Funding your retirement is no laughing matter. The days when a retiree could count on a company pension are just a distant memory for most of us. If your retirement fund is comprised of stocks and bonds you might do well until the market turns bullish, and we can remember the last time that happened. No wonder so many people are thinking about funding their retirement with rental income. Is that a viable option for you?
Pros of Generating an Income with Rental Property
Being a landlord has much to recommend if approached properly and you do all the pertinent research before committing yourself. If done properly, you can ride out the low spots in the economy and avoid wringing your hands every time you hear, "Social Security is going to run out of money." Here are some of the pros to consider:
Rental property can provide you with a steady income.
There are tax advantages associated with this investment. Much of your cash flow can be tax-deferred because the IRS presently allows you to depreciate the physical structures on your property over a period of 27.5 years, which means that a great deal of your cash flow will be tax-deferred.
As the cost of living goes up, so does the amount you can charge for rent, leading to a financial equilibrium.
Cons of Generating an Income with Rental Property
The rental situation is not always rosy; it also carries real possibilities of risk. When deciding to make this kind of investment, it's prudent to go into it with both eyes open.
Rental property can be capital-intensive to get into. Unlike a principal residence in which the borrower will live, lenders recognize the higher risk of rental property. Consequently, the down payment and the interest rate are usually higher.
There will be times when the property is between tenants. No income will be generated during these times. A set-aside buffer fund for these times is recommended.
Any real estate property is an illiquid asset; if you have to sell in a bad market you may end up taking a loss.
You may find yourself with tenants who stop paying. Kicking them out in the street may work in the movies, but in real life eviction proceedings can take quite some time. In the meantime you're losing money.
How Involved can You be with Property Management?
Although rental income is often referred to as "passive income", that is rarely the case. While being a landlord is not a 9-to-5 proposition, any property demands maintenance attention, dealing with tenant complaints, utility emergencies, and collecting the rent.
Employing a property manager can alleviate many of these duties. JWB offers a complete turnkey solution which includes property management, so you can focus on your life instead of managing your investment properties.
The Importance of Screening Prospective Tenants
A comprehensive screening tempered with your intuition or gut feeling goes a long way towards avoiding future headaches. A credit check is of prime importance. Next, look into any criminal history. Nobody wants to rent to a sex offender or to have their home turned into a crack house. More and more often, landlords check social media posts to get an idea of the applicant's lifestyle and habits. Trust your instincts. If the applicant tries to negotiate the deposit, this could be a red flag. Remember, if you have a property manager, this is another stress you wouldn’t have to worry about!
Rental income can be a real financial buffer during retirement as long as you do comprehensive research and treat it as what it is — a real business venture.