Property Management – San Fernando Valley – Residential and Commercial Property Managers
Funding retirement with rental income
Some people believe there is retirement gold in buying a piece of property, finding a renter and collecting income while the tenant pays off the mortgage.
If you’re willing to take the plunge, rental properties offer a rare opportunity to generate extra cash in post-work life. Indeed, a well-located unit can produce an extra $200 to $1,000 per month after expenses.
“Real estate can be a wonderful asset to have in retirement, because when you have tenants, you have money coming in every month and, if you don’t have pensions, that’s important,” says Barbara Pietrowski, a Certified Public Accountant in Roanoke, Virginia, who specializes in rental real estate.
According to author and landlord Andrew McLean, you may not need to produce a profit right away to make the purchase of an income-producing property worthwhile, especially if you are secure financially and have the right time horizon to retirement.
Pros and cons of rental properties
Generates income each month. Expenses and upkeep.
Tax advantages (e.g., depreciation). Deadbeat tenants.
Increasing rents over time. Risk of empty units.
Ability to fix mortgage costs. Illiquid asset.
“Rents are always going to go up; the value of your property is almost always going to go up and most of your costs are going to stay the same, particularly if you assume a fixed mortgage rate,” says McLean, who has written the books “Investing in Real Estate” and “Making Money in Foreclosures.”
“Eventually, even if you’re only making a little in the beginning, you will watch your income climb over the years.”
McLean, who owns three rental properties, spent $18,000 converting a workshop behind his house into a rental house.
It generated $1,000 in income each month, which paid the note on his entire property.
“It’s an ideal way to supplement my income,” he says.
Another big plus of income-producing properties is that the Internal Revenue Service lets you depreciate the building portion of your property (minus the land) over 27.5 years, which means much of your cash flow will be tax-deferred, Pietrowski says.
“You’ll have to recapture that depreciation when you sell, but if you never sell it and you own the property when you die, all that depreciation goes away,” she says. “Your heirs don’t have to pay it.”
The downside
Rental properties, however, also come with risks.
For starters, they’re expensive.
Banks typically require a larger down payment and charge higher interest rates for rental property than they do for owner-occupied homes.
Real estate in general is also an illiquid asset.
Should you be forced to suddenly sell, you may find yourself in the midst of a down market and unable to unload your home for a reasonable price — if at all.
At the same time, you may not find renters when you need them, which would force you to cover the mortgage yourself.
Walter Molony, spokesman for the National Association of Realtors, notes investors in income-producing property should keep at least six months’ worth of reserves on hand in the event they fail to find a renter.
From: http://www.bankrate.com
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