As retirement approaches, more people are seeking to supplement their living expenses with rental income. Following a case of someone starting to look for investment properties in Madison, we can see how budget, taxes, and loan conditions come together quite clearly.

First, we checked the rental market rates. According to Zillow, the average rent in Madison is $1,661, with one-bedroom apartments at $1,694 and two-bedroom apartments around $2,400. Although it has dropped about 1% in the past year, it is still considered an accessible market, being 14.1% lower than the national median rent.

Next, we applied the 1% rule. This rule suggests that if the monthly rent exceeds 1% of the purchase price, the cash flow is likely to be favorable. However, due to Madison's characteristics as a college town, property prices have steadily increased, making it necessary to narrow down the options to meet this criterion. The process of reassessing the cap rate against net operating income followed.

We also checked the loan conditions. For investment properties, the down payment is higher, ranging from 15% to 25%, compared to primary residences, and credit scores must start at 620, but scores above 740 are needed to secure favorable interest rates. Interest rates are often set 0.5 to 0.75 percentage points higher than those for primary residences. Rental income is only considered up to 75% of the expected rent for loan qualification, so it was necessary to prepare lease agreements or appraisal rent schedules in advance.

The tax aspect turned out to be more burdensome than expected. Madison's annual median property tax is $6,390, which translates to an effective tax rate of 1.84% based on a $346,900 home. This is higher than Dane County's average of 1.71% and Wisconsin's state average of 1.44%. It was particularly important to calculate whether this tax could be managed with fixed income after retirement.

We also examined neighborhood variations. Areas like Mayfair Park or Near East, which have relatively low school district ratings, tend to have lower rents, while neighborhoods with higher school ratings see both purchase prices and rents increase. School ratings can be referenced through GreatSchools or Niche, but boundaries often change, so it's essential to verify the assigned school after the property address is determined. It was also considered that neighborhoods with stable school districts tend to have shorter tenant search periods.

Insurance was also included as a separate item in the calculations. Landlord insurance differs from standard homeowners insurance in coverage and typically includes rental loss and tenant liability, but the premiums are higher than for primary residences. It was necessary to assess whether these costs could be managed within fixed income after retirement.

We checked tenant laws as well. Wisconsin Statute 66.1015 prohibits cities or counties from setting their own rent caps, meaning that no city in Wisconsin, including Madison, enforces rent control. The notice period for rent increases is set at 28 days, and there are no limits on the amount of increase. However, low-income rental housing receiving government assistance is subject to rent cap regulations, so it's important to verify whether a property falls into that category.

We also considered management methods. Managing the property directly saves costs but comes with the burden of spending time and energy on rental tasks after retirement. Hiring a management company allows for a commission of 8% to 12% of the monthly rent, but it also means offloading tenant interactions and rent collection. It seemed wise to decide in advance which option aligns better with retirement plans.

The final items organized before signing a contract in this case were as follows:

• Meeting the 75% income recognition criteria with lease documents that include a rent schedule
• Recalculating cash flow including property taxes and insurance based on fixed income after retirement
• Calculating actual income after deducting the 8% to 12% management fee from the rent
• Setting aside maintenance costs of around 1% of asset value annually

If plans arise to switch to another property, considering a 1031 exchange to defer capital gains tax is also worth noting. This article does not constitute investment or legal advice, and it is recommended to consult real estate and accounting professionals before making any actual contracts.