If you’re approaching retirement age, or if you’re just forward-thinking, you might consider buying a rental property as a way to fund your retirement. Properties are one of many types of investments that could collectively yield enough returns to cover all your living expenses and then some—assuming you have enough to invest in the first place. But are they an ideal choice for someone looking for a stable, enjoyable retirement?
The Perks of Rental Properties for Retirement
Let’s take a look at all the natural benefits and perks that rental properties offer the aspiring retiree:
- Real assets. First, your rental properties are going to be real assets in your portfolio, giving you more control over how they develop. Even if the stock market crashes, people are still going to need a place to live, and that gives property an inherent advantage. It also gives them a predictable trajectory for value growth, especially since property is finite.
- Predictable income. One of the biggest advantages of rental property for retirees is its function as a source of predictable income. Assuming you have everything in place, including a good long-term property investment, tenants who are interested in staying put for a long time, and a solid financial model, you can pull several hundred to several thousand dollars per month in excess of your ongoing expenses. That makes it much easier to budget your personal expenses (and indulgences).
- Diversification possibilities. If you’re buying multiple rental properties, you can diversify your portfolio by selecting properties that occupy different niches. For example, you might own both single-family and multi-family properties. You might own properties in different neighborhoods. You might have some high-end and some low-end properties. This helps you cover your bases in case there’s a sudden, unexpected change to the real estate market in your area, or if one of your tenants leaves you with a vacancy.
- Quick cash options. In many cases, you’ll be able to sell your property in a pinch. Rental properties always have the option of being sold to the highest bidder, even if there’s a tenant present. If you have significant equity in the property, that means you could raise tens to hundreds of thousands of dollars in the span of a few weeks. This is ideal for covering major unexpected expenses or compensating for a market downturn. It also allows you to change your investment strategy if you see another lucrative possibility.
- Inheritance planning. Rental properties are also a solid strategy if you’re planning to leave your children and grandchildren an inheritance. You’ll be able to collect rental income to cover all your expenses, hypothetically, then leave the properties for your inheritors to acquire; they can then continue taking rental income, acting as landlords, or sell the properties for their own investments.
The Downsides of Rental Properties for Retirement
There are, however, some downsides:
- Ongoing effort and management. When you’re retired, you’ll likely want to minimize the number of responsibilities you have, and decrease the number of hours you spend working. However, rental properties can be demanding of their landlords. You’ll need to handle tenant requests, keep the properties in good order, collect rent, and deal with issues like vacancies and evictions. That said, if you’re interested in the benefits without having to deal with the ongoing time expenditure, you could always hire a property management firm to take care of these things for you.
- Overexposure to the real estate market. Buying a property is usually a good investment, but there are some things that can turn it sour. For example, if new developments in your neighborhood start to cause property values to plummet, you could lose a good chunk of your initial investment. If rental prices start to decrease due to lower demand, your financial model could be compromised. There’s also the possibility of another real estate market downturn; at the wrong time, this could seriously compromise your financial integrity.
- Rate of return. Property values don’t appreciate consistently; they can grow very quickly in desirable areas or grow very slowly in stable areas. The combination of direct profits from your rental income and property value growth can yield you a fairly reliable rate of return, however, especially if you own multiple kinds of properties. That said, there are some investments that could yield a higher rate of return, in exchange for a higher risk (i.e., stocks). A good way to balance this is to use rental properties as just a portion of your portfolio, holding multiple types of investments simultaneously.
- Initial capital demands. Buying a property usually takes a lot of money. Without a significant amount of capital available from the outset, you may struggle to get approved for a loan, and you certainly won’t be able to buy a property outright. Even if you do get a loan, your equity stake may be minimal, complicating your investment with excessive financial leverage. Because of this, rental properties may not be a retirement option for everyone.
- Time to acquire properties. Not all properties are worth holding. Some are in low-rent areas, where rental prices are barely enough to compensate for the expenses of ownership. Some are in bad shape, and would require too much in maintenance expenses. Others are in bad neighborhoods with little promise for future growth. Finding a good deal on a property takes time and patience, which not all prospective retirees are willing to commit. It may take years, or even decades, to accumulate a real estate portfolio capable of generating substantial, consistent retirement income for you.
So are rental properties a good way to fund your retirement? The short answer is, they can be, especially when they represent one part of a broader investment portfolio. They’re even more attractive retirement options if you can reduce the number of hours you need to spend on them—which is where property management comes into play.
To learn more about how Green Residential can manage your rental properties, and keep your retirement hands-off, contact us today!