Skip the Hassle of Rental Property Ownership in the USA: Smarter Investment Options

Have you considered investing in rental properly for generating alternate source of income?
Did you step back due to high real estate prices, where the numbers didn’t add up?

If you answered "Yes" to both the questions above, this short article is for you. It explores an alternate investment to real estate . I will take the scenario of investing in a rental properly vs an Indexed Universal Life product offered by many financial institutions like North American, AIG, Nationwide ... etc.

Here are the things we will discuss today.

• What is indexed universal life (IUL) product ?
• Comparison: Investing in Real Estate vs. IUL
• Pros and Cons of these two investments.

What is indexed universal life (IUL) product ?

An Indexed Universal Life (IUL) policy is offered by top financial institutions. It is not based on indexed funds but rather on indexed contracts. Here’s how it works:

• You invest money with a financial institution and choose one or more stock market indexes offered in the product.
• The institution manages the investments and provides returns proportional to the chosen index’s performance.
• The good news: If the market performs poorly, you won't take a loss.
• The trade-off: When the market performs well, the institution keeps a portion of the gains and passes the rest to you.

An IUL contract provides the best of both worlds—safety of principal and upside potential from market performance.

Sample investment in Real Estate vs IUL

Let’s compare an investment in a rental property versus an IUL policy. I am 45 years old and aiming to generate an alternate income stream before retirement. Also I want to pass on the asset to my next generation. For this comparison, I assume a life expectancy of 85 years.

Here are the main stats for this investment.

Monthly expenditure - $2500 (EMI + property tax + monthly association fee)
Property cost - $300k
Downpayment to buy - $60k
Rental estimate - $1900

If you see this investment, I am starting with a $600 ($2500 - $1900) negative cashflow monthly. Considering 3% increase in rental value every year, my rental income will cross $2500 per month after 10 years . I am not even considering property tax and association fee increases for this back of the envelop calculations. So, in the best case, I will be able to generate a positive cash flow on this after 10 years i.e., when I will be 55 years old. Considering 3.5% increase in home value, the home will be around $1.1 M at my age 85. So, I will be able to pass on around $1.1M asset to my next generation.

Consider alternate investment of an Indexed Universal life(IUL) product with similar monthly expenditure.

Monthly Expenditure - $2500
Downpayment/Initial payment to start - None

In the initial years there is no monthly income from this product. So, neither negative nor positive cashflow. We continue to contribute to this product for 10 years. Considering 6.55% conservative returns on this product, after 10 years, I can start withdrawing $2,000 from this product every month ($24k yearly). When the death happens at 85, I will be able to pass on around $1.2M to the next generation as death benefit.

Pros and Cons of these two investments

Here is the comparison in a tabular format.

Final thoughts

I am not against rental property investment, but with current high real estate prices and high interest rates on loans, the rental property investment doesn't look practical anymore. While I compared the home and IUL for $2500 monthly investment, we can compare them at lower monthly investments as well. You can do the home analysis on Zillow/Redfin. But IUL simulations might not be easy to do. Contact me and I will be happy to help you with IUL simulations.

That's a wrap this week. Happy Learning and Investing!