Why Rental Properties Can Be an Excellent Investment

If you’re like most in the U.S. workforce, you have an employer-sponsored retirement account. You contribute a portion of your paycheck toward retirement, and your employer likely matches your contribution up to a certain point.

And if you’re like most in the U.S. workforce, you’ve probably asked yourself: “Is it going to be enough?” The average 401(k) balance at the end of 2020 was $129,157, according to financial services firm Vanguard. Only you know where you stand in comparison and whether it will be enough for retirement.

If you’re looking to boost your retirement savings, diversify your portfolio, or just build more wealth in general, maybe you’ve considered investing outside your company’s retirement plan. Have you considered real estate? Here’s why rental properties can be an excellent investment.

Rentals Are Mostly Passive Investments

If you want to increase your contributions toward retirement, the simplest way to do it would be to work more. Increasing your earnings would allow you to bump up your savings.

But if you don’t want to work a second job or a lot more overtime at your current one, investing in something that earns income passively could be the way to go. Instead of working for your money, your money (the investment) would work for you. A rental property is an investment that’s mostly passive.

You have to collect rents, fill vacancies, do bookkeeping, and maintain a property, but it’s not like a job you must physically work at all the time. To make it even more passive, you could hire a property management company, which can free up your time and might be surprisingly affordable. Property management in Santa Clara County usually costs between 7-10% of a property’s gross monthly rent depending of the type of property being managed. For a single-family home expect to pay 7-10% in rental property management fees. On multi-family properties this fee will vary based on the number of rental units, the location and condition of the property, and most importantly, what services are included for that fee.

Residential Real Estate Almost Always Appreciates

Historically, U.S home prices almost always have risen year over year. One recent exception was the financial crisis in 2008, which had its roots in real estate and caused home prices to drop. In the years since the recovery, of course, home prices have skyrocketed. In Santa Clara County where there is a strong job market and high demand for housing, due to the limited supply prices will likely continue to rise for the foreseeable future.

Through November of 2021, the median home price in San Jose was 21 percent higher than the same time last year, the 25th straight month of year-over-year increases. If you would have purchased a million-dollar home in the fall of 2020, it would have been worth $1.21 million by the fall of 2021.

Your equity alone would pay back your original investment if you put 20 percent down on a $1 million home. It would also more than make up for what you’d pay in property management fees to follow a totally hands-off, passive investment approach.

Rental Properties Provide Regular Income

Unlike other alternative investments – cryptocurrency, commodities, art collections – rental properties provide consistent, constant income each month in rent. No matter what happens to the value of the property on paper, your tenants’ rent will always provide a return on your investment.

Yes, properties in San Jose and Santa Clara Valley are expensive. But rental rates are high, too. In December of 2021, the average rent for a one-bedroom apartment in San Jose was $2,337, up 12 percent from the year before. With rental rates like that, your tenant would be paying down your mortgage, your property management fees and other costs and contributing to your retirement.

You could use that rental income as direct savings for retirement. You could reinvest it to earn even more money. If you used this to pay for your day-to-day expenses, depending on your level of income, you may be able to increase your 401(k) contributions.

Property Management from Valley Management Group

Valley Management Group has been providing property management in Santa Clara County for over 40 years and has high online ratings from both rental owners and tenants. If you own a rental property in San Jose, Santa Clara or elsewhere in Santa Clara County, contact us for a free property management quote and a free month of property management when you sign up for services.

Reviewed and Approved by Lloyd Kipp
Property Manager and Owner of Valley Management Group