Why Investing in Rental Properties is Better Than a 401(k)

It's well known that putting money back for retirement is an essential part of achieving long-term financial success. To most people, this means contributing to a 401(k). Though a 401(k) can be a good way to save money, it is far from the best way to ensure financial security in retirement, since it will not continue to produce more income once it has been drawn out. For those who want to see a steady, reliable income in their retirement years, one of the best options is investing in rental real estate.

What Are the Advantages of Real Estate?

The greatest advantage of investing in real estate is that it can produce a largely passive income in the form of rental payments. According to the 2015 Census ACS Survey, median rent in the United States averages $959 per month. Assuming this average, a landlord with even a small portfolio of four occupied properties would bring in a monthly income of $3,836. The more properties are included in a portfolio, the higher the monthly total will be. Of course, the actual amount you could reasonably earn with a portfolio of rental properties will depend on average rents in your area.

A real estate portfolio also offers wealth in the form of equity. While producing rental incomes monthly, the homes in your portfolio also carry their own intrinsic value in the form of their potential market prices. In order to turn this value into liquid cash, you will need to sell a property or borrow against it. In the event or major expenses, however, having such a large reserve of potential capital at your disposal can be quite useful.

How to Create a Great Retirement by Investing in Real Estate

With the considerable advantages described above, it's clear that real estate should be under serious consideration by anyone who wants to achieve true financial freedom. Before you can start collecting rents, however, you will need to begin by acquiring your first property. Try to find a property that is large enough to appeal to families, but still within a price range you can afford. If you're handy, you can consider getting a property that needs some repair and fixing it up yourself to keep the initial investment costs low.

Ideally, every property you purchase should have the ability to generate a positive cash flow when it is occupied. In other words, the rental income you get from it should exceed the cumulative costs of your mortgage payment, taxes, maintenance and other assorted expenses. If you can only break even each month, however, that's alright. Even without a positive cash flow, you'll be building equity in the property. Once a property is paid off, of course, you'll have a much easier time getting a net positive income from it each month.

A final step to consider for those who plan to retire on the income from a rental portfolio is hiring a property management company. Managing and maintaining multiple properties can turn into a full-time job of its own. Property management companies will handle all basic tasks associated with a property in exchange for a share of the rental income from it. Though hiring a property manager will reduce your profitability somewhat, it will allow you to enjoy more leisure in your retirement years.