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Owning rental real estate as part of your retirement income plan can be a great strategy or a huge headache. The success of this strategy is highly dependent on the specifics of the deal, including the mortgage rate, rental income, maintenance costs, property management fees, and property taxes. In this blog post, we’ll share a conversation we had with one of our clients who is nearing retirement and asked,
“Is it worth keeping my rental property, or should I sell it and invest the proceeds instead?”
If you're not subscribe to our YouTube channel, here's the video where we went through the analysis.
Real estate is often pitched as passive income—you buy a property, receive rent checks, and enjoy financial freedom. However, as many property owners know, it’s not always that simple. Maintenance, tenant issues, and other unexpected expenses can turn a seemingly passive investment into a significant time and energy drain.
Let’s look at a real example from one of our clients, Jennifer. Jennifer is 58 years old, single, and approaching retirement. She’s wondering if she should keep her rental property, valued at around $650,000, or sell it. She bought the property about five years ago for $220,000, so she has a substantial gain. It’s important to note that Jennifer happily rents her primary residence and is not in a rush to purchase a property for various reasons.
Here are some key financial details of the rental property:
Jennifer provided us with her tax return, which showed her actual rental income after deductions was around $5,669 before taxes, or less than $500 per month.
To determine if Jennifer should keep her property, we calculated her return on investment (ROI). Dividing her annual net income by her equity in the property (About $400,000 after commissions and capital gains taxes if sold), we found she’s earning a 1.4% return. This is significantly lower than the typical target ROI of 8-10% for rental properties.
Next, we looked at the impact of selling the property. Jennifer’s goal is to retire at 67 with about $3,200 in monthly discretionary spending. If she sells the property for $650,000, after a 6% broker’s commission and capital gains taxes, she’ll have approximately $420,000 to invest.
We ran a Monte Carlo analysis to project her financial future with and without the rental property. Keeping the property gave her an 83% chance of having enough money for the rest of her life. Selling it and investing the proceeds boosted her probability of success to 97%.
Selling the property will result in capital gains taxes. With a cost basis of $220,000 and a sale price of $650,000, Jennifer’s gain is $430,000. She’ll pay about 15% in long-term capital gains taxes, possibly a bit more if part of the gain pushes her into a higher tax bracket.
With a high probability of financial success from selling the property and investing the proceeds, we advised Jennifer to sell. This not only improves her financial outlook but also reduces the headaches associated with managing the rental property.
I’m not against investing in real estate. In fact, most of our clients have properties that do work out in their favor. Investing in real estate can be a profitable part of your retirement strategy, but it’s always important to evaluate the numbers. In Jennifer’s case, selling the property and investing the proceeds made more sense financially and personally. If you own a rental property, consider whether it’s truly benefiting your retirement plan or if selling might be a smarter move.
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