Rental Properties: Steady Retirement Income, Or Should You Sell?

Rental Properties: Steady Retirement Income, Or Should You Sell?

Rentals (commercial or residential) are a great way to accumulate wealth, snag some tax advantages, and get some diversification from the crazy stock markets. But, once a person clicks over into the retirement phase of life, are those rentals (along with the tenants and toilets) really the best? For steady income in retirement can you do better by selling that rental and using other financial instruments?

Let’s Compare

The first thing we need to do is calculate an honest version of the house’s yield using something known as net operating income or NOI. The NOI is a calculation used to analyze the profitability of an income-generating real estate investment. The NOI is equal to revenue from the property minus all reasonably necessary operating expenses for the house. NOI does not include mortgage or debt payments as those are not operating expenses of the rental.

Let’s use a hypothetical rental house (in my area) with a value of $430,000 and rent of $1,800/month. So, if you subtract

  • Annual insurance of $950
  • Annual taxes (in my area of Colorado) of $1,950
  • Monthly savings deposit for reserve of 3% (used for repairs) of $54
  • Monthly savings deposit of 3% used for future vacancy of $54

This leaves us with total operating expenses for our example of $349 a month, which nets our gross rent down to $1,451 per month or $17,412 annual. If you are using a property manager at a normal 10% of your NOI, annual now drops to $15,252.

The keyword to the above is “honest”. Landlords kid themselves by believing “this house is never vacant” or “I’ll do all the upkeep myself”. If my factors above prove too conservative, so much the better; but the NOI needs to be an honest reflection of the real costs. 

This NOI of $17,412 represents a 4.05% yield compared to the market value, or 3.55% if you are using a property managerBut can a retiree improve on their income?

Choices, Choices

Although it may seem like a foolproof source of income, rental properties may not be the best path to create income for your retirement. I don’t want to mention “tenants and toilets” right off, but rentals do need attention. A “snowbird” routine of extended multi-month travel may not lend itself well to collecting rent and generally keeping an eye on your asset. Commercial properties can be more hands off with triple-net rent and longer lease terms, but they have more risk of (long) vacancy at turnover and expensive repairs (think flat roofs, large HVAC units, etc.).

Again, you can add a property manager to handle all the hassles, but this will diminish your (net) yields by 12 to 15%, AND your repairs will be handled at retail costs by your managers; they are busy and have no energy for shopping your fixes/repairs to get great value.

So, what choices do we have?


One choice is a Delaware Statutory Trust or DST. This is a security purchased in a brokerage account that, as of this writing, is able to accept 1031 exchange real estate dollars (i.e., no capital gains tax or depreciation recapture is paid when you sell the rental home and “buy in”) into a certain pool of apartments, Walgreen’s stores, or old folk’s homes, which then will pay you monthly dividends that will feel a lot like rent. The yields are in the 4’s to perhaps low 5%, but they have very low liquidity, so your money is not accessible to you generally for several years. This needs to be a long-term decision.

Moreover, the DST four-color brochures won’t make much mention of the risks inherent with their batch of real estate, that being the dividends are not in any way guaranteed.  So, when Covid came round the Marriott DST’s quit paying dividends because the hotels weren’t able to operate and kick out rent payments to that DST. If your strip center focused DST gets gutted by Amazon, your net dividends will sink. DST’s are still real estate remember.

The ’A’ word.

If you haven’t looked at modern annuities lately, then you probably don’t know what the latest generation can do for you. Yes, they lack liquidity or full access to your account value in the early years, but so does your rental, the DST’s above, or REITs, etc.

Annuity highlights:

  • Principal is safe.
  • Growth is tied to the stock index, often double-digit credits when the markets do well.
  • Income is guaranteed for life in the 6 to 7.5% range (a key benefit)
  • And the income is tax advantaged (call for details).

The key here is to get the right annuity product that is good at kicking out income and you then compare that to how your rentals will be performing (NOI).


Those letters stand for Charitable Remainder Unit Trust. This is not a new idea, but rather a little-known idea. Here you “donate” your appreciated real estate to a special trust that does two things – it pays you/spouse income (in the 5 to 6% range generally) for as long as you live and then it gives the remainder to a charity of your choosing.   This charity can be a church, humane society, or school, but it can also be a family foundation organized and run by your family for charitable work.

Why do this? 1) you have a charitable inclination and want to benefit some group or cause, 2) taxes benefits dude! The benefits are pretty awesome.  

What are the taxes benefits?  First, you get an upfront Income tax deduction of 30 to 50% of the value of the property you shifted into this trust. So, a $1 million strip center yields an income tax deduction of $300,000 to say $450,000. This deduction (check for IRS rule changes that occur from time to time) can be used over 6 years against earned and passive income. Next, the income being kicked out of the trust is not 100% income taxed – there are provisions with the IRS as to how ‘charitable’ the trust was written that can result in only part of that income flow recognized on your return.

Lastly, you paid no capital gains tax and no recapture.

The disadvantage is you skewed the legacy away from family towards the charity you choose. So, the family won’t be inheriting that strip center at your death.


I won’t discuss REIT’s here as there is no way I know of moving real estate equity into a REIT on a tax-favored basis. So, why sell real estate and go buy REIT’s with the net cash as the numbers rarely work in your favor.

Moreover, REIT’s have been through some tough times lately with regulators clamping down on how the accounting is done, repricing of the assets from year to year, and other practices that were perceived to be a little scam-like. REIT’s don’t walk on water; many REIT’s that owned Marriott (type) hotels quit paying dividends during Covid. Many old folks home REITs are hating life just now and not paying dividends AND tanking in valuations.


In conclusion, rental properties can be an excellent addition to your investment portfolio

while you are in the Accumulation phase of life. But as you approach retirement, the Distribution phase – rental properties are just not as efficient at kicking out income as several other strategies and are not convenient for many in that phase of life who want to travel and have a loose footing for a few years.

A better fit is probably an annuity kicking out 7% tax advantaged income, a DST you feel good about, or the CRUT for those who fit that criteria – all without tenants, toilets, or telephone calls.