Why Rental Properties are a Great Investment for Retirement
I invest in rental properties for my retirement because they offer continuous cash flow and I have control over my investment. I used to invest most of my money in the stock market, but the amount of money I had to save to retire early with stocks was discouraging. When I plugged in my current savings plan into retirement calculators, I realized I had to save more than I was making each year or get a 40% return on my money to retire when I wanted to. The worst part about the stock market retirement calculators was I had to guess when I would die. If I live too long then I might run out of money.
Using the stock market to retire seemed like a ridiculous way to invest because there are so many unknowns. I can’t be sure what rate of return I will make, how long I will live, how well the market will do or how much money I will want to live on in 30 years. The biggest issue for me was I have no control over stocks, mutual funds or bonds. I can pick a stock, a mutual fund or an index fund, but after I pick the investment, it is up to the market or a company to perform well. I can’t do anything to improve the market or that stock, except sell and buy something else.
I have control over rental properties when I invest in rental properties, I pick the property to buy and I make that property perform for better or worse. I can repair a home, raise rents and pick the best locations to increase my returns. If I don’t want to manage my properties, I can hire a property manager to handle the day-to-day management. If I don’t have the experience or time to find great rental properties, I can even buy a turnkey rental that is already repaired and rented.
Why do rental properties solve the retirement calculator problem?
The biggest problem with the typical retirement calculator is it plans for you to run out of money. You build up the principal in your retirement accounts and you live off the interest and the money you make off that principal in the first years of retirement. In the later years of retirement, you start eating away at that principal. Sooner or later the principal will be gone, hopefully after and not before you die.
Rental properties provides cash flow and if you invest wisely the cash flow will provide more than enough money for retirement. The cash flow will most likely increase over time without ever eating away at your principal investment.
Why does cash flow increase over time with rental properties?
The best thing about rental properties is you can get a great cash flow now. The bonus with rental properties is that cash flow will increase with time. If you buy rental properties with the leverage it takes less money to buy a rental. As time goes by you will be paying off that loan and eventually pay off the loan, which will increase your cash flow significantly.
Even if you don’t have a loan on your rental properties, rents will most likely rise over time with appreciation. Rental properties are a great hedge against inflation.
Real estate can be bought below market value
Another great advantage of rental properties is you can buy real estate below market value. I own ten rental properties and I complete 10-15 fix and flips a year. I have to buy houses below market value in order to be able to flip a home. I make my money as soon as I buy a property and by repairing a home. I use the same strategy on my rental properties because it gives me more cash flow the cheaper I buy a home.
You can’t buy a stock or bond below market value; you can only hope the value increases due to the market value increasing. You can’t repair a stock unless you are warren buffet and buy entire companies and reorganize the entire operation!
It is not easy to buy real estate below market value, but it is certainly possible. Foreclosures, short sales, estate sales, auction sales and fair market sales can all be bought cheap. Some houses can only be bought with cash, which eliminates 80% of the buyers. Some houses need repairs that scare off most buyers and some houses are simply under priced and the first person to make an offer will get a great deal. I talk much more about buying properties below market value on my blog www.investfourmore.com.
How much does it cost to buy rental properties?
If you pay cash for a rental property, it is pretty simple to figure how much money you will need. Take the purchase price and add .05% to 1 % for closing costs. If you get a loan, you will most likely have to put at least 20% down plus about 3% of the purchase price for closing costs. Most people don’t have a lot of cash available to purchase rental properties with 20% down, let alone cash. However, many people have enough money in their retirement accounts to buy a rental property with 20% down or cash.
How to use an IRA or 401k to buy rental properties
Many people don’t realize you can buy rental properties with a retirement account. You can use a self-directed IRA or 401k to buy rentals. I do not personally use a 401k or IRA because I am 35 years old and I don’t want to wait 30 years to retire. I also make a great living as a real estate agent and I can afford to buy rental properties with my income. If I did have a large sum of money in a retirement account I would definitely be investing it in real estate.
Luckily, you are in the right place to learn how and execute self-directed purchases of real estate. iPlanGroup specializes in helping investors use their retirement funds to buy real estate and other investments.
I love real estate and it has been great to me over the years. The biggest roadblock for many investors is finding the money to buy rental properties, but if they knew they could use their retirement funds I think many more people would take advantage of the great opportunity rental properties offer.
By guest blogger Mark Ferguson. Mark has been a licensed real estate agent since 2001, owns 10 single family rental properties, fixes and flips 10-15 homes a year and runs www.investfourmore.com, a blog discussing investing in rental properties, fix and flips and becoming a real estate agent. Follow Invest Four More on Facebook!