-advertisement -
Bankrate's 2008 Retirement Guide
Finding the funds
Sometimes, finding that extra bit of income can turn a retirement nightmare towards a happy ending.
Finding the funds
Rentals rock for retirement income
Page | 1 | 2 |

When Kim and Robert Kiyosaki started investing in residential real estate, they selected homes in middle-class, moderately priced neighborhoods. The couple reasoned, "People need places to live and will probably look for middle-of-the-road rents," says Kim Kiyosaki, author of the book "Rich Woman: A Book on Investing for Women." And she believes that's still a smart strategy in the current economy.

Elements of a successful rental
Single-family home
Good school system
Stable, mid-priced neighborhood
Area with demand for housing
Enough land -- but not too much
Less than 10 years old

Bottom line: Research the area, the demand, the renters, and the zoning. And listen to your gut instinct.

Not a liquid asset
Rental properties, however, also come with risks. Banks often require a larger down payment and charge higher interest rates for rental property than they do for owner-occupied homes.

And never forget: Real estate is not a liquid asset. If you need to sell quickly, especially in a down market, you could have trouble getting the price you want or finding a buyer at all.

In addition, if you're without a tenant for a period of time, the investment goes from cash cow to cash drain. For that reason, it's a good idea to set aside about six months of monthly expenses, says Walter Molony, spokesman for the National Association of Realtors.

And when you find good tenants, treat them well, says Kiyosaki. If a tenant is "problem-free, paying on time," she says,"keep them happy -- that's priceless." If they make reasonable requests, respond immediately, she says.

Do the math
After you've done your homework on the area and the property, it's time to sit down with a calculator and run the numbers.

First, you need a good idea of what rental prices comparable properties in the area fetch, Phipps says.

Then total what you'd pay each month for the mortgage, insurance, and 1/12 of the annual property taxes. Include any expenses that you're paying, like water, maintenance or community dues. If you're not managing the property yourself, include the management fees. This is your monthly cost.

What you want to see on that balance sheet is a positive cash flow of at least 6 percent, Pietrowski says.

In addition to income, you can get a break on your income taxes. The Internal Revenue Service lets you depreciate the building portion of your property (minus the value of the land) over 27.5 years, which means much of your cash flow will be tax-deferred, Pietrowski says. If you ever sell the property, you'll have to pay taxes on that depreciation, she says. But if you don't sell it, "your heirs don't have to pay it," Pietrowski says.

And realize that this is not a short-term investment, she says. "You have to be in it for the long haul."

Before you consider buying a rental property, get an inspection from a certified professional home inspector. That way, you know exactly what you're getting and what, if any maintenance issues you may have. Also, especially in the current financial climate, be prepared for "all those negative emotions" from people on the sidelines telling you not to buy. "The people who are telling you this, I guarantee they are not investors," Kiyosaki says.

While owning rental property can be challenging at times, Kiyosaki says, "I think the rewards are really worth it."

-- Posted: Nov. 10, 2008
<< Previous article | Next article >>
Page | 1 | 2 |

- advertisement -
Rev up your portfolio
with these tips and tricks.
- advertisement -