In these markets, it is very popular to look for a more secure retirement investment than the stock market. You may have a nice 401(k) or 403(b) package at work, but where else should you invest for your retirement. Have you considered rental properties? Maybe it is time that you did. With historic low financing rates and the value of homes at a ten-year low, it seems like the perfect time to buy if you are stable enough to weather a difficult financial market.
While there are a lot more details to consider when purchasing a home to rent, the basic idea behind making a profit with rental properties is that as long as you can rent the house for slightly more than the monthly payment (and the cost of maintenance), you are building up wealth in a home. Essentially, someone else is paying down your mortgage on your house. If you find a home in a great market and great mortgage rates, you should be able to earn money even before the mortgage is paid off. It is after the mortgage is paid off that you will make the most money from rental properties because your expenses will be very low.
Potential for Retirement Income
In fact, this is the approach that many small investors take to ensure a retirement income. By purchasing multiple properties over the course of one’s life, one can secure a reasonable amount of income that supplements any other form of retirement income that you may have (Social Security, 401(K), etc.). This may be hard to grasp without any hard figures. Let’s say that you purchase five homes and are able to pay off all of the mortgages before you retire by renting them out to individuals. For a conservative figure, let’s say that you were just breaking even while you were paying off the mortgage. Let’s also say that each rental property rents for $1,000 per month. As long as you have someone renting each of the houses during your retirement, you would be earning $5,000 per month or $60,000 per year. It is expected to have some maintenance costs, but most likely you would still be clearing $50K per year.
Another great feature of rental properties is that the price of rent increases with inflation. Each year or every other year, you can raise the price of rent by a small percentage. This may not sound like a lot, but over time this small increase can make quite the difference. In addition, you have 5 houses that you could sell if a financial crisis ever came up. In fact, if you later discover that you do not want to deal with the hassle of finding good renters or keeping up with maintenance, you still have options. You can hire a rental management company, which usually charges 6-10% of the rent or you can sell your properties and live off of the return on the money that you received from selling your rental properties.
This not only serves as a great supplemental retirement income, but for some it is the sole source of income. Many use real estate to retire early. As soon as you are able to generate enough income (rent – expenses) from rental properties to satisfy your expectations for a retirement income, why not retire early?
What are your plans with rental properties? Is there a particular approach that you take? If you are interested in learning more details about rental properties, why not check out my guest post, ‘Two Approaches to Real Estate Investing’ at Life and My Finances. You can also check out: Rental Properties: Where to Begin?