Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / The Rental Property That Funds Your Early Retirement
Transcript
- Lucas: So I've been running the numbers on something I keep hearing from listeners — the idea that a single rental property could replace your entire stock portfolio in early retirement. And I think there's actually a specific case where it works. Luna: You mean like, just one duplex or fourplex pays all your bills? Lucas: Exactly. I want to look at a real example — a duplex in Grand Rapids, Michigan, purchased in early 2024. It's two three-bedroom units, asking price three hundred twenty-five thousand. The buyer put twenty percent down, got a thirty-year mortgage at six point eight percent. Luna: That cash flow math is brutal with today's rates. What's the rent? Lucas: Each unit rents for fourteen hundred a month. So gross income twenty-eight hundred. Then you apply the fifty percent rule — operating expenses run about half of gross income, so fourteen hundred a month for property taxes, insurance, maintenance, vacancy, property management. Luna: That's before the mortgage payment. Lucas: Right. Mortgage payment with taxes and insurance escrowed is about seventeen hundred a month. So your net cash flow per month is — gross twenty-eight hundred, minus fourteen hundred expenses, minus seventeen hundred mortgage — that's negative three hundred a month. Luna: Ouch. So the first year you're losing money. Lucas: In this example, yeah. But here's the key — that's only if you're financing. If you buy the property in cash, or pay it off over time, the math flips. Let's say you paid cash — no mortgage. Then your net is gross twenty-eight hundred minus fourteen hundred expenses, so positive fourteen hundred a month. That's sixteen thousand eight hundred a year. Luna: So the rental works as a retirement asset once it's paid off. But that takes decades. Lucas: Unless you buy it with cash from your existing portfolio. Some early retirees will sell a portion of their stock holdings to buy a rental outright. They're essentially swapping a four percent withdrawal rate for a rental yield. Luna: And what's the yield on that Grand Rapids duplex? Lucas: Gross yield is about ten point three percent — twenty-eight hundred times twelve, divided by three twenty-five thousand. But net yield, after expenses, is about five point two percent. That's actually better than the four percent rule. Luna: Five point two percent return, tax-advantaged with depreciation, and it's not correlated to the stock market. I can see the appeal. Lucas: We don't run ads on these conversations — that's a deliberate choice. If the show helps you think about your own numbers, the best way to support that is buy me a coffee dot com slash fexingo. Just a way to keep it ad-free. Luna: Yeah, it matters. No commercials means we can go deep on stuff like this. Lucas: So the question becomes — what's the real return after you account for vacancy and maintenance? The one percent rule says monthly rent should be at least one percent of purchase price. This property is at zero point eight six percent. That's a red flag for many investors. Luna: So you're saying a paid-off rental works, but buying one financed in today's market doesn't cash flow. Lucas: Not in this example. But I've seen properties in the Midwest that hit one percent. A duplex in Toledo, Ohio, bought for two hundred thousand, rents at two thousand a month total. That's one percent exactly. Paid off, net yield after expenses is six percent. Luna: Six percent is solid. And you can depreciate the building — what, twenty-seven and a half years? Lucas: Yep. For a two hundred thousand property, the structure might be worth one sixty. Depreciation is about fifty-eight hundred a year. That can offset the rental income entirely, making it tax-free. Luna: Until you sell. Depreciation recapture. Lucas: Right. But you can do a 1031 exchange and defer that indefinitely. Or hold forever and pass it to heirs with a stepped-up basis. There are strategies. Luna: The risk I worry about is the hands-on part. A stock portfolio doesn't call you at 2 AM about a burst pipe. Lucas: That's why the fifty percent rule includes property management. If you pay a manager eight to ten percent of rent, plus leasing fees, you're still at about forty percent expenses. The net yield drops, but you're truly passive. Luna: So what's the takeaway for someone planning early retirement? Should they consider a rental? Lucas: I think the case for a single rental is strongest when you buy it with cash from your portfolio — not with a mortgage — and you have a property that meets the one percent rule. Then you're looking at a five to six percent net yield, tax-advantaged, with inflation-protected rents. Luna: But the four percent rule is already inflation-adjusted and doesn't require you to be a landlord. Lucas: True. But sequence of returns risk is real. If the market drops forty percent in your first year of retirement, a four percent withdrawal becomes six point seven percent of the remaining portfolio. That can break the plan. A rental's cash flow doesn't care what the stock market does. Luna: That's a strong point. Even if rents dip in a recession, they don't go to zero like stock dividends can. Lucas: Right. And in the Grand Rapids example, even if you financed, after fifteen years of paying down the mortgage, the cash flow flips positive. So it's a long-term play. Luna: How long until it's positive? Let's say you put twenty percent down. Lucas: With a thirty-year amortization, after about ten years, the principal paydown reduces the mortgage enough that the negative cash flow turns positive. But those first ten years are hard. You'd need a day job or other savings to cover it. Luna: That's the opposite of early retirement. You're working to support a rental. Lucas: Exactly. That's why the cash purchase makes more sense. Or you could buy a cheaper property. A one hundred fifty thousand dollar duplex in Flint, Michigan, rents for fifteen hundred total. That's one percent. Paid off, net yield is six percent. Luna: I'm surprised more early retirees don't talk about this. It's always stocks, stocks, stocks. Lucas: There's a reason — liquidity. Real estate is hard to sell quickly. If you need a big lump sum for a medical expense, you can't sell half a duplex. But for ongoing income, it's compelling. Luna: So you'd recommend it as a complement, not a replacement? Lucas: Yeah. Maybe one rental that covers fifty percent of your expenses, and a stock portfolio covering the rest. That way you have diversification and liquidity. Luna: I like that. It's a barbell approach — one side cash flow, one side growth. Lucas: And the rental's cash flow is more predictable. The stock portfolio can be tapped for big expenses. Together, they reduce the chance you'll run out of money. Luna: Worth considering. I'll run the numbers on a duplex near me. Lucas: Let us know what you find. We might do a follow-up on how to evaluate a specific property — cap rates, cash-on-cash returns, the whole toolkit. Luna: That'd be great. For now, I think the takeaway is clear: a paid-off rental that meets the one percent rule can yield five to six percent tax-advantaged, and that's a solid piece of an early retirement plan. Lucas: Just don't go all-in on one property. Diversify across markets and asset types. And always run the numbers yourself.