5 Things You Need to Know About Using Real Estate for Retirement Income
The blog has been silent this week as I’ve worked on some “pay-the-bills” writing projects. However, I’m hoping to get back to a more normal posting schedule next week.
In the meantime, check out this article that originally appeared on Sixty and Me, an awesome site for women who are 60+. They’ve recently started a new morning program so if you want a positive start to your day, go check it out!
Real estate for retirement income might not seem like a topic geared toward widows, but I secretly (or maybe not so secretly now!) would love to have a collection of rental houses to bring in income when I’m retired. It might be unrealistic, especially since I am a single income house now, but a girl can dream, right?!
No one wants to work forever, but leaving a job – and the steady paycheck it provides – can be scary. However, if you have money arriving every month from multiple sources, retirement can seem a little less nerve-wracking.
Social security, pensions and annuities can all be dependable sources of monthly income. So too can real estate. But before you cash out your retirement fund and buy a rental property, here are five things you should know.
Real estate comes with risk.
Real estate doesn’t come with the same volatility or risk as stocks but don’t make the mistake of thinking it is a sure thing. One simply has to look back 10 years to the most recent housing bubble and crash to see how real estate can drop significantly in value. Even if the price of your rental property doesn’t drop, you could find market conditions make it difficult to find tenants or drive down monthly rental rates.
That’s not to say real estate is a bad investment. It simply means you shouldn’t believe anyone who tells you buying a rental property is an iron-clad way to ensure financial security in retirement. Use the same due diligence you would with any other major investment.
Location trumps price when making an investment.
You may be able to partially insulate yourself again those down markets by choosing the right rental property. Homes in desirable neighborhoods and good school districts may be more likely to retain their value in times of recession. Plus, those homes may attract more stable renters. Less expensive housing may be easier to fill, but low-income tenants may be in transient situations, leaving you with a frequently vacant property.
To find the right property in the right neighborhood, talk to a real estate professional who specializes in rentals. A good broker can not only help you find the right property, but they may also be able fill it with a tenant or connect you to a good property management firm. Plus, having an existing relationship with a real estate pro can make it easier for your heirs to sell the property when the times comes to pay for final expenses or other needs.
Property management firms make rentals easy.
Some people are hesitant to buy a rental property because it seems like too much work. After all, who wants to get up at 4am to track down someone to deal with frozen pipes, a faulty furnace or an overflowing toilet?
Fortunately, property management companies make being a landlord simple. They often charge between 8-12 percent of the monthly rent amount, but for that price, they may take care of everything. They will find tenants, collect the monthly rent and, best of all, field those middle of the night calls when something goes wrong.
Before hiring a property management company, be sure to ask all the following questions:
• How much is your management fee? Is that amount negotiable?
• What services are included in the management fee?
• Is there a vacancy fee when the rental is empty?
• Is there a separate leasing fee?
• Is there a set-up fee?
• How are extra costs, such as emergency maintenance repairs, handled?
• How do I communicate with the company? Is there a specific person I’ll work with?
But they mean you may not get to write-off a loss.
The upside of using a property management firm is they make the rental business easy. Yes, you may pay more, but you also don’t have to devote any time or energy to generate this retirement income.
The downside is you lose out what could be a lucrative tax deduction should you have a business loss. Assuming your adjusted gross income is less than $100,000, you can deduct up to $25,000 in losses from your rental. However, the catch is you have to “actively participate” in managing your property. If you hire someone else to do the work for you, you lose the ability to deduct the loss, unless you or your spouse are a real estate professional.
Tax laws for rentals – like so many other parts of the tax code – are anything but simple. To avoid making a mistake, it’s always best to confer with a CPA or other tax expert to ensure you don’t run afoul of the law while completing your return.
You can invest in real estate without buying property.
A final thing you should know about using real estate for retirement income is that you don’t have to be a landlord to make money. A number of investment options exist to allow you to become part-owner in developments without any of the hassle of finding and buying a specific piece of property.
These include the following:
- Real Estate Investment Trusts: Known as REITs, these are sometimes described as mutual funds for real estate. When you buy into them, you are buying into a number of real estate holdings which can make them a less risky option that putting all your money into a single property. REIT investors receive regular dividends that depend upon the fund’s income.
- Public Real Estate Funds: While REITs can be described as mutual funds for real estate, public real estate funds actually are mutual funds for real estate. If you buy shares in one of these funds, your money may be invested in a REIT or other real estate holdings.
- Crowdfunding: Websites like RealtyShares and RealtyMogul let people buy into what can be multi-million dollar developments. You may have to be an accredited investor to get in on the action, and it could be quite some time before you see a return on your money. Read the fine print carefully and consult with a trusted advisor before jumping on these opportunities.
- Private Equity Real Estate Funds: These funds are generally invite-only, and you may need to pony up a lot of cash (think $250,000+) to become a player in this world. It may not be a realistic option for most retirees, but it’s something high-net worth individuals may want to explore. Be aware that these funds are loosely regulated so you’ll want to understand the terms thoroughly before agreeing to join.
Real estate can add financial security and stability to your retirement, but it’s not as simple as buying a second home and sticking a “For Rent” sign in the yard. Whether you want to own a property or invest in real estate funds, be sure you get advice from tax and finance professionals who can help ensure you’re making a smart money move.
What about you? Is anyone else scheming and dreaming about owning rental properties? Let me know in the comments below or on The Mighty Widow Facebook page.