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Improving Cash Flow in Retirement with Rental Property

Is real estate a good investment?

by Arthur Andrews,

Rental property can help your cash flow during your retirement years. If you have a nest egg that is producing little income, real estate is worth considering.

Growing up, I learned the value of compound interest and its use as a source of retirement income; however, your average certificate of deposit today yields a negative return after inflation. A typical 24-month $100,000 CD pays 2/10 of 1% interest, so after 2 years with a 3% inflation rate, your $100,000 has the buying power of a little over $94,000.

Retirement Investments

Well, there is always the stock market you might say, but that too has grown with cheap money, and many economist predict a sudden drop of 33% to 66% in the near future, which could devastate Baby Boomers’ retirement plans.

The Bond market will also suffer a drop in value as interest rates – now artificially low – return to historical levels, again devastating the value of your bonds.

What is a Baby Boomer to do to ensure a comfortable lifestyle in their retirement years without gambling with their savings?

Real Estate Rental Property

My answer is real estate. Not buy and flip, which carries risks of its own, but rentals, which can generate great, nearly tax free, income legally.

I am not a real estate agent. I am not trying to sell you anything.

There is, of course, risk with every venture, but I think rentals are a good option. Unlike some investments, the value of real estate will never go down to zero.

Potential Return on Investment

Using a hypothetical savings of $480,000:

You can buy three single-family homes (in some parts of the country) for a total of $480,000 in several high-growth cities that would command $1000 a month rent or $36,000 a year in rental income.

Cost of 3 single homes:

Total Rental income:

Property Taxes:

Insurance:

Association Dues:

______________

Income before Taxes:

Depreciation:

Taxable Income:

Tax 15%:

______________

Net After Tax Income:

$480,000

$  36,000 ($1000 a month X 3 homes)

$    7,000

$    1,000

$       900

________

$  27,100

$  14,000 (1/27th of structure value)

$  13,100

$    1,965  ( Based on 15% tax bracket)

________

$  25,135

 

 

 

 

 

 

 

 

 

 

 

 

 

Advantages of Real Estate

Article about retirement income - boomerinas.com

baby boomer retirement income

If you use the example above, your return on investment is 5.2% (net after tax divided by cost). As you can see, your net after-tax return far exceeds the 2/10th of a percent of pre-tax CD income.

Under current laws, your estate would not have to pay capital gains on the property as long as your estate is worth less than 5 million dollars and you would not pay capital gains tax if you lived in each house for 2 years.

A triplex purchased for the same amount would yield similar income results, plus estimated appreciation of 5% a year, in most markets.

Emergency cash could also be accessed with an equity line of credit.

Real Estate Appreciation

Potential of increased value is a great possibility, with Zillow projecting annual increases in value of 5% in many markets.

Do your research on local real estate costs, rents, taxes and insurance; and do the math.

If you don’t live in the area, hire a property management company. (The cost is 5% to 7% of rent, for which they do the renting, arrange for any unexpected repairs, and enforce the lease.)

In my opinion, real-estate rentals are the best and safest option in our current economy, however you should divide your money into different types of investments. To be safe, you should not put all your money into one asset group.

Note: I am not a lawyer, real estate agent or tax professional. Laws change. Tax rates may be different for you. Consult your tax adviser and real estate agent to find out if rental property is a good investment for your specific situation.

More Articles on Baby Boomer Retirement:

Retired or Unemployed Baby Boomers - 6 Income Opportunities

How to Save Money on RV Camping Fees

Boise Makes Best Retirement City Lists: Forbes, CNN, US News, Huff Post

It's Hip to Be Old: Things They Should Make for Baby Boomers

Photo Credits:

  • Main Photo: Viyella prshots.com.
  • Baby Boomer Retirement Income: TheArches Flickr creative commons.

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Arthur Andrews is an online writer and ghost writer for financial sites. Mr. Andrews lives in Arizona.

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1 Comment

  1. Seniorly Team

    This is a great alternative retirement strategy for people to think about!