I was with my cousin Joel yesterday and he asked why anyone would buy a rental property and pay the mortgage off.  There are a number of reasons that I could think of, but the best one involve the concept of a ‘forever income stream’. 

Most of us have income from different sources – our jobs, alimony, child support, retirement payments, and social security and so on.  However, these income streams all end within some finite number of years or upon our death, the maturation of children and so on.  For example, alimony stops if you remarry, child support usually stops when the child reaches the age of 18 years, retirement checks stop when you exhaust your benefits or upon death (yours and or your spouse).  

However, if you owned a $150,000 rental property with a net rental income of $1,000 per month and no mortgage, the income is ‘forever’ so long as the property is maintained, taxes paid, etc., and it remains rented.  Regardless of what is happening in your life (or your death) the income belongs to your estate.  So think about this concept.  You buy a $150,000 property when you are 30 years old and rent it out for 25 years on a mortgage that amortizes over the same 25 year period.  When you are 55 years old the property is completely paid for and the net rental income (after insurance and taxes, and fees) is yours – all $1,500 or whatever you raised the rent to along the way ($20 per month per year rental increases means you are at $1,500 per month).  If you live another 20 years to age 75, you enjoy $18,000 per year or a total of $360,000 net dollars assuming no further rent increases. 

But what if your will gives the property to your son upon your death.  The title and deed transfer to your son and the income stream continues for the remainder of your son’s lifetime.  If you son is just 30 years old when he inherits the property, and he lives to be 80 years old, he will receive the $18,000 per year or more over 50 additional years – another $900,000. 

If your son has a child (your grand child), the income stream can continue for another generation, and another, and another.  With proper planning, it can be a forever income stream for all your heirs.

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