Rentals rock for retirement income
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
||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,
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,"
While owning rental property
can be challenging at times, Kiyosaki says,
"I think the rewards are really worth it."