Is retirement right around the corner for you and you’re thinking about which investments will produce the highest return for you? If so, why not consider investing in rental properties?
Over the last two years the demand for rental properties has only grown in California, especially in the Central Valley, and there’s no better time than right now to capitalize on that demand by adding rental properties to your investment portfolio.
Here’s Why You Should Invest In A Rental Property
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.
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. (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, 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 an 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, a rental property investment can basically pay for itself after the initial down payment is made, and becomes a source of on-going retirement income thereafter. Since the actual cash investment was $47,280, the return on invested cash is tenfold. 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 a Real Property Management office, these issues are overcome. We find and screen tenants, collect rents, manage maintenance, and handle the bookeeping. 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. – Source
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