What is a good Monthly Retirement Income?
What are some of the brilliant ways to have retirement income, or what we call passive income when you retire?
Obviously when you retire, you’re not going to work and you need to have some money, hopefully more than the Social Security money. So I’m going to talk about one of the ways you can create passive income when you retire so you can have a happy, healthy, and easy retirement life. Before I get into how to create, retirement income or passive income, I wanted to give you some statistics. According to reports, 64% of Americans are not really prepared when they retire. 50% of Americans are broke when they retire. But this number three is a kicker. 90%, and reports are that more than 95%, but I’ll go with 90%. 90% of people who retire in America Are either broke or they need financial assistance from their friends, family and government to survive in their retirement years. Pretty pathetic, I would say. Really, really pathetic. In a country like this, 90% need help financially to live in this country. So I’m going to give you one way to create passive income, and hopefully you and me are not in that category.
One way to create easily a passive income or retirement income when you retire is to buy arental property, so that when you retire, that property is paid off and you have income. But before I talk about that, a couple of things. There’s other ways you can generate income when you retire. One of them is obviously buying property, having an investment in a business, so that when the business is running, you can get monthly checks or you have obviously, Social Security. You might have stocks or 401k or pensions. So those are incomes that will be coming in.
If you’re healthy and willing, you may work part time, become an Uber driver. I know a lot of retirees in these days are DoorDash drivers or Uber drivers, Lyft drivers, and they’re making extra money willingly. But some people are doing it because they have to. So there’s other ways to generate income if you have to when you retire. If not, here’s a passive way.
And that way is to buy a house as early as possible before you retire, maybe get a 20 or 30 year loan. So let’s go through a scenario on how you buy a property now and that will become your potential or a great passive income with you doing not a whole lot.
So here’s the scenario.
Let’s say you buy a house, and I’m in Orange County, and the medium home income in Orange County is a million dollars, which is very expensive for the average buyer. So let’s say you buy a house in the Orange County area. Could be Riverside or could be LA County. Let’s say you buy a $500,000 house whether you’re 30 years old, 45 years old, 50 years old, maybe even 25 years old. The sooner you start, the better. So let’s say you buy a $500,000 house, assuming you already have your own house that you’re living in. So you’re making those mortgage payments. And assuming that we’re going to put 20% down. I’ve sold a lot of rental properties and I recommend that they put 20% down if they can afford it or if they have it, but they could put 5% down or 10% down. The reason I recommend 20% down is because when you put a 20% down, you avoid the PMI, which is the private mortgage insurance. So that’s an advantage.
You save right off the bat, $200 and $300 a month, maybe more, in this market. So again, going back to the example, let’s say you bought a $500,000 house, and let’s say you’re 30 years old, just as an example, and you’re going to put 20% down, which is $100,00, maybe you saved up for it. Maybe you borrow money for the downpayment from family, friends, pay them back. And let’s say the rate is, 5%. Obviously today the rate is six and a half percent. But for this example, as a scenario, I’m going to pick 5%. So if you buy a $500,000 house today as a rental, put 20% down at 5%. Your principal interest, tax and insurance, what we call the PITI, is going to be about $2,700 a month. That’s your monthly payment, but that includes your property tax.
In Orange County, like I give an example, the $500,000 may not be a house, but it could be a townhouse. Three bedrooms, two bath townhouse. So if you buy that with 20% down and you’re 30 years old, you can easily rent that house or condo, $3000 a month, easily. I’m going to say $3500. But let’s say as an example, you’re going to rent it out for $3000 a month. You’re 30 years old, you just bought a property. Your payment is $2700 a month. Mortgage payment. Your rent is $3000 a month to start, it’ll go up every two or three years. Rents go up every year, just like house prices go up on average of 4% per year. So now you’re renting at $3000 a month. Hopefully in five, six, seven years, you’ll get $3500 a month. But at $3000 a month, you are breaking even. You even have $300 cash flow. You can use that to fix it or do the accounting or whatever. So you’re not making any payments on the mortgage for the house.
Now it’s rented out.
You go along your way, you’re living your life, working. Hopefully you have kids, or even if you don’t have kids, or if you’re not married or married, you’re living your life and the renter is paying your mortgage.
The secret of finance OPM, other people’s money.
You bought the house, the landlord, which you are, his mortgage, his or her’s mortgage is being paid by the tenant that you put in there. So your $3000 a month payments are being paid by the renter. Fast forward to 30 years and your rent has obviously gone up from $3,000. But let’s step back and see what happens after 30 years.
You’re 60 years old, obviously, assuming your house has already been paid off, your rental house is also paid off now, because the renter maybe you had several renters in there over the 30 years, it doesn’t matter.
The renters paid off, your mortgage.
So now you have your house paid off, you have your rental paid off, you have pension coming in or Social Security coming in. Now, you also have a passive income from this $500,000 house that you bought 30 years ago. But here’s the great advantage, that you bought the house 30 years ago. That’s why I say the sooner you buy the house as a rental, the better.
So here are the advantages that you bought.
Obviously, you are getting the passive income. So one is that if you bought the house for $500,000, 30 years later, guaranteed, on average, house prices go up 4% per year over the 30 year history. So that house is way over a million dollars that you bought in today’s market, maybe even 1.5 when you’re 60 years old. So the first thing that happened is, your tenants paid your mortgage. Now you have a property, a rental property that’s worth, let’s say a million, maybe a million and a half, that’s equity sitting with you.
The other thing is the $3000 a month mortgage you are getting. Obviously, rents go up over time, just like house prices go up over time. Let’s assume your rental is $6000, maybe $9000 a month. You are getting $6000, maybe $9000 a month rent and you have no mortgage payment. That’s a great passive income, but it doesn’t stop there when you bought your house over the last 30 years. And of course, I’m not an accountant, I’m not an attorney, so please consult and talk to your accountant with these ideas and legal information. But over the 30 years, I’m sure you got tax advantages.
What kind of tax advantages?
Well, for one thing, if it’s a rental, you have depreciation and you have appreciation, but the depreciation is deductible. The interest payments that you paid are deductible. Property taxes were deductible. Some of the repairs that you made over the years, obviously there’s repairs and improvement. Some of those are deductible. Some of the vacancies, I’m sure there was a couple of months over the 30 years that it was not rentable because you were remodeling or there was a flood in the house, or you were on a vacation, could not rent it out, so it was vacant. So that’s what we call shrinkage. That can also be deductible.
But like I said, I don’t want to get into too much details, but those are the advantages. Talk to your accountant. So, what I’m saying is that by buying a house for rental, you created a lot of equity, you created passive income, and over 30 years you got great tax deductions. So this is one simple way to create passive income.