Retiring a millionaire is actually a lot easier than you may think. With careful planning, a focused retirement strategy, and active investing -- having a million or more to live off in your retirement days is well within reason. Most investors look to the stock market to grow their retirement nest egg and build passive income, but it's not the only option.
Real estate, particularly rental real estate, can be an incredibly lucrative avenue to becoming a millionaire retiree. Here's a closer look at why owning rental property can help you retire as a millionaire.
Rental income is just the beginning
Rental real estate is a well-revered way to create passive income. If purchased properly, the rent collected will cover associated expenses related to owning the property -- like property taxes, insurance, homeowners association (HOA) fees, repairs and maintenance, and a mortgage -- with additional passive income left over at the end of each month. While rental income alone can be a great way to generate new income streams now or into retirement, time is what will really help you retire as a millionaire.
Let's say you purchased a rental property for $250,000, putting $50,000 (or 20%) down and securing a 30-year mortgage at 3.75% interest. That would make your monthly mortgage payment $1,196. After adding in property taxes, insurance, and operating costs and saving for future repairs, the cost to hold the property on a monthly basis comes in at an even $1,700.
You then rent the property for $2,100, leaving you with $400 a month in passive income or $4,800 a year in extra income. This 10% cash-on-cash return on your investment may not seem amazing at first glance, but when you couple that with time and appreciation, you'll quickly see how a rental property becomes a millionaire maker.
Rental properties greater potential
Real estate, generally speaking, appreciates (i.e., increases in value) over time. In the past 20 years, home prices have appreciated at 7% per year. Using this average rate of appreciation, that $250,000 property would be worth close to $967,000 after 20 years. Now, 7% is on the higher side of historical appreciation rates. So, to illustrate the power of appreciation with a more conservative estimate of a 4% annual appreciation rate, the property's value has the potential to grow to $547,000 after 20 years.
Because the tenants' rent pays the mortgage, equity (i.e., the difference between the value of the property and the debt owed) is being created essentially for free. Plus, during that 20 years, you were able to earn cash flow and use certain tax deductions to lower your tax basis each year while also hedging against inflation by raising rents to cover increases in costs.
A millionaire retirement account is right around the corner
If you consider the potential appreciation gain with the income over the life of the rental, you can quickly see a rental property's return is far greater than the assumed 10% initially. Owning a rental property can be a super-smart retirement move, whether it be a single-family home, townhouse, duplex, or even a commercial building. Owning even just one rental in the right market can help build a million-dollar retirement portfolio, but owning several makes it much more of a sure bet.
If rental property seems like a good move for you, start by saving money for a down payment, which will be at least 20% of the purchase price if you plan to work with a traditional lender. While there is no bad time to buy your first rental property, the earlier you start, the greater the potential gain in appreciation or income. Just make sure you understand the responsibilities and risks of owning and managing rental property and always do your due diligence before investing. This retirement strategy can be incredibly powerful, but not every property is a good rental, nor is it this right investment vehicle for everyone.