Many investment advisors recommend their clients diversify their retirement investments to include rental real estate. The benefits of rental properties as retirement investments include passive rental income each month, a hedge against inflation, and assets that increase in value and cash flow over time instead of drawing down and diminishing.
Rental investing is not for everyone however, and comes with some challenges that should be considered before making the leap. Here are some golden rules to follow:
How To Use Rental Property Investments For Retirement Income
Devise a Concrete Written Strategy – The rule here is if it isn’t written, it doesn’t exist. Very few people stick to plans which are not in writing. Devising a plan on paper not only ensures compliance, but can serve as a motivator when things become difficult. How much cash flow are you aiming for? How many rental properties will it take to achieve this target? How long will it take to purchase this many rental properties at your current savings rate? Establish in writing how much money you will be devoting to a retirement account (or account for funding rental investing) each month, and stick with it no matter what.
Time Is of the Essence – The old adage about the early bird catching the worm has never been truer than in retirement planning. Utilizing rental income to fund your golden years can work well when time is allotted for proper planning. Do you have enough time to add to your portfolio? Is there enough time to diversify? And if you start early enough, you can even pay off the mortgage on your rental properties before
Stay Capitalized – Rental properties require both a large up-front investment of capital ($10,000 at the minimum), to cover the down payment and closing costs. Even after the up-front purchase, repairs, vacancies and lawsuits can create large and immediate bills – sometimes in the four-digit range. Rental investors must be willing to keep a reserve fund for rental emergencies, and not draw from it for other expenses.
Plan for Non-Liquidity – Real estate is one of the least liquid investment vehicles, and can take anywhere from a month to a year or longer to sell. It is an investment for the long haul, and cannot be easily divested.
Location, Location, Location – Where you purchase will determine in part how much time you have before you will see a profit. How stable is the neighborhood? Is there a different part of town/country better suited to rental investing? How old is the property, and when was the last time the systems were replaced? Will you continue managing on your own during retirement? If not, will you be able to afford to hire a property manager? Should you consider investing closer to home?
Have a Plan B – Some people believe having a Plan B means you are planning to fail. In retirement planning, having a Plan B simply means diversifying your retirement portfolio to include other investments like mutual funds, ETFs, REITS, stocks, bonds and other means to supplement your retirement income and provide security and peace of mind.
Landlords looking to utilize rents as a means of retirement income are ahead of many in the retirement race, but would be wise to plan early, diversify and follow the golden rules.This real estate investing article was written by Edwina Davis & Brian Davis