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By Josh Kattenberg
A number of people find that saving for retirement income is quite difficult. Currently, the main ways this is done is through Individual Retirement Accounts (IRA’s) and 401K plans. These are excellent savings vehicles since the money saved is oftentimes deducted from your taxable income. Additionally, interest accrues without taxation until you withdraw the funds.
However, another retirement income investment opportunity exists that a majority do not consider: purchasing a Sioux Falls rental property. If you buy the right property and manage it well, then it can become an additional retirement nest egg for you. Also, through diversifying your investments, you can also mitigate risks from stock market volatility with a more balanced portfolio.
Typically, you will need a 20% down payment for an investment property such as a three-bedroom single family residence, and this is often the most difficult aspect for many people – saving up enough for the down payment. Yet, over time, a rental property can essentially pay for itself though tenant rent payments to cover the mortgage and other costs. When you reach 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 significantly.
Here’s an example to demonstrate. For the sake of simplicity, this example disregards the tax advantages of depreciation and operating cost deductions.
Assume an investor buys a median priced existing home and puts 20% down. The monthly rent for the property would be $1,379 which is the national 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 only $230 per month for the first year. Yet with rental prices increasing, the loss would become a profit in just a few years. (All estimates based on March 2017 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 3.4% per year ($8,037) according to Case-Schiller data from 1968 – 2009. Over time, rents will increase, and so each year the out-of-pocket expense would be reduced.
Once the mortgage is paid off afher 30 years, the net monthly retirement income would increase by the mortgage amount of $1,015. Because 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 an average 3.4% property value increase during the next thirty years, the $236,400 house value will be worth $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.
Th above example demonstrate that a rental property investment can essentially pay for itself once the initial down payment is made, and then becomes a source of on-going retirement income thereafter. Because the actual cash investment was $47,280, the return on invested cash is tenfold. If sold in retirement, the rental property would yield a payout of nearly half a million dollars.
Few IRA’s or 401K’s can be expected to deliver this type of return. The key 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, yet only placing 20% down.
The top complaint that a property investor might have about a Sioux Falls rental property as retirement income is the time/hassles that it can present. Yet through hiring Real Property Management Express, these issues can be overcome. We find/screen tenants, collect rent payments, manage maintenance, and handle the bookkeeping. This type of investment can be as easy and carefree as an IRA or 401K is. Plus, the benefits include excellent returns, reduced risk from a balanced portfolio of investments, and tax benefits.
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