Real Estate Investment For Retirement Income
Whether you are nearing retirement or have a couple decades before those golden years begin, it’s never too soon to pay close attention to your financial and other goals for that important period of your life.
When it comes to investing, you likely have a 401K and other funds that are building in your portfolio. Maybe stocks, bonds, mutual funds, etc. Have you considered adding real estate investments for additional retirement income?
For some people, investing in real estate for retirement has been a way of life–perhaps passed down for generations. For others, it’s an unknown and maybe scary way to invest.
But for individuals who see they may be short of funds at their projected retirement date, real estate investments can provide additional retirement income fairly quickly.
How Does Real Estate Investing for Retirement Work?
Basically, you invest in a property, fix it up if necessary, find reliable tenants, cover all expenses, and take in monthly rent payments that supplement your other means of retirement income.
Determine the Amount of Money You Need to Invest, and the Source of Those Funds.
You may be fortunate to have the means to purchase real estate investment property with cash–always an advantage. But if you need a mortgage to include real estate in your retirement plan, advisors will always recommend you purchase the property before you retire. Most lenders require mortgage applicants to be employed with W2 income to qualify for any type of mortgage loan.
Some mortgage companies will evaluate and approve retired credit-worthy applicants based on these factors–credit score, income after retirement (Social Security, pension income, dividends and interest), and debt-to-income ratio. If possible, work with a financial institution that is familiar with your finances, and make sure you know about additional expenses like mortgage insurance and points. Naturally, you will want to shop around for the best interest rates and borrowing terms. It’s important to work with an real estate agent that also understands investment property.
For real estate investment funds to achieve retirement income, consider using your IRA funds. But make sure you consult with your knowledgeable financial advisors before proceeding with this route, and understand there are IRS requirements and rules tied to buying real estate within an IRA. Be aware you will need 20-30% down to invest in real estate for retirement income.
Also take a look at 1031 exchanges for financing real estate investments, or syndication for investing in real estate that doesn’t require your personal involvement beyond a financial commitment.
“LeAnn’s expertise in helping me find the RIGHT multifamily properties was an amazing opportunity to experience. I couldn’t have made a better selection of a Realtor to represent me in the purchase of investment properties. I’m already cash flowing more than projected thanks to the Proven Profit Formula and her coaching. Thanks, LeAnn.”
Locate a Desirable Property.
Search for a property–preferably a “bargain”–in an appealing location. To do this, it’s wise to work with a Realtor experienced in buying and selling investment property (most real estate agents work solely with clients focused on transactions for their own homes).
Your agent can assist in narrowing your search to a specific geographic area, price range, and property type–single family home, duplex, four-plex, etc.
Location is critical when considering a real estate investment in your retirement plan. It doesn’t pay to buy the cheapest property you can find if you can’t find renters who will want to lease and live in the property. As indicated, your investment property Realtor can help you find a rental property location that is accessible to transportation routes and options, close to employment opportunities and with appealing amenities nearby.
An appealing option for those investing in real estate for retirement is to locate a property in a vacation setting and rent it out on a short-term basis utilizing the services of a rental management company specializing in short-term rentals. This enables you–the owner and landlord–to decide when you choose to use your property and when to have the management company find renters. Just beware that there are tax implications on vacation or second home properties and get advice before you jump.
Be Prepared to Be a Landlord.
If you make a real estate investment for retirement, you will most likely be a landlord, and that involves maintaining the property and updating it as necessary. Are you prepared to fix a hole in the wall, or unstop the kitchen drain? Rental property investors who do the work themselves always come out better on the bottom line than those who have to hire the work done.
Being a landlord involves a lot more than taking care of the physical property; you will have tenants to deal with on a daily basis. You will need systems in place to screen tenants, get leases signed, receive monthly payments, take calls and complaints, manage your bookkeeping, and much more.
Some retirement age folks have the skills and abilities to manage rental units on their own, but generally these investors need help or just don’t want to do much work related to the investment.
uccessful rental real estate investors line up a team of reliable experts to ensure the business thrives. Team members might include an investment property Realtor to help locate the right unit(s), an attorney who will be needed if/when a tenant sues, a tax advisor to ensure you get all the deductions and savings possible, a couple of reputable lenders you can trust, a number of carpenters, handymen, plumbers, electricians, and more. Decide which tasks you can and can’t do/are or are not willing to do, and get your people in place– preferably before investing.
Be aware there are rules and regulations about tenant rights, handling evictions etc. Check for federal, state and local statutes and requirements.
Be Ready for Potential Problems.
If you invest in real estate for retirement, expect to encounter problems along the way. While the upside cash flow income is a real positive, the challenges include renters who don’t pay, maintenance costs you didn’t foresee, difficulty filling vacancies and more. If you decide to hire a property management company, expect to pay 8-10% of your gross rents for their services. This cuts into your bottom line, but may be worth it for a reduction in your time and stress.
Always utilize the services of a reliable inspector when searching for a property. Then you will know the total condition of your unit(s) from the outset and can forecast repairs, appliance replacement, and other expenses
Optimize Income From Your Investment Property for Retirement Income.
There are a number of ways to improve the cash flow as you work to maximize your real estate investment for retirement. Taking a close look at your expenses, is there a way you can reduce the cost of utilities by having tenants pay more, double check that you have the right insurance policy at an acceptable premium, are you paying too much for your handyman services, do you really need to buy new when you replace appliances. And the best way to optimize your real estate investment as part of your retirement plan is to raise rents. Often, the time for this is as one tenant leaves and a new tenant and lease is put into place. If you prefer keeping a trusted tenant then build in an inflationary 2-3% increase each year in the lease.
In summary, real estate investments for retirement income can provide a significant complement to the other investments in your retirement plan.