Rental Property: Is It a Good Funding Source for Your Retirement?
Filed under: Retirement, Supplemental Retirement Income
On paper, it seems like a great idea. You simply buy an apartment building or a duplex in a popular area of town and then rent out the units in the building. The rental property creates a stream of income that you can use to fund your retirement. At first glance, it appears to be a no-brainer.
However, as with all investment decisions, things may not be as simple as they appear. There are risks involved with rental property, just as there are risks associated with every type of investment asset.
Before you invest a significant portion of your retirement assets into a rental property, make sure you understand everything involved with the decision. Below are three reasons why rental property may not make sense as a piece of your retirement puzzle:
There are many costs involved.
You may be planning on paying for the property with cash, or you might be confident that the rent will fully cover and exceed the mortgage payment. However, the mortgage isn’t the only cost that comes with rental property. You will likely have to pay for insurance, taxes, some utilities, marketing services to attract renters, property management and even maintenance costs.
There are also the one-time expenses that can pop up from time to time. For instance, assume the water heater or air conditioner goes out. You can’t expect your tenants to wait while you raise the funds. You have to pay for that repair as soon as possible so your renters have a comfortable place to live.
Before diving headfirst into a rental property, be sure to estimate all the costs. You may find that the property isn’t as profitable as you’d once thought.
The property may be inconvenient and time-consuming.
You may be considering acting as your own property manager. That’s one way to reduce costs and maximize profitability. Of course, that could also mean making frequent visits to the property.
As your own manager, you will be the first point of contact for tenants. If there’s a problem with the property, they’ll call you, and those calls could come at all hours. If you have a unit empty, you’ll have to invest time and resources into advertising the property, meeting with prospective renters and running background checks.
Is that how you want to spend your retirement? Do you want to commit your time and energy to maintaining a building? And if not, are you willing to spend money on a costly property manager?
The property could create liquidity issues.
An investment property can be a valuable asset on your balance sheet. However, it’s not an asset that can be easily converted into cash. To get the cash out of your property, you may have to sell the building, and that process can easily take months to complete.
This can be an issue in retirement, especially if you face a major expense like long-term care. According to the U.S. Department of Health and Human Services, the average 65-year-old has a 70 percent chance of needing long-term care at some point in retirement.1
Assisted living facilities and in-home health aides can cost thousands of dollars per month, and it’s possible the care may be required for years. If you or your spouse need long-term care, you may need a significant amount of money to pay for the services. Raising that money could be an issue if your funds are tied up in property that is difficult to sell.
Not sure how a particular strategy may fit into your retirement plan? Let’s discuss it. At Ambrose Financial & Insurance Services in Walnut Creek, California, we’re happy to help you analyze your goals and needs, and determine whether a particular course of action is right for you. We look forward to consulting with you soon.
1http://longtermcare.gov/the-basics/who-needs-care/
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CA Insurance License No. 0F95178
15938 – 2016/7/28
