We hope you enjoyed Part 1 of this series where we presented things to consider before using real estate as leverage to retire. Remember, one of the most important decisions you can make is to find a realtor that specializes in securing high cash flow investments and can help you make educated decisions. At Jordan Bennett & Associates, we are experts in the field and have put over one million dollars into real estate investor pockets.
Now we’ll dive a little deeper into determining a good investment, and help weigh the positives and negatives of real estate investing to retire.
Elements of a Good Buy
While real estate investment is generally profitable over the long-term, there are such things as good and bad buys. Make sure yours is a good one:
Location – Yep, the tried and true “location, location, location” applies to rental real estate as well! Properties in solid locations will remain in high demand, have lower vacancy, and more competitive rental rates. (read: more money in your pocket!) Do your research on sought-out school districts and areas with low unemployment.
Local Economy – Thriving job markets with low employment typically draw more people. More stable jobs equals more stable income, making the tenant pool more dependable!
Positive Cash Flow – The cheapest house on the market isn’t always the best deal. Sure, your mortgage will be low, but who knows what damage is hiding behind that price tag. The repair expenses on bad deals can be catastrophic! Money wise, we consider a good deal one that brings in a cash flow of at least 5% COC (Cash On Cash) Return. However, there is always a trade off between higher cash flow and desirability. In other words, you will often find higher cash flow from a property in a less desirable area but may have more issues to deal with than you would with a property in a more desirable area. Some quick math…
Let’s say the property you want to buy is $500,000
You put 20% down ($100,000). Your closing costs were $4,000 and your initial repairs are $10,000. Your initial cash investment is $114,000 ($100,000+$4,000+$10,000=$114,000)
You plan to charge $2,950/month for rent ($2,950*12=$35,400/year). Expenses including mortgage, insurance and taxes are around $2,450/month ($29,400/year). Your yearly rental income is $6,000 ($35,400-$29,400=$6,000)
To calculate your property’s COC Return, divide the annual return by the amount of the initial investment.
COC = $6,000 ÷ $114,000 = 0.0526 or 5.3%
At 5.3% COC Return, this would be a good deal!
Upsides and Downsides of Real Estate Investing to Retire
Pros of Investing to Retire
Ongoing Income with No Withdrawals or Selloff – Most retirement plans require a monthly withdrawal or stock liquidation in order to maintain the quality of life you worked most of your life for. And even the best savers still fear running out of money! On the contrary, real estate continues to grow your bank balance month after month, with little withdrawals.
Rental Income Adjusts for Inflation – In most markets, landlords can look forward to the end of a lease and the inflation of rental rates. The good news here is that you will be collecting more per month, while your mortgage payment stays the same.
Risk Management through Diversification – The stock market and real estate market are independent of each other. This is good news for you as a rental real estate owner – if the stock market takes a hit, your rental income will be unaffected.
Cons of Investing to Retire
High Barriers to Entry – It takes a significant amount of cash to invest in real estate, even if you’re financing the deal. Most rental property mortgages require at least 20% down, plus you’ll have closing costs, and any repairs to get the home rent-ready.
Rentals Take Work to Buy and Manage – Owning residential income property is not a hands-free endeavor, and is definitely not for the faint of heart! Luckily, if you hire a property management company, most of this leg work can be done for you.
Maintenance and Expenses – Irregular maintenance expenses do come along when you least expect. Sometimes the issues are small (like a leak in the kitchen faucet). Some can be immense (like a broken furnace…Yikes!) The good news? You can budget for them so you aren’t completely gutted when an unavoidable repair is needed.
Vacancy – you may not be able to rent your property out 100% of the time. (Think: time between the end of the lease, time to market, process applications, and find new tenants). When calculating your deal, make sure to research the vacancy rate in your area.
We would love to chat with you if you think your retirement portfolio is missing the income (and adventure!) that real estate investing can provide. Contact our team to learn more about our investing services!