Can you live off rental income in retirement? Yes, and some of the people I have mentored do. It is not the rent on the advertisement that pays you, though. It is what is left after the property has paid everyone else, and that is a smaller, steadier number worth knowing well.
Gross rent and net rent
Gross rent is what the tenant pays. Net rent is what is left after property management, council and water rates, insurance, repairs, body corporate fees and the weeks between tenants. On a property with no loan, the net is commonly well short of the gross. On a property with a loan, interest comes off too, and in retirement there is no salary to cover the difference.
What has to be true
- Little or no debt on the properties you live from, or rent well above the interest.
- A cash buffer for the empty weeks and the new hot water system.
- Properties people want to rent, so vacancies are short.
- A property manager you trust, so the income does not depend on your health or your patience.
- A plan for the day a property needs selling.
A retired couple want $60,000 a year to live on and own two properties outright. The rents total $70,000 a year. After management, rates, insurance and repairs, about $52,000 is left. Their super pension makes up the rest. They are living off rent, but only because they cleared the loans before they stopped work and counted the costs honestly.
The rent you can rely on
Rent from a well-located home with no loan is the kind of income that keeps arriving in a bad year. Rent from a heavily geared property is not; a rate rise or a vacancy can turn it into a cost. That is the split I call the income floor, and it is the first thing to see before anyone plans to live on rent.
Living off rent is not a strategy you switch on at 65. It is the result of the decisions made in the ten years before it: which properties to keep, which loans to clear, and which to sell.
Nicholas Lockhart
General information only. No advice is given. Figures in the example are illustrative.