Investing in Rental Properties to Supplement Your Retirement Income
When most people retire, buying a rental property may not be the first thing they consider to bring in extra income. As a long-term investment, it could be a good idea for a steady income stream, not to mention appreciating property values. However, this endeavor is not for the faint of heart, as risks are involved and some work and financial outlay to start.
Do You Need a Mortgage?
The first thing to consider is how you will pay for this property. Most mortgage lenders want at least 25% to 30% down on a rental property. You also should note that lenders will only give a mortgage with proof of income and employment history in the same job for at least two years. Therefore, you will need to take out the mortgage before you retire. Lenders will also look at your credit score. The higher your score, the lower your interest rate. If you have the cash up front, that would be a better way to pay.
Financial Aspects to Consider
Besides the down payment, you should have a contingency fund for maintenance and repairs. You also need to be able to cover the bills in the case of a vacancy. Funds are required for property taxes, utilities, homeowners’ insurance, cleaning, and maybe homeowners association fees. This should go into your budget when planning a rental property investment. You will pay taxes on income generated from the rent but also be able to deduct your expenses.
If you buy a currently 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 hire a property management company to handle rent payments and repairs, but be prepared 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. Knowing your tenants will help you develop a relationship with them and keep them happy, knowing you are looking out for them and the property.
Location is Important
The location of the property is essential. If you plan on managing it yourself, you will want it close to your neighborhood. Search for a place that has a high rental rate. Seek out college towns or something close to a downtown area. Ensure the community is safe, has good schools, and is close to amenities like public transportation, shopping, and entertainment venues. Places like this are more desirable to tenants, so you may have fewer vacancy periods.
Are you Prepared to be a Landlord?
As a landlord, you will have many responsibilities that require you to be on call 24 hours a day. You will be responsible for any needed repairs, some of which may be small and some large. You will save money if you are handy and can fix things yourself. However, even handy people may have difficulty with bigger jobs, such as a leaky roof.
You must advertise and show the property as a landlord when there are vacancies. You should also do background and credit checks on each potential tenant. Make sure they can afford the rent and any expenses required of them. Every municipality has laws regarding keeping properties habitable and in good shape for the tenants. You will have to familiarize yourself with them. Make sure you know the Fair Housing Act and do not discriminate.
A Housing Program to Consider
You can help those with low incomes with the Housing Choice Voucher program from the U.S. government. Section 8 allows families with low income, disabilities, and seniors. This program pays 2/3 of the monthly rent, and the tenant will pay the other 1/3. You will be guaranteed the government’s portion of the rent each month. In most cases, the tenant will likely pay since they want to retain their spot in the program. Only a few places offer this program, so you will have a more extensive and steadier pool of applicants who will stay longer. Stop by your local housing authority for approval.
As stated above, investing in a rental property will require some work and financial outlay on your part. Monetary rewards are available if you are okay with the work. The return on investment could be much greater than investing in stocks or bonds. As with any other investment, there are risks. Do your research before diving in. If you feel rental properties are a good fit for you, hire professionals to take you through the process and help you find the right place.