How Real Estate Investment Can Boost Retirement When Pensions, 401(k)s And Social Security Fall Short

Bruce W. McNeilage, CEO Kinloch Partners.

There was a time in the United States where the norm went something like this: Graduate from high school or college, and then work 30 to 40 years with the same company and retire with a pension and a gold watch.

But that’s not the way it works today.

Those pensions? For most Americans, they are history. In 1980, 60% of American workers had access to a defined benefit (company-funded) retirement plan. Today, the percentage of workers in the private sector with a defined benefit retirement plan has plummeted to 4%, according to CNNMoney.

Defined contribution (self-funded) retirement plans, such as 401(k)s, have helped pick up some of the slack, but these plans are often underutilized. According to a 2015 report from the Government Accountability Office (GAO), the median retirement savings for Americans ages 55 to 64 was $104,000. If invested in an inflation-protected annuity, this would equate to a $310 monthly payment.

How about Social Security? The average Social Security benefit was $1,503 per month in December 2020. The maximum possible Social Security benefit for someone who retired at the full retirement age of 66 or 67 is $3,148 in 2020. This leaves millions of Americans woefully short when it comes to retirement income. 

What’s the answer to this problem? For many, investing in single-family rental homes can make a huge difference. Though real estate comes with its risks and challenges, on the upside, the cost to get started with single-family rentals is relatively low, and your investment will most likely be cash-flow-positive. You will also build equity over time, and real estate values typically go up.

An Illustration

In 2003, my first real estate investment was a $98,000 house with a down payment of $9,800. My mortgage payment was $633 per month, and the rent I charged was $875 a month. The $242 monthly profit represented an annualized profit of 29%.

The thing is, I was in for the long haul. I did not use the profits from the positive cash flow to supplement my income. Instead, I pooled those assets and bought a second rental home in year two. In year three, I took profits from each of the two existing homes and bought two more rental properties. Heading into year three, I had four properties and a positive monthly cash flow of well over $1,000 per month.

Even though I eventually moved onto much larger investments, I still own that original house today. It is nearly paid for and has almost doubled in value to $170,000. That’s a terrific return on an initial $9,800 investment.

These results are available for anyone to gain. Let’s say you start with 5% or 10% down on a $250,000 home. Take a 15-year mortgage, and buy three more with some initial profits in the early years. Even without any appreciation in the market, those four homes would be worth $1 million in 15 years. They would be paid off and would likely generate somewhere between $6,000 and $10,000 per month in rental income. That’s a whole lot better than a $310 monthly annuity and double or triple what you’ll get with social security.

Practical Considerations

So where’s the downside? There are three things to look out for before launching into single-family rental home investing. First, if you don’t find high-quality tenants, it can disrupt cash flow, or worse, the tenants can damage the home (think about the long-term impact of smokers or pets).

Second, the real estate market can go down. The real estate crash in 2008-09 hurt a lot of real estate investors who were overleveraged. If they needed to sell during that time, they might have taken a significant loss.

Third, owning a small portfolio of homes requires significant sweat equity. If you don’t want to roll up your sleeves and make a few home repairs, this might not be the investment for you.

How do you avoid these pitfalls? First, high-quality homes attract high-quality renters. Renters want many of the same things as traditional homeowners. They want homes in good communities with excellent schools, recreation opportunities and good restaurants. Find these amenities, and you will attract high-quality tenants.

Second, invest conservatively. While cash-flow-positive rental income is a likely outcome of your investment, there might be some months where you don’t have a tenant. Make sure your monthly payments won’t break you if you can’t find tenants immediately.

Finally, be ready to roll up your sleeves and get a little dirty. Owning a single-family rental portfolio isn’t glamorous. It’s hard work, and the more you can do yourself, the more money will fall into your pocket.

When should you start? Frankly, as soon as possible. If you are now in your 30s, it’s realistic to build more than $1 million in assets before you hit age 50. If you are already 50, don’t sweat it. You can still hit a nice target by the time you reach 65.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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