 (or your determined amount) right now. You need enough funds to hit your cash-flow goal by the time you retire. If you have 10, 20 or 30 years before retirement, you have more time to reach your desired portfolio size.
Many REITs and real estate crowdfunding platforms let you reinvest cash flow. These reinvestments expand your positions and get you closer to your portfolio goals. While reinvestments have a small impact when you get started, they snowball over time.
Management teams capitalize on several opportunities to generate more cash. Many REITs raise the rent on tenants, lower expenses to increase profit margins and perform other strategies to reward shareholders. Revenue growth and savings translate into dividend hikes, and most REITs raise their dividends every year. A company offering an annualized dividend of $1 per share may raise it to $1.50 per share within a few years.
You don’t have to do any extra work to benefit from your dividend hike. All of your current shares and reinvested shares will benefit from each dividend hike. These hikes reduce how much capital your investment nest egg because your personal yield goes up.
Appreciation does not impact your cash flow, but knowing your investment grew in addition to the cash flow is a nice bonus that impacts your total returns.
Social Security paychecks in retirement reduce how much you need to retire from your portfolio. If you receive $1,500 per month in Social Security, you will receive $18,000 per year from the government. You would only need to generate $42,000 in annual cash flow to reach a combined $60,000 per year in income. You only need $646,154 at a 6.5% yield to retire with Social Security, but it’s best to create a buffer for yourself to anticipate taxes and rising costs.
Dividends are not guaranteed, and every investment has inherent risks. A buffer helps you weather uncertainty, but even then, saving $646,154 sounds less intimidating than accumulating $923,077 in your portfolio.
Real Estate Investing Without Any Hassles
Real estate investing crowdfunding offers more investors the opportunity to gain exposure without the responsibility of owning. You can experiment with REITs and real estate crowdfunding platforms to make your money work for you. Any investment has risk, but some are more stable than others.
If you want a stable real estate asset, consider investing with long term fractional positions in single-tenant commercial properties. Established U.S. companies with long term leases can provide a 6.5% + yield to its investors over monthly distributions. You can start investing with as little as $100 to gain exposure to commercial properties with reliable tenants.
Frequently Asked Questions
Is real estate a good way to retire early?
Real estate investing combines consistent cash flow with asset appreciation, making it a great way to retire.
Is it too late to get into real estate?
Real estate remains in strong demand, and it is never too late to enter the market. Real estate platforms like Elevate.Money make it easy to get into the commercial property market with a $100 minimum investment.
Do millionaires invest in real estate?
Real estate is a popular asset among millionaires. Many people have used real estate investing to build their wealth and reach the seven-figure status with this asset.