How Retire off Rental Cashflow: The Smart Way & Feel Financially Free

I never planned to quit my secure government job in 2015; it just happened. I always had a goal of early retirement and, during a recent one-year sabbatical, I decided to accelerate this plan and turn it into reality. Finally, my real estate portfolio was generating cash flow that theoretically exceeded my basic living expenses.
Many real estate gurus out there aggressively market that you can retire early if you acquire enough properties in so many years. I ran a quick Google search and found these interesting headlines:

”How to Retire Rich and Early with Real Estate”

“How Rental Properties Can Help You Retire Early”

“Retiring Rich with Rent-to-Own Properties”

I decided to pretend to ‘retire’ for one year, relying completely on rental cashflow. My experiment was to see if I could reliably live off rental cash flow without dipping into my reserve funds.

Real Estate Investing Background

To understand me better, this is the state I was in when I decided to pretend to retire for one year:

• I had been acquiring at least one property per year since 2007;
• My real estate strategy was to buy and hold (or buy, fix and hold);
• All of my properties had mortgages;
• My real estate portfolio was generating enough cash flow (i.e., rental income minus ALL expenses, including mortgage) to cover my housing and living expenses;
• I had reserve funds for expensive repairs and maintenance.

My Year Off

The first three months were quite boring. Nothing happened in my real estate properties. No one bothered me and there weren’t any big repairs. A few paycheques from my rental cashflow went towards basic housing expenses and savings: no problem.

After 6 months, I received a few pay cheques and other times, I had to return my pay cheque.  Then, I experienced my worst string of vacancies in over 8 years. Moreover, the Canadian economy was affected by the global oil crash and the rental market changed overnight. I had to drastically reduce rent to two of my largest cash flowing properties to remain competitive. This really hurt my rental income. I lost at least a thousand dollars of monthly rental income.

I had a string of bad luck. Or maybe it’s normal when you have a larger portfolio to have more frequent and larger expenses. During this time, I had to pay for a new roof, furnace repairs, two tree crownings, paint jobs, and normal wear-and-tear repairs.

The plus side was that I never had to dip into my reserve funds. The minus was that all of my rental income for that year was all gone.

In the end, I was finding it incredibly hard to have a sustainable and significant amount of rental cashflow. This level of uncertainty can be unbearable if you have never gone without a steady pay check AND you need the rental cashflow to pay for life expenses. Every month had a level of uncertainty on whether I was paid or not.

This level of uncertainty is probably why so many people who have left their full time job trade it in for something else related to real estate, for financial stability. Very common paths include becoming a property manager, house flipper, turning into a real estate agent, real estate investment coach and/or running real estate investment workshops. However, unless you have a few of your properties mortgages paid off, it is very difficult to ‘retire early’ relying solely on rental cashflow.

How Do I Recommend Retiring Early and Relying on Cashflow through Real Estate Investing?

If you ever decide to quit your job and retire using real estate, you need a risk management strategy. Here are strategies to help protect yourself:

1) The safest way to retire early through real estate investing is to have serious coin for contingency funds and completely pay off your mortgages so that you have minimal expenses and to reach a number that you are comfortable living off of.

2) Build a large reserve fund covering all of your known unknowns. Known unknowns are events that are known to happen but you don’t know when. The key is to assign budgets for these individual events.

Here is a simple example:

A vacancy is likely to happen once every two years, costing $1000/2years/property=$500/year/property.

A roof repair is likely to happen once every 10 years, costing $5000/10 years/property=$500/year/property.

Tree maintenance is likely to happen once every five years $1000/5years/property=$200/year/property.

If these are the only known unknown events for your one property, you add up all of the above for a total of $1200 per year for your one property. This is your contingency fund.

3) Build a reserve fund to cover two months of expenses for every property and commit to replenishing when you draw from it. The problem is that it won’t cover large expenses like replacing a roof, removing trees, or repairing exterior work if all your repairs and vacancies come at the same time.

For example, if your mortgage payments are $1000 dollars per property and repairs cost is $500/year for every property and you have ten properties. Your reserve fund would be ($1000 *10 properties + $500 * 10 properties) *2 months = $30,000. Not everyone has $30K just lying around and I personally do not like holding that much cash in a separate account.

4) Build supplemental plans for increasing your rental income. Some creative ways to boost your income include: renting out parking spots, renting out storage space, charging for laundry, adding a secondary dwelling suite to your unit or turning the units into short term furnished rentals. Be creative.

5) Have a secured line of credit for each property based on the equity you’ve built up. This is your lifeline to each property. This provides security and access to fast cash for unexpected large expenses, i.e. the unknowns unknowns.

6) Be proactive with your repairs and maintenance. It sounds counterintuitive to spend money upfront but if you ignore it, it can turn ugly later. This is why I routinely maintain my trees: to avoid damaging roofs, for safety reasons, and to prevent the larger expense of removing a dead tree. Routinely check your furnaces and conduct tune-ups to your air conditioner to increase the longevity of the units.

7) Hustle, hustle, hustle to reduce vacancies. If you personally manage your properties, you have to be very proactive with marketing your property. If you have property managers, you also need to be very proactive in overseeing your tenant turnovers to mitigate vacancies.

8) Have good relationships with your tenants. Treat them with respect and be a good landlord. They are paying down your mortgage and living in your units and you rely on the cashflow they are providing. That money keeps coming in as long as you own the property and have good relationships with your tenants.

What are your risk management strategies? Were you successful at retiring early through real estate investing and staying retired?  Send me your feedback:)

    19 replies to "Real Estate Investing Series: How to Retire off Rental Cashflow The Smart Way & Be Financially Free"

    • Sam

      Howdy! I’m impressed you bought one property every year since 2007! Does that mean you have 9 properties? If so, how much is the average worth of these properties, and did you have any difficulties getting that many mortgages? In the US, the limit is 4 usually.

      Sooner or later, I think the cash flow will be great for you as the mortgages stop getting paid off one by one.


      • Financial Nirvana Mama

        After selling off one last year, yes, I’m left with nine now. As for average worth, it fluctuates with the market… ranging from low 300K to mid 600K. As for getting mortgages, there are different financing strategies to getting more properties in Canada as long as your debt ratio is ok to the underwriters and you have a great broker who is a holistic thinker. I think in the US, it has gotten a lot tougher. After leaving my salary job, I finally found financing much more difficult. I’m following your path in paying down mortgages as fast as possible.

    • Adam and Jane


      Thanks for sharing the strategies. I was getting stress from reading your post. Rentals are definitely not for us BUT I know even with some up and downs, you will be in a great financial situation as each mortgage is paid off. Your cash flow will be amazing one day so more power to you dealing with 8 propeties!

      My parents have 5 rentals and one tenant who lived in one appartment for 40 years paid the entire mortgage. This tenant just moved out and the unit needs a new kitchen, two bathrooms, windows, rugs and 15 plus gallons of paint. Unit has been under renovation for 4 months so far. My parents have to dig into saving to cover all the expenses. My parents are stressed at times dealing with issues and with major expenses.

      Since my wife and I don’t want to deal with problems and tenants, we prefer to keep it simple. We don’t want another job. We have tax free passive income from bonds to cover our expenses. It is like set it and forget it. The only work I do for our passive income is to buy another bond as each one is called or matures. It is pretty much stress and work free. We will work at our IT jobs for at most 4-5 more years to build up our pensions and then we will call it quit at 55. We are striving for 3 sources of income and each source to cover all expenses so that we will be OK if one or two income streams are gone.


      • Financial Nirvana Mama

        Thanks Adam for sharing your parent’s story. I can’t believe one tenant paid off the entire mortgage. Great to hear you are investing bonds. I’m actually doing the same now with a direct investing brokerage account. What bonds do you invest in and where do you invest them? If you don’t mind me asking, do you buy them at a discount with a decent coupon rate? I’m very excited to hear that you will be retiring soon. That is great news! And striving for 3 source of incomes makes it so much more secure AND very, very smart.

        • Adam and Jane


          We are from the US and we only invest in individual municipal bonds (no bond funds) from our State that pays tax free interest twice a year. We buy MTA, water, dormitory authority for schools/hospitals rated A and above with NO AMT. This year we purchased many 4% – 4.25% municipal bonds close to PAR (face value of $100) or at most 2% ($102) above PAR. For example, for a 4% bond, we don’t want to pay above $102 which will take 6 months of interest bonds to break even. We don’t buy zero coupon bonds since we want passive income throughout the year whereas zero coupon bonds pays interest when the bond matures. Our State is very financially stable so we don’t worry about the munis. We have NO money in the stock market.

          We use a self service brokerage like fidelity or etrade, etc to purchase individual muni bonds since using a broker at our bank usually cost 1-2% more.

          Although, we think we will be OK if we quit now but it is tough to walk away from a stable pay check. Our company is outsourcing so we hope we get a package which will allow us to start collecting the pension now instead of 55. If we reach 55 then our pension doubles and the company will provide 7-9K to each of us for medical coverage.

          You, RB40, FS, DM are very brave to quit your jobs so young and are very smart to generate enough income to break free!

          Our 3 sources of income will be munis, pension at 55 and 401K at 59.5. Social Security at 62 but we are not counting that.

          Let me know if you have any additional questions.


          • Financial Nirvana Mama

            Thanks Adam for all the great details on Bonds and generous comments.

            I’m about to buy bonds because I just liquidated a bunch of US stocks and took up on the opportunity with the exchange rate favorable from US dollar to Cdn. I’m looking at municipal and corporate bonds as a passive way of investing. I’m not worried about bonds defaulting since Canada is also very stable and the companies have been around for a long time (utility companies). I will use your rules of thumb with respect to buying close to par. In layman’s terms, it sounds like you hold your bonds to maturity (buy and hold) and get a return on your investment at coupon rate (annual interest) for a fixed term. Does that mean you loan the company whatever the par value is at that time (slightly above or below ex: 102) with an expectation that they will pay you interest annually at the coupon rate and return the value at par (100) at maturity?

    • Adam and Jane


      I am very obsessed with munis. Someone introduced and taught me how to buy munis over 6 years ago and bonds currently provide us with financial security. So, I am happy to share what we did to become FI. Our company is laying off over 50% of staff and my co-workers are in panic mode. My wife and I are not stressed. We will either we get a package or work until 55. In the worst case, we can quit if we had enough.

      You are correct. For example, if a 4% bond is $102 (martket value) and I buy $10,000 worth of them then cost basis is $10,200. I do buy and hold until it is redeemed/called or matures. When it is redeemed or matures then I will get back the face value ($100) of $10,000. Since the cost is $2 or 2% above par then it will take 6 months to break even. This 4% $10,000 bond will pay $200 twice a year until the bond is redeemed or matures. Another indicator that I use when buying a bond is YTW or YTC (Yield to Worst or Yield to Call). I try to buy bonds with yield to worst from 3.8 to 5%+. I search for bonds rated A and above and I sort them by YTW. I try to get the best return. Also, buy what you know. When I started 5-6 years ago, I purchased 5% bonds but many of them cost $105 to $108 with a YTW of 3% to 4%. A couple of years of ago, I purchased several 5% bonds under and around PAR. Since prices changes every day and every year, You just need to be happy with the price of the bond. I only buy municpal bonds because they are totally Federal and State tax free and that is why I don’t buy any corporate bonds.

      Since the current 5% A rated municipal bonds are around $108-$115, I recently purchased a lot of 4 to 4.25% bonds around PAR 6 months ago.

      In the future, I can sell the bonds if I need cash only if the market value is above my cost basis otherwise I hold them until they mature. The passive income generated from bonds is like my own personal pension.

      I know that my bond investments will not appreciate in value when a bond is redeemed or matures but that is OK since I won’t invest in the stock market anyway. I would only put my money in CDs anyway. Since CDs interest rates are so low, munis are a great alternative for us.


    • Kurt

      You’re lessons learned are invaluable, but I think the smartest thing you did was to simulate retirement and living off of your real estate income before actually taking the plunge. By doing an experiment as you did, you learned important lessons ‘the easy way’ instead of ‘the hard way.’ Best of luck!

    • Ginger

      Do you have stock/mutual funds as diversification?

    • Emma Healey

      Tracy – this was a refreshing read. As an owner of real estate I can relate to so many of these points. I don’t think we’ll be able to retire just on rental income alone until our mortgages are cleared, although we did appreciate the monthly cash injection whilst we were travelling. Still, that was only 20%ish of our income requirements. However, we have also been affected by resources tanking, in our case it’s coal. We have a house in a coal mining town that has just become vacant, I can’t see it being rented anytime soon. I’m so glad this happened while we are able to go back to work and earn an income to pay the shortfall. If it happened while we were living in Spain last year living off savings I would have been majorly stressed.

      • Financial Nirvana Mama

        I’m glad it was a refreshing read for you! I understand your situation, I fell into that with two of my properties, I had to drastically reduce rent to remain competitive. Good that you have your other income to rely on until your properties are paid off, smart move. How long have you been investing in real estate? Is it worth it? I think its worth it but I wonder how others feel (risk vs reward).

    • Ashlee

      Whoa. This is an amazing, encouraging read (and intimidating, too)! You laid out some seriously helpful strategies here. Great groundwork for our (possible) future in rental property as potential income.

      Awesome article, Tracy!

      • Financial Nirvana Mama

        Hi Ashlee, glad I can help. Please take a look through my posts, I have a lot of articles that will help you when you buy your first rental property.
        Or if you have a question, please email me and I’ll try my best to answer it or write an article about it.

    • Mrs. SimplyFinanciallyFree

      I love your little experiment of trying out retirement for a year and living off of your rental income. I think this is a great way to figure things out. Do you know yet what your next step is and if/when you are going back to work?

      We just purchased a duplex a couple of weeks ago in addition to our current owner occupied duplex. Our eventual plan is to buy a single family home for ourselves and then have 2 fully rented duplexes (so not as ambitious as your 9 properties) but the thought of having those mortgages when making the leap to quitting our jobs years down the road is a little frightening. What is your strategy for paying off your mortgages and is this a priority before making the final leap to being fully financially independent?

      • Financial Nirvana Mama

        Thank you Mrs SimplyFinanciallyFree. Great job buying the duplex. The hardest part is buying your first and then it gets easier as you go through the process. That is a great way to start your real estate many people start that way by renting out a basement suite or buying a duplex. Keep me posted of your journey.

        My next step is following my 7 phases of retirement, just execution mode now, I’m at Phase 6 (see article:

        As for paying down the mortgages, it will be on autopilot mode: my income +rental cashflow + consolidation of rental properties will accelerate paying down the mortgages:)

    • tris winfield

      HI Tracy, my wife and I accomplished FI in about 4 years in real estate investing.

      We were focused on freedom in our 20’s and 30’s and figured out a system how to leverage maternity leaves and having kids into having two incomes but only one of us working for about 6 years. The downside was having a baby every second year and moving province every year 🙁
      The upside was it paid off our house mortgage in Dec 2009 after owning for only 4.5 years. Free of the mortgage now but not free of jobs we read books on how to get rich through apartment bldgs and after refinancing our house to pull out 180K we bought a 24 unit apt bldg in a small town.

      The financial returns of a high cash flow return environment and the often relatively low competition that small towns tend to be resulted in passive income beyond our wildest expectation. The size of the building we started with also immediately meant that management was included in the expenses, and we found and trained our own manager. We then decided to focus on small towns as an investment theme. Three years later we had both quit our gov’t jobs. Two years after that in Aug of 2015 we moved to the south of France where we rented a farm house villa with pool that was a summer weekly rental for the whole low season. Our 3 kids went to the local French school and we soaked up the sun and incredible scenery of the Pyrenees and the Mediteranean beyond the Roussillon plain.

      Choosing to focus in on the right small towns allowed us financial results that are very rare, and we are now dedicated to sharing that small town high cashflow strategy with the world.

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