Purchasing a rental property can be an excellent way to plan for retirement, providing you with tax benefits in the short term and an income stream in the long term.  Your best bet is to purchase an investment property when you are in your 30's, but a purchase later on in life can still be of great benefit to you as well. 

Today's low mortgage interest rates will allow you to purchase many types of properties and immediately have positive cash flow, or at least be breaking even on a monthly basis.  Financing 80% of a $150,000 townhouse purchase will require a total monthly payment of around $800 including the principal, interest, taxes, insurance and home owner's association dues.  Most such townhouses will then easily be leased for $900 to $950 depending on the age, condition and location.  Thus, there is a cost for getting started with this type of a retirement strategy – the 20% down payment plus closing costs – but then there will not be many costs as you move forward.  Many owners of rental properties will save up their excess monthly cash flow ($100 - $150 per month) to save for any need repairs and maintenance.

As you move past the first three to five years of owning your rental property you will start to see an increasing monthly financial benefit.  The largest portions of your monthly costs of the rental property – principal and interest – will stay fixed over time thanks to 30-year fixed mortgage interest rates.  You will eventually start to see small increases in taxes, insurance rates and home owner's association dues, but in most cases those will surpassed by increases in rental rates over time.  Thus, as time marches on, your monthly positive cash flow will increase.  Five to ten years in, you may be seeing a rental rate of $1,000 to $1,050 compared to a monthly cost of $850.  

With positive monthly cash flow from the first day you owned the rental property, you have effectively only had to pay 20% of the market value of a townhouse, and put yourself in a situation where your tenants will be paying the other 80% for you as they pay off your mortgage with their rental payments.  Thus, over 30 years, you can thank your tenants for helping your mortgage loan balance decline down to zero.  In addition, if we assume an average of 2% appreciation per year over 30 years, when your tenants have finished paying off your mortgage in 30 years, your $150,000 townhouse would be worth as much as $270,000.

Purchasing a rental property allows you to create a "retirement account" into which you made the initial deposit (the down payment) and into which other people (your tenants) will make all of the subsequent deposits.  This financial transaction can provide positive cash flow from the first day of your ownership of the property, and will also provide tax benefits based on the interest that is being paid on your mortgage payments.  In the mid to long term, you will have a regular source of monthly income when either the increased rental rate exceeds your monthly costs or once the mortgage is paid off.  Then, after 30 (or 20 or 40) years, you can sell your rental property and cash in on your retirement savings.

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Have any questions? Contact Scott Rogers at 540-578-0102 or scott@funkhousergroup.com