When it comes to retirement, it’s important for people to generate as much income as possible to maintain a comfortable lifestyle. Along with Social Security and pension plans, many seniors are turning to real estate investing as a way to generate additional income. Rather than rely on stocks and bonds in an increasingly volatile financial market to build a nest egg, smart investors have turned to purchasing rental properties in an effort to gain passive income. However, before jumping into this venture, there are many factors to take into consideration.
Becoming a Landlord
While rental property can provide a nice source of passive income, it can also bring with it much more responsibility and inconvenience. For example, while in most cases landlord duties may not go beyond collecting rent each month, it can also mean getting a call at 3 a.m. to tell you the renter’s toilet is broken. If you don’t mind the occasional trek to the property to fix this or that, then rental property may be a good option.
“Building a rental property portfolio takes time, patience and education,” according to Than Merrill, a San Diego based real estate investor and educator. “If you make the commitment to buy a property with the specific goal to transform it into a rental property for the foreseeable future, you acknowledge that you will not see a return for several years. Any down payment money, rehab costs, annual repairs and maintenance will be recouped only when the house is paid off, you decide to sell, or there is enough equity to take out a line of credit. It can be unappealing to go this route and have to wait years to see a return; however, your return at that time will often be far greater than any short term investment available.”
Buy Solid Properties
If you’re wanting to purchase real estate for investment purposes, it’s best to buy certain types of properties. For example, start by purchasing properties as close to where you live as possible. By doing so, you’ll have an easier time keeping tabs on them without spending too much time traveling back and forth. Also, most experts recommend buying single-family homes located near great schools, since these homes will tend to attract long-term renters with solid backgrounds.
Take Advantage of Tax Advantages
For owners of rental property, much of their cash flow can be tax-deferred, meaning they can put off paying large amounts of taxes for several years or more. According to current IRS rules, property owners can depreciate physical structures of their properties over more than 27 years, allowing much of their cash flow to be deferred.
Have Plenty of Capital
Unlike obtaining a loan for a property where you will live, lenders are often a bit more hesitant when approving loans for rental property. Because these properties carry a higher risk of having tenants who many not pay their rent, loans for these properties may have higher interest rates and require larger down payments.
While rental property can be a great option for generating monthly income during retirement, taking these and other factors into consideration will make buying and owning these properties much easier.