Finding the Best Places to Retire Since 2006!
What are the Benefits of a Retirement Rental Income Strategy?
Looking for an Excellent Way to Generate Retirement Income in Colorado?
Every Colorado retiree wants to ensure that he or she has enough money in retirement. In fact, running out of money in retirement is the number one fear of retirees. Sources of income during retirement often include Socials Security benefits, private pensions, working part-time, distributions from a 401(k), etc.
One source often overlooked, though, is income from rental properties. There are always horror stories about being a landlord, but it doesn't have to be terrible, and done correctly, this retirement income strategy is one of the best ways to ensure a steady stream of revenue during your post-working years.
Here's why:
According to the IRS, passive income is earnings from a rental property, limited partnership, or other enterprise in which a person is not actively involved.
This is not to say that there isn't work involved in owning rental property, but it's not like going to work every day for a paycheck. Your passive income comes from the rent your tenants pay each month, less your monthly mortgage payment and other costs associated with maintaining the property.
Passive Income
So if your Colorado tenants pay $1,600 per month in rent and your mortgage payment plus the HOA fee (if there is one) is $1,300 per month, then your passive income is a cool $300 per month. If you have three rental properties at about the same price point, then you're bringing in $900 per month profit. That amount can make a real difference during retirement.
You can invest those proceeds in the stock market, stash them in a liquid rainy day fund or plow them back into your rental property by applying them to the mortgage. By doing the latter, you're building up more equity faster so once your mortgage is paid off - maybe in eight years instead of 10 - your monthly profits will be even greater.
Just think about it. Even if you don't invest your net profits into your rental property to pay off the mortgage faster, you'll still have your tenants paying the loan off for you. Down the road you'll own your real estate asset outright, without having had to pay the mortgage off all by yourself. Your tenants will have done much of the heavy lifting for you. How great is that?
If you are looking for steady retirement income, then you might be thinking about buying an annuity from an insurance company. In exchange for the lump sum you pay upfront, you will receive a check each month for a set duration of time, usually anywhere from five years to 35 years (or longer in some cases).
The problem with this arrangement is that you no longer own your lump sum of cash. Yes, you receive income from it, but your asset (the cash) is no longer yours. It belongs to the insurance company.
The beauty of purchasing and leasing out a rental property is you own the asset - the building - AND you receive income from it. You haven't given up ownership of your asset. It is still yours, so at some point you can sell the asset if you want and reap a profit because your tenants have paid down your mortgage. It is a double win. Not so with an annuity.
On average, over time, real estate appreciates at about 4% per year. Yes, there are down years, but overall, this is what you can expect when you own real estate.
So the property you buy today for $275,000 will be worth $407,000 in 10 years. And over that time, your mortgage will be dropping and you'll be building equity, thanks to your tenants paying down your mortgage. And what can you do with all that equity? Use it to buy more rental properties, of course!
Colorado rental income is taxable income, but you can use your rental property to reduce your taxes because the IRS lets you deduct the costs of nearly anything you need to maintain the property, from lease agreements and property insurance to having the carpets cleaned between tenants.
The IRS alo lets you deduct a portion of the property's value each year to reflect general wear and tear over time. If you hold onto the rental property for a long time, this is a way to lower your annual tax payments. Keep in mind that the depreciation is eventually recaptured on your taxes when you sell the property. Retirement is supposed to be a time to relax and enjoy life, whether you want to golf all day or travel to the ends of the earth. The thought of dealing with tenants, making repairs, collecting rent and all the other things that go into managing a rental property is what keeps a lot people from considering rental revenue as a retirement income strategy.
Afterall, no one wants to hear the phone ring at 1:00 a.m. because their tenant is calling to say that the pipes have sprung a leak or the roof is leaking. This is not fun when you are in your 40s. It's even less fun when you're in your 60s, 70s or 80s. The way around having to handle the the daily dealings of owning rental property, such as midnight repairs and 2:00 a.m. phone calls, is to outsource the day to day management to a management company that specializes in this very thing. These companies are all over the country, including Colorado, and they usually charge about 10% of the monthly rent. For this fee, they will advertise the property, find new tenants, sign a lease, make repairs as needed, clean the property between tenants, collect the rent every month and do the dirty work of evicting renters if needed. What could be better than owning an appreciating asset and collecting passive income from it without having to deal with tenants? You can set up an LLC or an S corp for your rental property business - and it is a business - or you can keep it simple and just operate as a sole prop and report all income and expenses on your 1040 Schedule C.
Whether you maintain and rent your properties yourself or you hire a management company to do it, you will need to set up a separate bank account for depositing rent checks and withdrawing money for expenses, including repairs, insurance payments, etc. Talk to your accountant about the best business structure for your situation. It is also a good idea to buy some umbrella insurance to cover things like slip and falls, mold complaints, etc. There may come a time when you want to cash out, sell your rental properties and then take a tour around the world or set up a trust fund for your grandchildren. The great thing is you'll be able to do this because your properties will be worth more than they were when you bought them, and your mortgage will be much lower than when you started out as a landlord. The difference between these two price points should net you a tidy profit.
Not every Colorado retiree thinks of rental properties as a great income strategy, but they should because owning and leasing rental properties is full of benefits and has few downsides, particularly if you hire a management company to do the day to day operations. If you really want steady, reliable retirement income, then consider buying a rental property. Start with one, use its equity to buy a second one and so on. Soon you'll have a very profitable portfolio.Colorado Rental Property vs an Annuity
Colorado Real Estate Appreciates
Owning Colorado Real Estate Has Tax Benefits
Generate Income and Let Someone Else Do the Dirty Work
The Bookkeeping is Not So Bad
Sell Your Colorado Rental Properties Down the Road
Conclusion
Webwerxx, Inc. Copyright (c) 2006-2022. All rights reserved. No part of this electronic publication may be reproduced in any way without the express written consent of Webwerxx, Inc. Reproducing any original part of this publication without written permission from Webwerxx, Inc. is plagiarism. Numerous attempts were made to verify the accuracy of the information contained in this website, but some information may have changed since each article and/or report went online, and Webwerxx, Inc. is not liable for inaccurate information contained in its articles and/or reports.