Rental Income vs. Job Income
Today, I want to talk about a common misconception: Rental income is not equivalent to W-2 income.
If you’re not entirely sure what W-2 income is, it’s essentially the income from your job—what you earn when you go get a job, or a "J-O-B", working for someone else where you earn a predictable monthly income, like three, four, or five thousand dollars. Many people mistakenly believe that earning the same amount from rental properties equals a steady job income. I want to put that myth to rest and show you, with actual data from properties we manage, just how much variability can be involved.
First off, if you’re considering rental properties as a way to replace your job income, stick around. This will be crucial for planning your financial future. You need to ensure you're calculating rental income correctly—not assuming you’re earning a certain amount only to find out you’re making significantly less. Nobody wants to think they’re making 5,000 a month and discover it's only 500. God forbid, it’s that drastic.
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The Reality of Rental Income
Let’s explore why rental income isn’t a straightforward replacement for job income. I know it might sound great: "Earn 5,000 a month from rentals and quit your 5,000 a month job—you're financially free!" But doing the math and getting the calculations right is key.
I've discussed rental property analysis in other videos, showing you how to analyze properties to avoid surprises at the end of the month or year. Think expecting a thousand a month but only getting a hundred. Here’s some truth—a simple illustration with three properties, showing varying scenarios with and without turnovers.
Property One: Rents for $1,295 a month. For the first quarter, everything seemed smooth; we deducted our $100 property management fee, hitting consistent figures. But around April, maintenance issues reduced the income. Come May, there were more significant expenses, causing a negative payout. By June, everything corrected itself.
Property Two: Rents at $1,376 a month. Beginning of the year, the owner only walked away with $750, less than expected. It took until May to align expectations with the actual rent, less our management fee.
Property Three: Renting at $2,050 a month. This property, however, faced difficulties straight from January. A turnover amplified issues, which severely impacted cash flow.
Understanding Cash Flow Variability
The point is, a rental property earning a significant monthly rent isn't immune to variability—unexpected maintenance can eat away profits. Events like a tenant moving out can drastically alter cash flows and disrupt your financial planning.
You can’t simply tell your creditors you had a rough month with your rental, and they'll adjust your loan payments. Make sure to anticipate these fluctuations with reserve funds and proper financial planning.
In rental property management, just because things are rocking one month doesn’t mean they’ll continue smoothly. You’re going to have maintenance issues, tenant turnovers, and unexpected costs regardless of how good you or your property manager are.
Final Thoughts
While replacement of job income through rentals is a dream many of us strive for, remember to do it intelligently. Real estate remains one of the best ways to achieve financial freedom, especially long term, thanks to leverage. But success requires doing the math and keeping realistic expectations—don’t buy into overly optimistic promises.
That’s all for today. Please let me know if you found this helpful or if I could improve. See you all next week!
