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Retirement Income? Consider a Rental Property

Two-story house for rentMany Americans have a hard time saving for retirement income. Nowadays, this is often done through 401K plans and Individual Retirement Accounts (IRA’s). These are good vehicles for saving since the money being saved is often deducted from your taxable income, and interest accumulates without taxation until you withdraw the funds. However, many people never consider another retirement income investment opportunity–buying a rental property. With the right property and management, it can become another retirement nest egg. By diversifying your investments you can also mitigate risks from the stock market unpredictability with a more balanced portfolio.

Usually, an investment property such as a 3-bedroom single family residence calls for a 20% down payment. Saving money to pay for the down payment is the most challenging obstacle to overcome. In the long run, a rental property can basically pay for itself with rental payments coming from tenants in order to cover the mortgage and other costs. As the 30-year mortgage ends, much of the rental income becomes an annuity to the owner. In addition, property values will likely have risen drastically.

Sample Scenario

To explain the point in detail, here is an example based on national numbers. For simplicity, the below example disregards the depreciation tax advantages and operating cost deductions. Let’s say an investor buys a nationally median-priced existing home and puts 20% down. The property’s rent would be $1,379 which is a 3BR single-family residence’s national median rent according to RentRange. Then add the average maintenance costs, insurance, property management fees, and property tax expenses. As a result, this investment would see a loss of just $230 monthly for the first year. With rising rental prices, that loss would turn into a profit in just a few years. (March 2017 online data sources serve as the basis of all estimates.)

National median existing-home price in the USA (Source: YCharts 1Q17): $236,400

  • A down payment of 20%: $47,280
  • Monthly median rent for 3BR single family residence (Source: RentRange): $1,379
  • Mortgage cost per month at 5% interest (Source: YCharts ): $1,015
  • Monthly maintenance and repairs at 1% of home value (Source: Zillow): $197
  • Insurance (Source: Vale Penguin): $80
  • Property Management fees (Source: Real Property Management 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 yearly out-of-pocket expense would be $2,760. On the other hand, the average growth of house value would be 3.4% per year ($8,037) based on Case-Schiller data from 1968–2009. As time goes by, rents will rise, so the out-of-pocket expense would decline annually.

30 Years Later

Once the mortgage is completely paid 30 years later, the net monthly retirement income would climb by the mortgage amount of $1,015. Because the growth of rental rates keeps up with inflation’s pace, the actual income per month will probably be considerably more.

Besides the property cash flow, the rental property’s value will increase with time. Let’s assume an average 3.4% property value increase over the next thirty years, so the $236,400 house value will become $477,528. If converted to an annuity with a 2% return above inflation, it would result in $2,500 of monthly retirement income for 30 years.

This example shows that a rental property investment is essentially able to pay for itself after the first down payment, and then becomes a source of ongoing retirement income thereafter. The actual cash investment was $47,280, so return on that cash is tenfold. If the property is sold during retirement, then the property would yield a payout of around half a million dollars.

Few IRA or 401K investments can be expected to produce that type of return. This is largely because the loan funds for the rental property are being leveraged: the bank paid 80% of the initial property expense through the mortgage process. Although only putting 20% down, investors acquire the full advantage of housing price appreciation.

The main grievances a property investor may have about a rental property are the hassles and time involved. However, by hiring Real Property Management Metro Detroit these issues can be solved. We find/screen potential tenants, rent collection, maintenance management, and bookkeeping. So, this investment type can be as simple and hassle-free as an IRA or 401K investment. The benefits include exceptional returns, reduced risk from a balanced investment portfolio, and tax benefits.

If you are interested in having your property managed by Real Property Management Metro Detroit, have more questions, or just want to speak to one of our team members, then contact us online or call us directly at 248-808-6550 today!

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