Living Off Rental Income
During our full-time travel and work experience, we used remote work to pay most of the bills. But, our rental properties helped supplement our cash flow while continuing to help us save. As such, we’ll use this article to discuss living off rental income on the road.
In addition to writing about his and Jenna’s travel and work adventures, Chipp is a CPA and founder of Walutes Capital, a real estate development and accounting firm. Wearing this “other hat,” Chipp offers real estate investment and development consulting services to clients. If you’d like help with your own real estate investing journey, contact Chipp here to set up an appointment!
What is Rental Income?
As the name suggests, rental income refers to the excess cash generated from rental properties. When you own one or more of these assets, you charge tenants to live there. After deducting the operating expenses (e.g. insurance, real estate taxes, maintenance, management fees, etc) and loan payments from the rents received, you’ll either be left with a positive or negative number.
If your cash in exceeds your cash out, you have rental income. If your cash in does not exceed your cash out, you have a rental loss. Assuming you’ve properly analyzed your property’s performance in the current market, it will generate rental income that you can use to pay living expenses - a particularly valuable source of income for full-time travelers.
How to Live Off Rental Income
Now that we’ve defined rental income, the question remains: how can we actually live off this extra cash? First, you need to define your budget. That is, how much do you expect to spend every month?
Say, for instance, you anticipate needing $3,000/month in total travel costs (e.g. lodging, food, flights, activities, etc). Next, you need to determine how much rental income your properties will generate every month. If that total exceeds your $3,000 travel expense budget, you’re golden (i.e. you can fully live off your rental income). Conversely, if your income doesn’t exceed your expenses, you have to adjust one of or both “levers” - income or expense. That is, you need to: 1) increase your income, 2) decrease your expenses, or 3) a combination of both. Here are several options:
Refinance Your Mortgage to Decrease Monthly Debt Service
This option may not apply to all investors. But, if 1) you’ve significantly paid down your existing mortgage, or 2) interest rates have dropped, you may be able to refinance your loan to reduce your monthly payments. Any dollar saved in monthly debt payments is a dollar added to your available rental income.
For example, prior to heading out to travel and work for a year, we coordinated with a lender to conduct a portfolio refinance of three rental properties. This refinance dramatically reduced our monthly payments, and doing multiple at the same time gave us even better terms. That extra debt savings translated directly into more cash for our travels.
Take Time to Purchase Another Rental Property
Travel isn’t binary. That is, you don’t have to make a go-now-or-not-at-all decision. As such, it may make sense to work another couple years to potentially save money for a down payment on an additional rental property.
Sure, this is easier said than done, but it is possible. And, with an additional property under your belt, your rental income increases to cover more future travel expenses. This increased cash flow could make the difference between a couple weeks overseas and a true, full-time travel itinerary.
Rent Out Your Primary Home While Traveling
Many travelers don’t have the luxury of owning a rental property (or several). This doesn’t mean you can’t live off some rental income while traveling. If you own a primary residence, you can rent that out to bring in some extra cash.
For example, when we headed out for our first year of travel, we knew that paying the mortgage on a vacant home would severely cut into our budget. So, we decided to rent out our place. Logistically, this takes some effort, as you need to figure out what to do with your personal belongings. We live in a three-bedroom townhouse, so we just turned one of those bedrooms into storage - jammed all our personal property in there, locked the door, and rented out our home as a two-bedroom instead of a three-bedroom one.
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Supplement Your Rental Income with Other Cash Flows
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Once again, living off rental income doesn’t need to be an all-or-nothing prospect. If you don’t want to reduce the expense lever of your travel budget, you need to increase the income one. Outside of investment properties, travelers can also work remotely on the road or find other ways to make money while traveling.
For example, when we headed out on our year abroad, Jenna continued to work for her old company remotely (albeit on a contract, reduced-hour basis). Concurrently, Chipp brought additional cash in with a variety of freelance contracts he could do on his laptop. Both of these additional streams of income supplemented our rental income, stretching our budget and letting us travel longer than if we relied on real estate alone.
Travel to a Region with Lower Cost of Living
Alternatively, you can focus specifically on lowering your travel expenses to stretch how far your rental income goes. For instance, traveling to western Europe, you likely can’t get by too comfortably on $100/day. On the other hand, in many places in Latin America, Africa, and Southeast Asia, this sort of budget can let you live quite lavishly for an extended period of time. So, if you’re dead set on solely living off rental income, maybe shift your travel destination to a lower cost of living region.
Shorten Your Travel Time
But, what if you do want to travel to western Europe (or some other high cost of living area)? Can you still find a way to let rental income cover all of your expenses? Potentially, but you may have to reduce the duration of your travels. Say you have a rental property that generates $6,000 in excess cash flow every year. That certainly won’t let you spend a year in many expensive European cities. But, if you change your time horizon, that can be an outstanding travel budget for a few-week trip abroad.
So, instead of using your rental income to live permanently abroad, look at the cash your investments generate as a travel budget for one big trip every year. Then, when you return home, you begin filling up that travel bucket again, and repeat the following year.
Rental income helped us pay for a sailing trip in South Africa
Additional Rental Income Considerations
While figuring out how to live off your rental income, it’s critical to also consider the following three items:
The Importance of a Rental Property Replacement and Reserve Fund
With real estate, you cannot ignore deferred maintenance. That is, you have to account for the “big ticket” costs that you don’t regularly face (e.g. roof replacements, HVAC repairs, new appliances, etc). As such, you can’t look at every excess dollar kicked off from a rental property as disposable income. Instead, you need to transfer a portion of that excess every month into a replacement and reserve fund. That way, when you get hit with one of these inevitable repairs, you simply transfer cash out of that fund (as opposed to paying from your cost-of-living budget). Phrased differently, you can think of this reserve fund as your help-you-sleep-at-night money.
The Peace of Mind of Long-term Leases
With the advent of short-term rental sites like Airbnb, many landlords have been attracted to the allure of higher per-night rates on these platforms. But, while you may make more money on a nightly basis with short-term rentals, you sacrifice long-term stability.
When traveling, we’re firm believers in securing long-term leases for our rentals (at least long enough to cover your time overseas). Yes, you sacrifice some cash potential, but you gain the peace of mind of knowing a tenant will be paying rent every month.
Secure a Local POC to Deal with Emergencies while Traveling
When you’re in another timezone, having a trusted, local point of contact to help when rental property issues pops up is essential. While in Zanzibar, one of our tenants skipped out on rent. Fortunately, we knew a local real estate agent who we could coordinate with to change locks, clean the property, and find/place a new tenant. If we didn’t have this established relationship, we would have not only had to eat the monthly mortgage and other costs, we also would’ve sacrificed the excess cash generated by that property.
Moral of the story? Make sure you have some “boots on the ground” to help with your rental properties while you’re traveling! For some people, this could be a formal relationship with a property management company. For others, a reliable friend can potentially get the job done.
Hope this helps, and good luck using your rental income to pay for your travels!
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