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Is Rental Real Estate the Best Way to Leverage Savings?

PBS NewsHour business and economics correspondent Paul Solman weighs in on whether buying, renovating and renting fixer-uppers is a smart way to increase your retirement funds

By Paul Solman | September 10, 2012
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Paul Solman is the business and economics correspondent for PBS NewsHour. He has taught at Harvard Business School, Yale University and Brandeis University and his reporting has won multiple Peabody and Emmy awards.

PBS NewsHour business and economics correspondent is now answering questions from Next Avenue visitors about personal finances, business and the economy. His advice appears on Next Avenue as well as Solman's PBSNewsHour blog, Making Sen$e With Paul Solman, and the Rundown, NewsHour's blog of news and insight. PBS NewsHour is an hour-long television program and accompanying website with the mission of providing intelligent, balanced and in-depth reporting and analysis of the day's most important domestic and international issues and news.

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My savings interest is so small that I now want to use my savings to buy cheap fixer-uppers to renovate and then rent. I think this would give me the value of the property as well as income that surpasses the interest in a savings account. I am fast approaching retirement and far behind in the funds for it.  —Katie Haerr

I don't know if this is the best leverage for your savings. That depends on how good you are at choosing fixer-uppers and how cost-effectively you can renovate and rent them.

The vicissitudes of the real estate market will also be determinative — and beyond your control.

What I like about the strategy, though, is its dependence on "sweat equity."

As Ben Franklin pointed out, "time is money." (Indeed, Franklin once told me this in person on camera, though you have to watch about half a segment on "The Paradox of Thrift" before he appears.)
 
Your Time and Your Money

The key, then, is your time.

If you don't have a more productive use for it at the moment than sizing up and then fixing up prospective rental properties, I wholeheartedly approve of your plan. You will be building "equity" — ownership — with the sweat of your brow (or wherever your sweat tends to pool).

It so happens I have in-laws in north-central Ohio who are successfully engaged in just the pursuit you propose.

Indeed, one beloved wiseacre of a nephew bought a foreclosed fixer-upper in the past month. He paid bottom dollar, and it now looks as though he'll be able to get low-interest loans for the materials needed to fix the porch, among other up-fixings.

He'll have to live in the property for at least a year, however, the condition for such financing.

Bottom line: It appears he won't even need to borrow from his uncle. But he sure will be working hard for a while.

Paul Solman is a member of the Twitterati and can be followed at Twitter@paulsolman. His daily blog can be followed, well, daily at Making Sen$e by linking here or just Googling the words: "Making Sense."
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