Supplementing your retirement with rental income can be a beneficial way further to increase your financial security, secure generational wealth, and invest in properties that can generate long-term value and capital appreciation.
When building your retirement plan and setting goals, it’s important to consider how real estate investing and earning rental income can become consistent wealth generators while minimizing risk and maximizing overall returns.
For many soon-to-be retirees, investing in real estate may seem like a daunting process. Although this may be the case in some instances, it’s important to understand every potential pitfall one may encounter along the way. More importantly, work with a trusted expert or financial advisor to ensure a person can effectively leverage various real estate market opportunities.
Suppose you’re thinking not that many Americans supplement their retirement with rental income. In that case, you might be surprised to know that 47 percent of those aged 65 and over supplemented their retirement with interest, dividends, or rental income in 2022, according to the U.S. Federal Reserve.
Being smart, and looking towards the potential future benefits you can draw from owning one of perhaps multiple rental properties can be an effective way to motivate you to start thinking of investing in high-value, low-risk, and stable income-generating rental properties for your retirement.
The Basics Of Real Estate Investing In Retirement
Real estate investing can provide dependable and secure income during your golden years. Using real estate investing as a way to complement your retirement income can be beneficial in the long term. However, some factors and risks can influence the average returns a person can expect to receive.
Financing
One of the biggest, and perhaps most important, factors to consider when investing in real estate is how much money you have available to direct toward such a significant investment. In most instances, you must provide an upfront downpayment, usually 20% of the property’s value.
Though it would be best to purchase the property in cash in the perfect scenario, many property investors take out a mortgage or personal loan to cover the additional costs of buying a rental property.
As a retiree, you might not have the necessary financial leverage and resources compared to someone still receiving a full-time income or having several years until they are set to retire. When considering buying a rental property, as an already retired individual, consult with a financial advisor to consider all the risks and whether it’s possible to take up another mortgage or loan against the value of your current property if you already own it.
Market Conditions
The housing market is constantly changing, and although there will always be a strong demand for new and existing housing, economic cycles, such as what we’re currently experiencing, may increase your risk of buying a rental property.
For starters, interest rates are currently at their highest levels in nearly twenty years. Though there is indication that they will decline in the near future, it could be another several years before we see rates fall back to their levels before the pandemic.
Secondly, housing prices have soared in recent years, with some housing markets across the U.S. seeing double-digit price increases due to strong demand and low supply. Knowing whether housing prices will fall or moderate in the coming years remains uncertain. However, it’s essential to consider markets or areas where prices are relatively stable and provide long-term growth potential.
Location
In real estate, location is everything, and it’s perhaps one of the most essential factors any would-be buyer needs to consider beforehand. Cities undergo massive change throughout the years, and as a potential investor, it’s essential to consider which neighborhoods have changed in the past. It will continue to experience strong and steady demand.
By evaluating the location of each property you’re interested in, you can effectively determine whether you will see continuous demand from potential renters or whether, should you decide to sell in the far future, your property will have appreciated over time.
Things that may influence the value of your property and its potential appreciation can include nearby amenities, schools and universities, public transportation availability, retail and commercial properties, crime rates and overall safety, and ease of access from nearby major roads or highways.
Evaluate these and other factors when looking for rental properties. Additionally, review previous listings in the area to better understand how property values have changed over time.
Taxation
The rules regarding taxation tend to be slightly different for those investing in real estate and retirees compared to an ordinary individual who receives income from their retirement savings.
There are plenty of taxes involved in purchasing a new property, and first-time buyers will need to cover the costs of land transfer taxes, which can add up to 1% to 3% of the property value.
Let’s say you decide to invest in Toronto properties, but you live in New York. You will be required to pay taxes to the provincial government and declare these taxes on your annual income tax return.
Then, if you’re thinking of buying a fixer-upper and selling it again for a profit, you will be subject to capital gains taxes. Any asset purchased to resell again for a profit will, in most cases, be subject to capital gains tax.
If you’re receiving a rental income from your property, you must disclose this information to the IRS, and you will need to pay property taxes each year. On top of this, you may be subject to income tax related to your rental income, which is a standard practice in most states.
There is much to know about taxation and property investing, especially for would-be retirees considering buying a rental or second property. It’s important to disclose any information regarding your investments and to stay up to date with your taxes each year.
Property Management
Let’s say you’ve decided on a property, gone through the process, and received confirmation that the property is now in your name and you are the sole owner. Next, you must decide whether to manage the property yourself or hire a professional property manager to do it for you.
Hiring a property manager would be the smartest decision, as you can rely on them to oversee all the administrative burdens and various hands-on tasks such as maintenance, repairs, and routine inspections.
Hiring a property manager can run you between 8% and 12% of the total monthly rent in some parts of the country. Some property managers can charge you a rental percentage fee or a flat monthly fee.
Other factors, such as the property’s size, the rental property’s location, and the property’s condition of the property may influence the total final cost of hiring a property manager. If a lot of work is still required, you may be expected to see property managers request higher fees and potential upfront payments.
Property Type
Next, you need to start thinking about the type of property you’re interested in buying. There are plenty of properties to choose from. However, when buying as part of real estate investing for retirement income, you will need to remember your long-term goals and how each property will help you reach those intended goals.
For instance, a residential apartment can efficiently receive consistent monthly income, but there may be some drawbacks, such as taxes, property management fees, and other costs.
A small single-family home can help boost your return on investment over time; you might be required to pay higher property taxes, and the cost of maintaining the property could be significantly higher.
Single-family homes and other stand-alone residential properties can be a smart investment for someone looking to capitalize on the long-term return of the property’s value appreciation. But you might also risk losing value on your property over time should ongoing changes occur in the area or the market begin to turn sour.
Another option may be commercial properties, which include retail and office space. Though these might be riskier, you will likely sign one tenant for several years, meaning you will have consistent income for the signed period.
Commercial space may also be slightly more affordable; however, there are different tax rules associated with owning commercial properties. Additionally, you will most likely own part of a bigger commercial property, not necessarily the entire land or building, which could limit you in how much you can charge for rent and may influence the overall demand for the space.
Key Real Estate Investing Strategies For Retirees
From the outside, buying real estate for retirement income can help fund additional investment opportunities you can leverage during your golden years. Making the right decisions can help ensure you have secured a winning property that delivers high returns and receives sufficient value appreciation over time.
For would-be retirees and those entering retirement in the coming years, here’s a look at seven important strategies you can apply when investing in real estate as part of your retirement income.
“House Hacking”
“House hacking” is an unconventional approach to real estate investing. However, many investors use this strategy to increase their equity leverage while still maintaining ownership of their investment property.
Simply, house hacking is buying a property you will live in as your primary residence. You can then rent out a part of the property, reducing your mortgage payments with the rental income you receive.
With house hacking, you can spend more of the income you receive from the rental on repaying your mortgage quicker or increasing your monthly payments. You might be limiting the profits you will make on the property. Still, should you turn a small profit, you can put that money towards a high-yield savings account to repay your mortgage, make another big-ticket purchase, or expand your portfolio.
Invest in Residential Properties
There are multiple properties to choose from; however, residential properties are often considered the safest and quickest way to generate rental income. Residential properties are a high-value long-term investment that can appreciate over time and provide sufficient equity liquidity.
More than this, the type of residential property that you purchase will also influence your long-term financial returns. For instance, many property experts claim that single-family residential homes are often the most valuable real estate investment options, as demand will always be for these properties.
In addition, single-family properties tend to appreciate more in value, which can provide significant financial benefits in the future. However, this would likely raise your capital gains taxes should you decide to sell your property for a profit.
Buying a residential property, whether a condominium, single-family home, or a small apartment, you can draw plenty of benefits from this type of investment. Residential property will always be in demand, likely to see an increase in value and diversify your retirement portfolio.
Purchase Vacation Rentals
We often see many retirees swapping their current lifestyles for something much more relaxing, which might involve many leaving their current city and relocating elsewhere.
In the U.S., it’s common to see many retirees move to Florida, as the state offers a somewhat low cost of living and plenty of warm, sunny weather. For many of these retirees, moving here allows them to sell their current primary residence and purchase a new home or perhaps a second property.
Buying a second property with the intention of using it as a vacation home can be a way to get a foot into the real estate investing market. Many individuals, families, and retirees rent a property during summer periods, which can turn a significant profit for the owners.
This strategy is most favorable for individuals who live in high-tourism destinations or decide to use their vacation rental property as their primary residence in the near future. Vacation rentals can be rented out both short and long-term, and you can advertise the property on rental platforms such as Zillow, Airbnb, and Booking.com, among others.
Buy To Flip
By now, you’ve most likely heard of investors who purchase properties to restore them and sell them for a profit.
This tactic is called “house flipping. ” It involves an investor buying a property that needs a bit of work, such as major repairs, maintenance, and other structural changes. The investor will then use their own capital to pay for restorations and, once completed, list the property for sale on the market to sell it for an attractive profit.
It’s a fairly common exercise that many investors do. However, as a retiree, it would require you to have enough capital leverage for a downpayment, the mortgage, and the investment needed to pay for all the necessary repairs. Listing and other legal fees may also need to be calculated.
House flipping can be a smart way to turn a dilapidated house into something profitable that you can rent or sell. Though it can turn a big profit, it does require a lot of work and effort and plenty of capital investment.
Purchase Vacant Lots or Land
Another unconventional approach to real estate investing is purchasing vacant lots or land that can later be used to develop or transform into something more profitable. Since there will always be a need for more space and for towns and neighborhoods to expand, buying up vacant land can help secure your potential future as a property investor.
Keep in mind that buying land comes with some benefits and drawbacks. For starters, when you purchase a vacant lot or piece of land, you need to be well-informed on whether the land has been zoned for development, and which type of zoning restriction may apply to the land.
Next, purchase land in high-density neighborhoods that will likely be developed in the coming years. You don’t necessarily want to sit with acres of habitable land far from city centers, shops, and schools.
Finally, not all vacant lots of land may be accessible by road and have running water or electrical layouts. Be sure to assess the condition of the land with a local council member, property expert, or realtor before agreeing on the purchase.
Lease to Own
You may have heard of lease-to-own, commonly known as rent-to-own options. These agreements allow you to live and rent a property with the opportunity to purchase it at the end of the contract or lease term.
This is a smart strategy for investors who don’t have a lot of upfront capital but intend to own their property in the coming years. There are some things to know when thinking of renting to own.
Lease option vs. Lease purchase
There is a difference between a lease option and a lease purchase, which can influence your rights to purchase the property in the coming years.
For starters, a lease option is a contract that allows the tenant the exclusive opportunity to buy the property at the end of their contract term. If the contract terms end, you can decide whether to purchase the property before it goes onto the market. The lease option gives you less financial upfront commitment, and you are paying for the refusal option to purchase.
With a lease purchase, you, as the tenant, will be required to purchase the property once the contract term has ended. This would mean you must have the necessary capital saved to put towards a downpayment. A lease purchase is often viewed as a real estate purchase with a delayed closing date.
Rent-to-own properties can be an easy and highly affordable option for retirees, as this allows them enough time to save for the initial upfront investment and consider other property options should they have a lease option in place.
Join a Real Estate Investment Group (REIG)
For retirees and would-be property investors who don’t necessarily want to undertake all the risk themselves, a real estate investment group (REIG) allows them more flexibility and the option to invest in real estate options alongside other professionals.
A real estate investment group is often governed by private agreements. Members vote for the board of directors and decide as a group whether they want to own a full or partial stake in a physical property.
REIGs can be a safer alternative option for less-experienced investors, but certain limitations may exist.
For instance, you might not be the sole owner of any property the group invests in but instead receive a dividend from the property investment. Additionally, you may have a limited choice regarding the type of properties the group decides to purchase.
You might run the risk of investing with other individuals that you don’t personally know, which can make some early-state real estate investors uncomfortable. Finally, being part of the group could mean you will be subject to paying membership fees and capital gains taxes on any revenues you have generated through your investments.
Though there are some drawbacks, the REIG option is an easy yet somewhat profitable way to gain access to the real estate market without having to take on all the financial risk yourself. Instead, you can share the risk among other investors and benefit from the group’s investments.
Closing Thoughts
Investing in real estate for retirement income can be a smart, efficient, and secure way to increase your earnings potential during your golden years. Real estate investing will provide you with equity leverage and possibly long-term security.
Real estate investing is also an effective way to diversify your portfolio and retirement savings. You can decide on the type of property you want to invest in, and how you can most effectively turn your investment into a profit.
While there are plenty of benefits, there may be some drawbacks. You might be responsible for covering the down payment, management fees, realtor and legal fees, and transfer duty fees. This can quickly increase the initial upfront capital required, leaving you with a bigger bill.
Though it’s a risky investment, sufficient evidence has proven that real estate can be profitable. For individuals who will soon be stepping into retirement, this could be a smart and efficient way to complement your long-term income and significantly diversify your retirement equity.
Featured Image Credit: Photo by Khwanchai Phanthong; Pexels
