Rental Property For Your Retirement

Let’s talk about the value of rental property for your retirement.  And let’s throw away the discussions about cash on cash returns and cap rates and the like.  Let’s just get down to what your retirement is going to look like if you add even one rental property to the plan.  You already have social security (supposedly) that’s going to come in.  You should have some sort of IRA or 401k that your employer maybe contributing to.  My wife works for a Kansas school district so there is the KPERs required plan. Your state may have something similar.  Etc.

But most people won’t have enough. Here is how even one rental property can help you with your retirement planning. Buckle up.  Get comfortable and get out your calculator.

We’re going to base this on a lower bell curve house in Johnson County, Kansas.  Not the best cash flow county but a safe, go-the-distance county where we know our investment isn’t going to turn in to a melting ice cube.

Purchase cost is $168,500.   (Turn key, with closing costs.)
25% down payment at 4.875% & a 30 year amortization
Expected rent $1,425/mo = $17,400/yr
Expenses figured at 38% of Gross Rents which include;

  • taxes
  • insurance
  • property management
  • utilities when vacant
  • basic repairs
  • miscellaneous

With those expectations (based on 12 years of experience) your yearly cash flow would be a paltry $2,929 year.

We all know that over time real estate has proven to be a safe hedge against inflation.  We also know that in the decade to come there will be ups and downs and stagnant periods and boom times and, well, if you’ve lived more than 30 years you’ve seen some big swings. So looking in to my crystal ball I can only go with history.  And history in the Kansas City market tells me an average of about 3.25% – 3.5% per year over any given 10 year period.

But, I’m not even going to figure that. After 10 years we are saying that we;

  • had a 2.5% per year steady appreciation rate
  • only took out $1,500/yr of that $2,929/yr cash flow because of additional expenses, safety, etc
  • didn’t raise rents one time until the 12th month of the 10th year.

Now we raise the rents up to an acceptable ratio with the value of our house currently.  For the next 5 years, with no variances, we go from $1,425/mo to $1,950/mo.  We recalculate our expenses because we also expect those to rise.  Because we had a fixed rate mortgage our annual debt service stays the same.

Thereby, our cash flow has now jumped to approximately $6,649/yr.  Yet, we are only going to account for $4,000/yr in the figures below because I believe in being conservative and there is nothing wrong with having extra.

Now retirement is getting closer.  Let’s take a look at where you are.

On this rental home that has been of good service to you you now have an equity position of not the original 25% you started with (your down payment) but of 65%.  Because the tenants have paid down $40,250 m/l of your loan principal and the appreciation train has dropped you off at a home value of $244,000 m/l  your total equity in the home is $160,500!  That’s not a bad rise from your original $44,750 investment (with closing costs included).

The cash kicked off over the years doesn’t seem so bad now, either.  Remember the first 10 years we weren’t figuring any rises in rent and keeping only $1,500 /yr.  Times ten we have generated $15,000.  Now in the last five years we have generated another $20,000 /yr in cash flow with the adjustments in rent.    So that’s $35,000 more this rental property has kicked off over the last 15 years.

And we haven’t even touched on the tax advantages that your CPA has been helping you with over the years.

Essentially, your $44,750 investment in this one rental property has now become $195,500.

Now you have choices to make.  At this time I turn you over to your CPA for tax planning.  And we discuss the quality and condition of your property  as well as the equity that is just waiting to be mined for better leverage elsewhere.  Your choices include;

  • Keeping the property. Your equity position will increase as likely as your cash flow increasing as rents continue to rise over the years. This is a very conservative approach but you’ll know by this time how your other investments have worked out.
  • Selling the property outright.  You’ll have capital gains to pay as well as depreciation re-capture.  But you’ll have cash on hand for living expenses or medical bills or whatever you want.
  • Sell and acquire using a 1031 tax deferred exchange. You may wish to turn this one property in to three properties for the next 15 years.  We’ll have to see what the conditions are at that time.

Keep in mind we looked at a 15 year period of a steady, predictable economy.  (Yeah, right.)  Conditions may accelerate or decelerate this entire equation.  But we (me?) sometimes confuse ourselves.  We’re looking at all these sexy numbers and forget to get started! Today!  

I hope this helps you when you are thinking about what even one property can do for you.  Later, we can work out your particular situation if you like.  You may have more cash to invest in real estate.  You may have less cash to get started with your first income property.  Each person comes from a different place.

Give me a call today to help you make a retirement plan through real estate investing.  Let’s have A Retirement worth having.


Filed under Real Estate Investing

2 responses to “Rental Property For Your Retirement

  1. I really like your post, thanks for sharing this wonderful post.

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