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Retirement Income with Diversified Investments

Retirement Income: Have You Considered a Rental Property?

Most Americans find saving for retirement income difficult. Today, the key ways this is done is through Individual Retirement Accounts (IRA’s) and/or 401K plans. These are great savings vehicles because the money saved is often deducted from your taxable income, and interest accrues without taxation until the funds are withdrawn.

Yet to have a truly diversified investment portfolio, there is an additional retirement income investment opportunity most people never consider: buying a rental property. If one buys the right property and manages it well, it can easily become an additional retirement nest egg. Diversifying investments can also mitigate risks from stock market volatility with a more balanced portfolio that includes real estate investments.

One of the books, we recommend, is “Retire on Real Estate” by Kia Anderson. Very popular investment book that covers the basics and has proven insights with practical ‘ how-to steps’. The book’s goal is to help you build retirement income for a safe and secure retirement. Coupled with this book, there is a podcast called Bigger Pockets. To listen to that podcast you can listen on their website found here.

Generally, an investment property such as a three-bedroom single-family residence requires a 20% down payment. That’s the biggest hurdle to be overcome – saving for the down payment. (A future post will discuss ways IRA money can be used to buy an investment property.) Over time, a rental property can basically pay for itself using tenant rental payments to cover the mortgage and other costs. At the end of a 30-year mortgage, much of the rental income becomes an annuity to the owner, and the value of the property will have risen dramatically.

Following is an example to demonstrate the point. This example ignores the tax advantages of depreciation and operating cost deductions for the sake of simplicity. We are not CPAs nor offer tax advice, yet the impact of depreciation is significant and will further improve your investment return.

Assume an investor buys a median-priced existing home and puts 20% down. The rent for the property would be $1,379 which is the median rent for a 3BR single-family residence according to RentRange. Add average maintenance costs, insurance, property management fees, and property tax expenses, and this investment would lose just $230 per month for the first year. With rental prices rising, the loss would become a profit in just a few years. Now the data is a few years old however the model is what is important and still holds true in 2022.  (All estimates based on online data sources.)

Median existing home price in U.S. (Source: YCharts 1Q17) $236,400
Down payment @ 20% $47,280
Monthly median rent for 3BR single family residence (Source: RentRange): $1,379
Monthly mortgage cost @ 5% interest (Source: YCharts ) : $1,015
Monthly maintenance & repairs @ 1% of home value (Source: Zillow) : $197
Insurance (Source: Vale Penguin) : $80
Management fees (Source: RPM estimate of average property management fees): $138
Property taxes (Source: WalletHub): $179
Monthly estimated cost: $1,609
Monthly net loss/out-of-pocket expense: ($230)


The first year’s annual out-of-pocket expense would be $2,760, yet the average growth in the value of the house would be 3.4% per year ($8,037) according to Case-Schiller data from 1968 – 2009. Over time, rents will increase, so each year the out-of-pocket expense would drop.

When the mortgage is paid off in 30 years, the net monthly retirement income would increase by the mortgage amount of $1,015. Since rental rate growth keeps pace with inflation, the actual monthly income will likely be substantially more.

In addition to the cash flow from the property after 30 years, the property value will increase over time. Assuming a very conservative average 3.4% property value increase during the next thirty years, the $236,400 house value will become $477,528. If converted to an annuity with a 2% return above inflation, it would produce $2,500 in monthly retirement income for 30 years.

As this example demonstrates, rental property investment can basically pay for itself after the initial down payment is made, and becomes a source of ongoing retirement income thereafter. Since the actual cash investment was $47,280, the return on invested cash is 10x. If sold in retirement, the property would yield a payout of nearly half a million dollars.

Not many IRA’s or 401K’s can be expected to deliver that type of return. The main reason is that 80% of the initial property cost is paid by a bank via the mortgage process. The loan funds are being leveraged. Investors receive the full benefit of housing price appreciation, despite only putting 20% down.

The biggest complaints property investors have about rental properties is the time and hassles they can present. By hiring Real Property Management Peace, these issues are overcome. We find and screen tenants, collect rents, manage maintenance, handle the bookkeeping and manage all the hassles!  This type of investment can be as easy and carefree as an IRA or 401K. And the benefits include excellent returns, reduced risk from a balanced portfolio of investments, and tax benefits.

Contact us for your FREE custom assessment of your investment property here!

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