A Rent House Solution
Jerry's and Beth's dilemma was that their retirement income consisted of Jerry's teacher retirement, some social security, and $240,000 that they have saved in a taxable annuity. The income earned from interest on the savings was down to 3.5%, or $8,400.00 per year. The interest rate of 3.5% was considerably less than the 8% interest rate they had planned on. Their home is paid for and they do just fine on the income they have. The extra income, (if they could make more income from their investments), would have allowed them to travel more and enjoy a few extra luxuries. They are both in their late sixties and they will more than likely need a good income for many more years.
I suggested that they buy three $60,000 rent homes in a good working class neighbor hood and rent them at $650 to 750 per month. That would generate $550.00 net per house, per month after taxes and maintenance cost, or a total of $19,800.00 per year in additional income. After buying the homes they would still have about $60,000 cash on hand as a safety cushion. That will give them a return of about 11% on their cash investment.
I explained to them that the homes in this price range are readily available in their town and that finding renters in this price range is easy since that rental rate is very competitive with apartment rents. If they did not wish to deal with the tenants then they can hire a real estate agent who specializes in handling the rentals for a percentage of the rent.
The Advantages to this proposal are:
1. Increased monthly income.
2. Tax savings from depreciation.
3. Income inflation protection from by increasing rents.
4. Inflation protection of the original investment from increasing home re-sale values.
5. Low risk of long term vacancy by buying moderately priced homes with affordable rental rates, in good neighborhoods.
6. Paying cash for the homes reduces the risk of a negative cash flow during vacancy.
If Jerry & Beth do not want to be landlords they could still use real estate to accomplish the same monthly cash flow without the rental worries. See more on this below.