Is a Rental House a Good Retirement Savings Investment?

It is never too early to begin planning for a secure financial future. The sooner you begin investing and saving, the more you will accumulate for your retirement. Although real estate goes through good and bad performance periods, it generally remains a wise long-term investment. A rental home can generate immediate income that you can apply to your retirement savings. In addition to the income, there are other benefits associated with investing in a rental home for your retirement.

Rental Income

A rental home provides a steady stream of income as long as rents exceed your mortgage and insurance payments and other associated expenses. As inflation increases and market rates rise, you can increase the rent you charge tenants. Purchasing a rental home can be a good way to earn cash on your investment. If you purchase a home for $100,000 and rent it for $800 a month, you are making $9,600 a year. You will need to deduct the cost of taxes and homeowner's insurance, but can still yield a decent amount to contribute toward your retirement savings. To determine whether investing in a rental property is profitable, compare the possible annual rental earnings to the amount your money would yield invested in a secure account, such as a certificate of deposit or money market. At the time of publication, a 1 percent interest rate compounded daily for a CD is considered an average interest rate. A $100,000 investment would earn $1,005 in a year. Market rental rates vary depending on the location. According to MSN Real Estate, the 2012 national average fair-market rent for a two-bedroom home is $949.

Control Over Your Investment

Investing in a rental home allows you to earn an immediate income, while the value of your home increases over the years. You can continue to earn rental income from the home until you decide to sell. A rental home offers you investing flexibility. If your needs change and you need cash immediately, you can sell the property when the tenant's lease ends. To make money with most high-yielding investment accounts, money is often tied up for years at a time.

Tax Breaks on Expenses and Repairs

Owning a rental home also offers tax advantages. Although you are required to report rental income, there are qualified deductions that can reduce your taxable income. Landlords can deduct mortgage interest payments on loans used to acquire or improve the rental home. If you pay a property management company to take care of the home, you can deduct the associated fees. Advertising costs incurred to find a tenant are also deductible. Another potential tax break is deducting repair costs. Some examples of qualified repairs include painting, fixing a broken toilet, cleaning gutters and replacing a window or faulty light switch. However, renovations that add value to your home are not deductible.

Reinvesting the Rental Income

To maximize your retirement savings, you can invest any rental income into a designated retirement or investment account, such as an annuity. With a deferred annuity, you can make monthly payments to an insurance company during the investment phase. During the income phase, the money accumulates along with interest earnings are distributed to you either in a lump sum or periodic payments. Earnings are not taxed until you begin withdrawing funds. If you choose to sell your investment home, you can defer the gains tax by using the profit to purchase another investment home. The IRS allows you 45 days to find another home and six months to close the deal.

About the Author

Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.