Managing Your Money: A Rental Retirement Plan

Turn your hard-earned knowledge of the market into a steady income stream.

April 1, 2000

My goal is to retire by age 40,” says Susan Pepal of her investment strategy.

Pepal, 30, office manager at RE/MAX in Columbia Md., seems well on the way to achieving that dream.

Together with her husband, Bill, she has assembled an investment portfolio of six rental properties and is actively looking for others.

“We figure that with a dozen properties, we’ll have enough cash flow to retire,” she says.

Pepal’s strategy is a common one for real estate professionals, and for a very good reason--if there’s one thing they know about, it’s buying and selling houses.

“We always try to buy at least 10 percent under market,” she says. “We’ve gotten some of our best deals on houses whose owners are getting divorced and need to sell quickly.”

She adds that “we’re always looking. I check the MLS every day to see what’s come on the market. The deals are out there. You just have to be patient and look for them.”

A case in point was Pepal’s first property, which she and her husband bought in 1998.

“We bought it for $170,000, spent six months ripping off the wallpaper, painting, and installing new carpeting, and then sold it for $218,000,” she says.

All of Pepal’s current properties are in a nearby college town where there’s a shortage of on-campus student housing.

“We’re not looking to sell anymore,” she says. “What we want to do now is accumulate.”

Her strategy is to buy houses and then rent them out to groups of four or five students who each pay between $400 and $500 a month in rent. “Their parents cosign the leases,” she says, “so we know we’ll get paid.

“We want single-family houses in the $150,000–$170,000 range, which is low for this area.”

She adds that “we look at houses that cost up to $200,000, because sometimes--if it’s a foreclosure, say--you can offer $20,000–$30,000 below market and walk away with it.”

She also pretests the market by running For Rent ads before actually buying. “If we get a lot of interest,” she says, “we know it’s a good investment.”

Pepal and her husband put 10 percent to 20 percent down on each property, and the rents more than cover the monthly mortgage payments. “On average, there’s a $500–$1,000 positive cash flow on each property every month,” she says.

The investments take varying amounts of time. “Right after we buy them and are cleaning them up, we might be there every night,” Pepal says. “But when everything’s leased up, it may be only a couple of hours a month.”

The couple’s goal in the next few years is to start paying off some of the properties. “We figure we should be able to pay one off in two years,” says Pepal. “That way, if there’s a downturn in the economy, we’ll have some flexibility with rents.”

Investment strategy: Assemble a portfolio of rental properties in order to retire by age 40
Currently owns: Six single-family houses in a Maryland college town
The prices: $150,000–$170,000, with downpayments of 10 percent to 20 percent
THE PAYOFF: The houses each rent for about $2,000 a month and generate positive cash flows of $500–$1,000 a month.

Robert Sharoff is an architectural writer for The New York Times, Washington Post, Chicago Tribune, and Chicago Magazine. With photographer William Zbaren, he has produced books highlighting the architecture of Detroit and St. Louis. He is a former senior editor with REALTOR® Magazine.

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