Rental Properties For Retirement

I stopped funding my retirement accounts when I reached the $100,000 mark at age 40. I rather save money to buy real estate properties in my 40s than continue to buy stocks during a fading bull stock market. According to a recent article by U.S. News & World Report, people need to put aside eight times their salary if they want to have a comfortable retirement. Few people discuss the fact that a large nest egg may break if the stock market suddenly drops before a person retires. Investing in rental properties in my community is a more attractive option to me than crossing my fingers and hoping the stock market continues to rise. I didn’t always feel that way. However, I can think of several reasons now while becoming a landlord makes financial sense as I head toward retirement.

Losing faith in retirement accounts

I’m starting to lose faith in retirement accounts such as the Roth IRA. Lawmakers have been discussing changing the rules. I might end up being forced to take required minimum distributions from my Roth IRA just as I have to do with my traditional accounts. I have no way of knowing if lawmakers won’t change the inheritance taxes and rules regarding retirement accounts.

Taking advantage of short sales

At this time, there are a number of homes in pre-foreclosure and foreclosure in my Florida community. Although the foreclosures are sketchy because some have been abandoned for a number of years, there are a lot of short sale deals ideal for investors. My mortgage lender said I’d have to put 20 percent down on an investment property. For a $120,000 short sale, I’d have to come up with $24,000. If I am constantly funding my retirement accounts, it’s difficult to save up that much money. In addition to the 20 percent down payment, I need money in reserve for repairs and ongoing maintenance.

Generating income in retirement

One of the advantages of buying an investment property in my 40s is that I can use the rent checks to pay off the mortgage. By the time I’m 70 years old, I’ll have a paid-off home that generates income. At this time, it’s possible to rent out a $120,000 for about $1,200 to $1,300 a month. Considering a mortgage payment would only be about $600 a month, I could use the excess money to save as well as pay the property management company. If I wait to purchase an investment property, I might lose out on the low interest rates as well as the abundance of short sales.

I get annoyed with so-called retirement planning experts that preach about the one true path to financial freedom in retirement. Typically, they want people to save up several million dollars in a 401(k) or IRA account. During a bear stock market, I am more aggressive about saving in my retirement accounts because of the “bargains.” At this time, real estate seems like a much better deal than stocks. But saving too much for retirement will sabotage my efforts to buy investment properties that pay for my retirement.

Finding Leverage In Real Estate

The concept and power of leverage is a simple one, yet it’s often misunderstood or not thought of when people think about real estate. I find this interesting since leverage is one of the most powerful reasons to invest in real estate.

All too often I’ve heard people say how real estate consistently under-performs the stock market, and we should therefore just invest in the stock market for long term gains. This may be true if you look at total gains, but leverage changes things.

Leverage basically means that you’re able to combine someone else’s money with your own money to buy an asset or invest in something. While it’s true that you can do this in the stock market with a margin account, most people who think real estate is too risky definitely would think a margin account is too risky.

By leveraging your money you’re able to multiply your gains, and this is why real estate can be (notice I said can be) much more profitable than other investments like the stock market. I suppose it would be best explained with an example:

Say that you put $10K into the stock market and you average an annual gain of 20%. Most people would say that this is quite an extraordinary rate of return. So, after 3 years your $10K would have grown to $17,280 which is outstanding.

Now let’s say that you put that same $10K as a 10% down payment on a rental property and finance the other 90% (this is the leverage part). We’ll also assume a rather conservative gain of 3% annually, well below what the stock market earned in our example. After three years, the property would then be worth $109,272 meaning that your $10K is now worth $19,272.

So as you can see, you’re money will still grow faster with an investment property appreciating at 3% than in the stock market at 20%. I understand that there are many other considerations, but you can’t dispute the power of leverage in real estate. This is why another reason why you should consider real estate as an investment option.