Why Owning Real Estate in Retirement Is a Good Idea
(Original article courtesy of The Motley Fool)
Owning rental real estate can be a good idea, no matter what age you are. But owning real estate in retirement can be extra advantageous because it can help you diversify your retirement income while also padding your retirement savings.
If you're looking for ways to expand your senior income, here are three reasons why owning real estate in retirement could be a good move for you.
1. Rental income
Rental income is the most obvious benefit of owning real estate. You, as the landlord, get a paycheck each month from the tenant.
If purchased wisely, the rental property should generate enough money from the monthly rental rate to cover its ongoing expenses, including maintenance, repairs, property taxes, and insurance, leaving you with extra cash each month to use as you please. This rental income is generated somewhat passively, making it a fantastic way to supplement your retirement income outside of savings, investment income, and social security alone.
Plus, rental income yields can be a lot higher than a traditional dividend stock. As an investor myself, I will generate a minimum of a 10% return on my rental properties. That means for every $10,000 I spend, I expect to generate around $83 a month in passive income.
Rental properties also have the benefit of growth over time. From 2010 to 2020, the average annual rent grew by 4.7% on an annualized basis. The slight increase can help offset a rise in expenses related to the property, but since the mortgage payment is fixed, it can also lead to increased cash flow.
2. Price appreciation
Home prices aren't guaranteed to rise, but historically speaking, most homes appreciate or rise in value over time. Supply and demand in the given market or for the property features themselves will ultimately determine if the home rises in value or falls. Buying a rental property that appeals to a wide range of people in a high-demand neighborhood or real estate market increases your chances of benefiting from appreciation over the long haul.
If you invest wisely, a $300,000 rental property could be worth far more 15 to 30 years from now. And by using the power of leverage to purchase a rental property, putting just 20% down for a fixed rate mortgage, each rental payment made by the tenant will build your equity.
As the debt is paid down and the home appreciates, you could be left with a notable safety net for your retirement savings, all from one 20% down payment. Having the flexibility of being able to sell the rental property or refinance it if and when you need the money is a huge fail-safe for your retirement years.
3. It can be as passive or active as you want
A lot of people hear the word rental property and think of work. It's true; there is a lot of active management that goes into owning rental property. But the good news is, it doesn't have to be done by you.
If you're looking to kick back and relax in your retirement years and have no desire to talk or work with a tenant on a property, you can hire a property manager to do the heavy lifting for you. Property managers will handle everything, from showing the property, screening tenants, collecting rent and safety deposits, and coordinating repairs on the property for a small monthly fee.
On the other hand, if you're looking for some part-time work to keep you busy during retirement, managing a rental property can help you stay busy. It's just important you learn the most effective steps to managing a rental property from screening tenants, advertising a property for rent, accepting online rental payments, bookkeeping best practices, and making sure to set aside money for future repairs.
Owning rental property isn't right for everyone. And there's a lot for you to consider when it comes to buying the right property. However, if you have extra investment money and are looking to diversify your senior income, rental property can be a tremendous path to take for your retirement years.