A home-based investment that works for many

Dec 1, 2014
Austin American Statesman

The first home I bought cost far more than I could afford. Worse, it needed renovation from top to bottom. In spite of that, owning it was a comfortable experience. The monthly expense of living there was stable for the 20 years it was home

How could that be possible?

Simple. It was a lovely Georgian townhouse in the Boston area. The two small apartments that I built provided rental income. It was enough to pay all monthly expenses except the mortgage. The rental income turned my shelter cost into a fixed expense

Lots of people have done this. South Boston has streets lined with wooden “three-deckers.” And you can find duplexes in urban areas all over America. If you own one of these houses and pay off the mortgage before retiring, the rental income can be a big part of your retirement plan

You can understand this by considering the economics of a duplex. These are houses that have two complete living units. Since you are buying what amounts to two houses instead of one, you’ll be paying about twice as much as you can reasonably afford. But the rental income from one side should pay half of all expenses. The mortgage is one big expense. But the real estate taxes, insurance, services and maintenance mount up, too

You’ll also find that the annual cost of the mortgage will be larger than the annual cost of the operating expenses. This has major implications for your long-term future. Pay off the mortgage, and the rental income will pay all the operating expenses for both units, perhaps more

Yes, you read that right: Rental income can cover your shelter expenses for life

Here’s an example. Suppose you buy a duplex for $500,000 with a 20 percent down payment. A $400,000 30-year mortgage at 4.5 percent will set you back $24,320 a year. Now let’s assume some expenses: a tax bill about 2 percent of home value; insurance and service bills at 1/2 percent of value each; and maintenance/repair expenses of 1 percent. So the annual operating expenses will be about 4 percent of value — $20,000. (Note: The Center for Retirement Research at Boston College suggests a lower figure, 3.25 percent of value.)

Bottom line: If rent covers one-half the total costs, it will cover all operating costs. Maybe more

There are lots of variations on this. In Seattle and elsewhere you can find townhouses with small “in-law” apartments on the first floor. These won’t cover half the costs, but they will make ownership easier. Own a three-decker in South Boston free and clear, and it can be most of your retirement plan. The rents would cover shelter expenses twice over. Add Social Security, and you’ve got it all covered

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