Is it Worth Considering a Rental Property to Generate Retirement Income?

The following is a guest post from Michael Clark and Property Turkey.

Is it worth considering a rental property to generate retirement income? There are many reasons why you may not have enough in your retirement pot to secure the retirement income you either desire or need. Usually this is a result of unforeseen and uncontrollable circumstances. There are methods of increasing your retirement pot but this can be a difficult process. Instead, it is worth considering purchasing a property which can be rented to create an income for the rest of your life.

Rental Property

In fact, a rental property can actually other significant advantages over traditional investment opportunities, buying as the property market dips will allow you to sweep up a good deal and quickly build equity as well as generating an income. However, before you invest you should consider the following points:

Funds – The first thing you will need is adequate funds. Using the traditional mortgage method will mean you need approximately a thirty percent deposit. If you do not have these funds available then it is possible to release funds from one of your retirement pots. The size of your deposit and your income will control the value of the house you can purchase. You should also consider having funds available for maintenance and emergency repairs.

Location – This is very important. The best rental properties are those which will be attractive to families. This means three or four bedroom houses within easy reach of a variety of amenities. Any location can work provided you pay the right price for the property and know the market you need to attract.

Earnings – To make a property investment worthwhile you will need to calculate all expenses involved in the maintenance of your purchase. This should include regular maintenance and management fees. The income you receive, less these expenses should leave you a return of at least eight percent. This will ensure your investment is worthwhile.

Issues – Tenants who fall behind on the rent or simply do not wish to pay can add significant, unexpected costs to your expenses. There can also be emergency issues such as boiler failures or additional inspections. Ongoing work can be either costly or time consuming and you must be prepared for this. There may also be a range of improvements and safety issues which need to be instigated once you have bought the property butbefore you can rent it. These costs can quickly add up although they can be reduced by doing as much of the work as possible yourself.

Tenant Selection – Choosing the right tenant will make a huge difference to the successfulness of your investment property. There are a variety of checks which can help to establish the suitability if a tenant. These include whether they are employed, are in a relationship and if they have good references or not. The more checks you can make the more likely it is thatyou will have a good, long term tenant. The best tenants are those who pay their rent on time and stay long term.

Assistance – There are a variety of people who can help you find and purchase the right property. Perhaps the most important one of these is the real estate agent; they should know the best areas, when a price is right and the type of tenant a property is likely to attract. A financial advisor can also be of valuable assistance to ensure you organize your finances properly and can borrow the amount of funds necessary to both purchase and maintain your investment property or properties.

Taxes – An investment income property can provide a variety of ways to reduce your tax bill. There are also plenty of options which can help you save money on your investment. It is advisable to consult a tax advisor to ensure you maximize the benefits of your income property and earns yourself the retirement you deserve.Believe it or not, income property has the potential of being an important bridge to your retirement. However, it is important to make sensible decisions if you want to see any returns. Ask for guidance if you can’t make a decision, choose your property and tenants wisely, and you have the highest chances of witnessing reasonable returns.

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

8 Comments

  1. I would not buy a rental property as an investment unless It fit my lifestyle as well. I owned a timeshare for years and you can not give them away.

    You are stuck paying maintenance fees. I was able to use it for vacations a few times, but I do not use it enough to warrant having one.

    I got lucky and the resort took it off my hands.

    • In my mind, a rental property is distinctly different from a timeshare. Whereas a rental property is a viable investment, particularly as a means to provide portfolio diversification, though pitched as investments, timeshares are anything but. I’ve never really understood the appeal of ‘owning’ something you don’t really own.

      Glad to hear you were able to rid yourself of that yoke. Thanks for stopping by, my friend.

      Be sure to check out Monday’s – Feb 29 – post where timeshares are referenced.

  2. I remember someone pointing out if you have a friend working with you, it’s way better to cross rent the homes to each other for tax purposes because then it’s a business. Kind of funny, kind of sad. I live in a tiny town and haven’t found anything worth trying to purchase as a rental or to flip. I’ve thought about it on and off though, I haven’t even gotten my own house under order yet though.

    • We currently have one rental property and have given some thought to another, and like you, we have given some thought to flipping a property. However, we haven’t been too serious about either and no obvious situation has presented itself.

      Thanks for stopping by and kicking off the conversation, my friend.

      • I’d be interested on your thoughts about your landlord experience, what you would do differently or if you’d do it again.

        • I kind of stumbled into owning a rental property. It definitely was not planned nor part of an investment strategy. I would definitely purchase another if the right conditions existed. Based on my improved knowledge of personal finance and having owned a rental property for ~ 15 years, these are some of the things I would consider – and recommend for someone looking to take the leap for the first time – when determining if a rental property makes sense. These are the first thoughts to come to mind:

          · Determine how a rental property would fit into the overall investment plan … what is the objective? Perhaps it is to generate $xxx.xx in monthly retirement income indefinitely or for a significant time period (e.g. 15+ years). Perhaps the objective is to hold the property for a shorter time period (e.g. 5 years) with the goal of selling the property once a profit can be realized to use the gains to purchase other properties or other investments.

          · Understand that any money invested (down payment, repairs, maintenance, property manager if used, etc.) in the rental property necessarily means that money can’t be used for other investments. In short, what is the projected rate of return for a rental property as compared to other potential investments?

          · Determine if you will actively manage the property or use a property manager. Of course, there are costs associated with both. Understand the costs.

          · Understand every aspect of the market where the property would be purchased. Good market research is a must. As an example, are people more likely to rent a $1,500 sq. ft. house with three bedrooms or a $2,000 sq. ft. house with four bedrooms? What’s the difference in what you can expect to be able to charge for rent? It doesn’t matter if you get a relatively good deal on a property with say $750/month mortgage payment if the market suggests the rent in the area generally tops out at $700.

          · Plan to have at least three months of the mortgage payment set aside for the periods you may be between renters. Now double that amount to cover any potential catastrophe.

          Again, those are just the first few things to come to mind. However, you will notice a common thread … it’s all about the numbers. Know the numbers inside and out.

          The reason I like having the property is that it adds diversification to my portfolio. Once you get past all the numbers, that should also be a consideration.

          • Thanks for the detailed reply. I mainly like the diversification, if planned right it can be pretty stable stream of income in comparison to the market which is completely out of your control. Something I’ll keep mulling over, maybe in a couple years.

            • Best of luck if you decide to work some real estate into your portfolio.

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