How to live off rental income with real estate investment
If you’ve rented before, you’ve likely thought about it: it would be nice to own multiple properties, rent them out, and live comfortably off those rents. Real estate is perhaps the first thing that comes to mind when we imagine becoming rentiers. For many, it seems like an unattainable dream: can you really live off rents with real estate investment?
J. L. Collins states in his book “The Simple Path to Wealth” that financial independence is achieved when you can live off 4% of your investments. Generally, you live off rents when you only rely on managing your wealth to generate income. Brick and mortar are usually a component, but that wealth can also consist of investment funds, savings accounts, stocks, businesses, etc.
Real estate investment to live off rents
In Spain, the traditional way to invest in property involved acquiring one or more homes, renovating them – or giving them a facelift – and renting them out – or selling them. This strategy requires a significant amount of capital or resorting to financing to cover the home purchase and associated costs. And that is precisely its main disadvantage. Not everyone has the necessary resources, and many prefer not to take on debt.
Apart from money, a lot of time is needed. To begin with, one must study the market thoroughly to try to buy properties with clear potential and at a reasonable price. If financing is needed, the state of the mortgage credit must be taken into account, deciding how much can be contributed, and what type of mortgage is desired or achievable. With the subsequent time and paperwork costs.
Once the decision to purchase is made, it’s good to know what is involved in terms of procedures and costs: taxes, notary, registry, etc. If renovations are planned, it will be necessary to assess the costs and deadlines, involving market research for contractors. And monitor the progress of the work on time and properly. And once we have our first house ready for rent, we need to find solvent tenants and resolve any problems that may arise.
If we complete all the steps, we will have our entire investment concentrated in a single asset. To aspire to live off rents, we should repeat the operation several times, monitoring our indebtedness and the time we dedicate to the mere management of the properties. It’s possible, but it requires a lot of work and a long-term perspective.
Real estate crowdfunding for rentiers
There are more alternatives. Real estate crowdfunding allows investing in properties with little money. The key is the number of investors: instead of one, there are hundreds – or thousands – of people participating, lowering entry barriers. In Urbanitae, the minimum investment is 500 euros. Each investor becomes the owner of a small part of the property and accesses – proportionally – the returns it generates, usually after its sale.
The advantages are clear: there is no need to incur debt or spend money and time on procedures, paperwork, and management. Additionally, it is easy to diversify: with 10,000 euros, you could invest in 20 different properties.
But what if you could do the same with a rental property? That is the idea behind rent projects. The basic approach is the same. However, in this case, you invest in an asset, usually a commercial space, intended for rent for a typical period of three to five years. Solvent tenants and consolidated locations are sought to keep the investment risk very low.
For the investor, profitability is obtained in two ways: first, in the form of quarterly dividends from the rent, with annual returns around 5-6% net of expenses. Additionally, when the asset is sold – at the end of a period usually five years – the capital gains obtained are distributed among investors based on their contribution.
Can you live off rents with real estate investment?
Real estate investment is one of the best options for those aspiring to live off rents. The traditional strategy, as we’ve seen, requires a significant amount of resources and time on the part of the investor – and greater risk – so many will discard it outright. Real estate crowdfunding offers another path to the goal of living off rents with real estate investment, with a diversified portfolio and a moderate level of risk. In any case, the chosen path is based on the long term. So why not start this 2024?