Investing In Rental Properties To Supplement Your Retirement Income

Buying a rental property involves both effort and financial commitment. Here are a few factors to consider when determining if it’s the right choice for you.

When planning for retirement, buying a rental property may not be the first strategy that comes to mind for generating extra income. However, as a long-term investment, real estate can offer a reliable income stream and the potential for property value appreciation. That said, it’s important to recognize that this approach requires careful consideration, as it involves certain risks, upfront costs, and ongoing effort.

Things To Consider Before Purchasing A Rental Property

Do You Need A Mortgage?

The first thing to figure out is how you’ll pay for this property. If you’re considering a mortgage, lenders will want at least 25 – 30% down on a rental property and proof of steady income with two years’ worth of employment history in the same job. Therefore, you’ll need to secure the loan before retirement. Additionally, your credit score plays a key role – higher scores often mean lower interest rates. If you have funds available, however, paying cash might be a better option.

Financial Aspects To Consider

Besides the down payment, you should have a contingency fund for maintenance, repairs, and potential vacancies. Be prepared to cover expenses like property taxes, utilities, insurance, and possible homeowner association (HOA) fees. Include these in your budget when planning a rental property investment. While rental income is taxable, you can deduct related expenses.

If you buy an owner-occupied home, your municipality may have regulations requiring inspections and fees to turn it into a rental property. Hiring a professional to help you search for a rental property is highly recommended, as they can guide you through many legal aspects.

You can use a property management company to handle rent payments and repairs but expect to pay 6% or more for this service. Even if you go this route, visiting the property at least once a year is in your best interest to ensure everything is running smoothly. Get to know your tenants – building a relationship can help keep them happy, knowing that your attentive to both their needs and the property.

Location Is Important

The location of the property is essential. If you plan on managing it yourself, you’ll want it close to your neighborhood. Search for areas with a high rental rate, such as college towns and downtown locations. Ensure the community is safe, has good schools, and is close to amenities like public transportation, shopping, and entertainment venues. Properties in desirable areas tend to easily attract tenants, reducing the risk of vacancies.

Are You Prepared To Be A Landlord?

As a landlord, you’ll have several responsibilities that require you to be on call 24/7. You’ll need to handle repairs, ranging from minor fixes to more significant issues. Being handy can save you money, but even the most skilled DIYers may face challenges with larger tasks, like fixing a leaky roof, making it necessary to seek out professional assistance.

You’ll need to advertise and show the property when vacancies occur. You should also do background and credit checks to ensure potential tenants can afford the rent and associated costs. You’ll also want to familiarize yourself with the Fair Housing Act to avoid discriminating as well as know the local laws regarding property maintenance and habitability.

A Housing Program To Consider

You can support low-income individuals through the U.S. government’s Housing Choice Voucher program, also known as Section 8. This program assists families with low income, seniors, and those with disabilities by covering two-thirds of the monthly rent, with the tenant responsible for the remaining one-third. Only a few places offer this program, so you’ll benefit from a more stable and committed pool of applicants who will stay longer. Stop by your local housing authority for approval.

Summary

As stated above, investing in rental property involves both effort and financial commitment. However, it can offer substantial rewards, potentially outperforming investments in stocks or bonds. Like any investment, there are risks, so thorough research is essential. If you decide rental properties are right for you, consider hiring professionals to guide you through the process and help you find the right place.

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Membership required. Programs, rates, terms, and conditions are subject to change without notice. Normal lending criteria apply. All loans subject to credit approval. Property must be located in Texas. NMLS #405608.