Many retirees have found that owning a rental property can be an effective way of supplementing their retirement income.
First, let’s talk about the benefits of owning rental property:
Monthly Income: Rental property income provides a steady and somewhat predictable source of monthly income.
Tax Benefits Owning rental property allows you to take advantage of various tax benefits, such as the ability to deduct most operating and maintenance expenses, including mortgage interest expense. You can also depreciate the structure (not the land). If you later sell the property, you’ll have to recover that depreciation. However, if you own the property until you die, your heirs can take advantage of a step-up in basis of the property, so that depreciation goes away.
Inflation Protection: A fixed-rate mortgage can serve as an inflation hedge. As rents and maintenance expenses rise over time, your mortgage will not.
Flexibility: Allows you to choose how much time you spend managing your property. You can either do it yourself or if you feel your time is better spent on other activities, hire a professional property manager.
The following are some important considerations one should make before jumping into investment property ownership:
Planning is Key: First and foremost, plan ahead! The best time to begin investing in real estate is NOT when you’re in or near retirement. If you plan to mortgage your investment property, do so before you retire. Many lenders require applicants to have two years of steady employment in the same or similar occupation in order to qualify for a loan.
Tenant Screening: Whether you screen prospective tenants yourself or rely on your property manager do that, be sure the process is thorough. Remember, you’re entrusting your retirement asset to the tenant.
Be Smart: Keeping your rental property leased can sometimes be challenging, particularly if the location or conditions are not ideal. Some experts suggest investors in income-producing property should keep at least six months’ worth of reserves on hand in the event the property remains vacant.
Be Prepared: Remember to set aside money for repairs and maintenance. You have an obligation to maintain your rental property in habitable condition, so you won’t have the luxury of delaying necessary repairs and maintenance until you can save the money.
Owning rental property isn’t for everyone, but it can definitely work for your retirement if you plan and are prepared.