Stocks, IRAs and employer-sponsored plans are fundamental aspects of many retirement plans, but they are by no means the only options. A frequently overlooked alternative that might be worth considering is owning and renting out real estate.
Rental properties can provide a steady source of income while you build equity in a property. In addition, the property may appreciate in value, and you may be able to enjoy certain tax advantages along the way. Here’s a look at how the process could work.
You’ll have to make an investment to generate cash flow from rental properties. Although mortgage interest rates are still favorable, you will need to come up with a down payment that could range from 20% to 30% for investment properties. Of course, you’ll have recurring expenses, as well. Factor in your mortgage, taxes, landlord-specific insurance policies (both property and liability), repair and maintenance costs, and unexpected expenses related to your tenants – such as legal fees incurred as a result of a problem tenant.
It can take a few years to generate a stable and positive cash flow from rental properties. The price you set for rent is an important factor, and one that will affect your bottom line. If you charge too much, you may not find a tenant; charge too little and you might not generate enough cash to make ends meet. When figuring out how much to charge for rent, try to find a number that allows you to:
- Cover your operating expenses (mortgage payments, property taxes, insurance, maintenance, utilities and administrative costs)
- Earn a reasonable return on your real estate investment
- Be competitive with the local rental market
It’s important to consider the supply and demand for your area’s rental market. If the rental market is flooded with properties, you may have to decrease the rent to attract tenants; if demand is high and people are having a hard time finding housing, you may be able to set a higher (yet still attractive) rate.
Being a landlord isn’t easy, and it’s definitely not for everyone. As a landlord, you’ll have many obligations and responsibilities. You won’t be able to generate any income without tenants, and finding reliable tenants is a challenge. Ideally, tenants will be able to pay their rent in full and on time each month, keep the property in good condition, and follow the policies in the lease or rental agreement.
It can be well worth the time and effort to find dependable tenants, especially for longer-term rentals. In many markets, an experienced real estate agent or realtor can help you find them.
A property manager can perform such duties as marketing your rental property, selecting tenants, maintaining the property, creating budgets and collecting rent. You may consider hiring a property manager if you want to limit your day-to-day responsibilities for your rental property.
Depending on the role you envision for your property manager, you may want to find a person – or management company – experienced in advertising, marketing, tenant relations, collecting rent, budgeting, leasing and maintenance. The property manager also should be knowledgeable about local and state laws. As the property owner, you can be held liable for the acts of your manager (for example, you can be sued if your manager violates fair-housing laws).
Rental properties provide an opportunity to generate a stable and positive cash flow during retirement, but profiting from them takes work. Like the stock market, investing in real estate has risks and tax implications. It’s important to do your homework and consult with qualified professionals – including a real estate attorney and/or tax specialist – before and during your tenure as a landlord.