If You Are Looking to Retire Early, Invest in a Rental Property
If you’re pursuing financial independence and early retirement, you’ve probably heard of the 4% rule: When calculating whether your investment portfolio will cover the cost of your life, assume the divestiture rate is 4%.
CampfireFinance gives a good summary of why the 4% rule works, at least in theory:
The 4% rule is based on two financial averages.
First, the 4 percent rule says that your stock portfolio will grow at an average of 7% annually . Second, since the average inflation rate is 3% , you can safely subtract 4% of this growth, leaving 3% to keep up with inflation.
Since you only spend the average incremental gain from your portfolio, in theory you should never be out of money.
However, Paula Pant of Afford Anything calculated – and if you invest in rental properties, you will be able to withdraw 6% instead of 4. This means that you will receive a larger monthly payment after retirement, and perhaps even be able to retire earlier. than you expected.
Here’s how she explains it:
If you are retiring to index funds, you can plan your retirement on a 4 percent withdrawal rule.
But if you are retiring from a rental property, you can use the equivalent of the 6 percent waiver rule.
This is true even if the total return on the two investments is the same.
Why? There are two reasons: (1) rental property income is biased towards income stream rather than capital gains, and (2) rental property does not carry the same risk of principal withdrawal.
Her full post explains why rental properties generate more cash than index funds, why rentals are less risky than stocks, and how you can get started with rental properties even if you don’t have a lot of money to invest. (Spoiler alert: Look for single family homes in the Midwest. They’re still available!)
If you’ve started investing in rental properties as a passive income and / or retirement early, let us know if you think the 6% rule is correct and if we should all start buying rent in addition to to invest your money in the stock market.