A couple nearing retirement sought advice on renting out their townhouse in Roland Heights to supplement their retirement living expenses. After confirming the purchase price and rental levels, we first examined the difference between total return and cap rate.

The median rent for a townhouse in Roland Heights is $2,670. The purchase price is reported as a median of $955,000. According to RentCafe, the overall average for apartments is $2,251, but townhouses tend to be higher. Let's calculate using a purchase price of $955,000 and a monthly rent of $2,670.

The annual rental income is $32,040. The total return is 3.35 percent. The net operating income estimated using the 50 percent rule is about $16,020, and the cap rate is 1.68 percent. Roland Heights is part of Los Angeles County, where the effective property tax rate is approximately 0.69 percent. If the townhouse has HOA fees, the operating cost ratio may be higher.

If the goal is cash flow for retirement expenses, the cash-on-cash return should be considered. This metric calculates the pre-tax cash flow relative to the actual cash invested, including down payment and closing costs. If purchased with cash, the cash-on-cash return equals the cap rate, but if financed, the cash flow decreases by the amount of principal and interest payments, while the actual cash invested also decreases.

• Total return = annual rental income / purchase price
• Cap rate = net operating income / purchase price
• Cash-on-cash = pre-tax cash flow / actual cash invested

According to the 1 percent rule, the monthly rent should be at least $9,550, which is 1 percent of the purchase price, but this townhouse is less than a third of that. If the purpose is retirement living expenses, it's advisable to determine whether to approach it from the perspective of stable cash flow or total return considering capital appreciation.

For the couple comparing retirement planning and property options, I explained two scenarios side by side. One is the cap rate if they rent out this townhouse as is, and the other is the cap rate if they purchase a property in a different area with a slightly higher cap rate within the same budget. Roland Heights has a high purchase price, resulting in a lower cap rate, but many properties have been held for a long time, so the net cash flow may feel significantly higher than the cap rate suggests.

From a total return perspective, capital appreciation and tax benefits from depreciation should also be considered. If income decreases after retirement, the tax bracket may change, affecting the depreciation benefits, so it's best to confirm this with a tax professional.

HOA fees and property taxes can vary significantly by complex and parcel, so be sure to check the management fee statement for the actual property.

In order, there are three main things to check. First is the accurate operating costs including HOA fees, second is the actual net cash flow based on how much loan is remaining, and third is the tax plan tailored to the income bracket after retirement. If these three aspects are not addressed in order, it's easy to make hasty decisions based solely on the apparent cap rate.

Retirement funds are money that is hard to earn back. Therefore, I advised them to consider not just the cap rate number but also the consistency of cash flow and the availability of reserves for unexpected expenses. For the couple, predictability may be a more important criterion than immediate returns. When weighing the two options, it can be easier to decide by calculating how much the difference in cap rates impacts actual living expenses. Practically speaking, it's better to sketch the overall picture first rather than getting fixated on a single number to reduce regrets. I provided the couple with a cap rate table and organized scenarios for the next 5 and 10 years, and I recommended they seek further financial advice based on that information. This article is not investment or legal advice, and it is advisable to consult with retirement planning and real estate professionals before making any actual contracts.