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Building Retirement With Real Estate

  • Ryan Tollefsen
  • July 22nd, 2011

A recent Wall Street Journal article indicated that 95% of Americans will face financial difficulties when they retire. As most people don’t enjoy the thought of working into their 60’s and 70’s, now is the time to start building a retirement nest. While safer investments may be CD and money market accounts, others will opt for stocks, which hold the potential for great return, but also the gamble of losing your investment. A common trend for building a retirement fund is investing in real estate. For the initial investment required to buy an investment home, real estate has hands-down the highest return on that investment and has tons of potential to bloom into an abundant retirement fund if cared for correctly.

Real estate values have risen over the past 50 years continuously. While there were definite ups and downs in values at different points in time, the appreciation of home values has still consistently risen. The median price for a single family home in the 1960’s was just $62,900; in 2007 that price was at $217,800 and today those prices are even higher. While it might be unrealistic to expect property values to quadruple in the next 50 years just in time for a hefty retirement as they did before, it can still be safely expected that values will continue to rise. The process of property values increasing is called appreciation.

Appreciation is the igniting factor that makes real estate investments such a smart move for investors. It is the tool that allows investors to get such a profitable return on their investments. Here is an example; if you were to purchase an income property today for $150,000, you might put down a $30,000 down payment as your initial investment. If you were to rent out that home for $1500 per month, your initial investment would be recouped in a little under 2 years. After breaking even you will have this asset that will grow while a renter is making your mortgage and tax payments on the property. With a very conservative 3% appreciation estimate each year, after 30 years paying towards that mortgage your home will be worth almost $365,000 and you will own it free and clear. Pretty awesome considering the initial out-of-pocket investment was just $30,000. Think about having 2 or 3 of these projects going at one time. Keep in mind that with rental income properties, there will be need for maintenance and property management, this is something that an investor can take of themselves, or sub out to a professional for a fee.

There are also tax benefits involved with investment properties. Any ordinary, necessary and reasonable repairs to an income property are tax deductible, for example putting on a new roof or replacing a faulty toilet. Travel expenses incurred in going to and from your rental buildings are tax deductible. Insurance premiums to cover properties are also deductible. Property taxes, just like the taxes on your personal home, are also deductible on your Federal tax return each year. Maintenance and mortgage interest are also common deductions. Hiring a tax specialist is likely a smart move when you start investing and need help finding and organizing different write offs for your return.

Down the road when you decide to sell an income property, there are also tricks to take advantage of to evade paying income tax on the proceeds from your sale. With a special rule called a “1031 exchange,” you can sell a property (or properties) and purchase another property with the profit from the first sale, without having to pay any income taxes on that profit. An investor can save a substantial amount of money by not paying the income taxes they normally would by using this method, and are able to continue selling and buying bigger and better properties each time. As an example, if you sell a home and make $75,000 in profit from that sale, if you apply that money towards purchasing a new property, you will not have to pay income taxes on that $75,000. The rules and regulations for a 1031 exchange are specific, so hiring an accountant or lawyer to help with the details is highly recommended.


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