Making the right decisions on the assets to include in your financial plan is the foundation for a happy retirement. You can’t afford to make mistakes on those choices because financial errors made during the golden years can be quite unforgiving. Unlike when you were younger, you don’t have room for recovery when you make those wrong decisions.
To insure against losses, you typically want to include only investments with low risk but high enough returns to give you a comfortable life in retirement. Is there any asset class that offers this rare combination – low risk and decent returns? The investment that comes closest to meeting this criterion is real estate.
Should you include real estate investing in your retirement plan?
You already have real estate as part of your retirement plan if you own your home. Your home provides peace of mind that comes from knowing you have a place to call home. It is a store of wealth because you can always sell the property if you need to. Lastly, it is a hedge against inflation in that the value of every dollar you invest in the home is preserved.
So, should you include more real estate in your retirement plan by investing in rental properties?
The main reason you want to think about this is to take advantage of a rental property’s ability to yield monthly income. Conversely, are you ready for the hassle of managing a rental property and the tenants in it? Remember, it may benefit you to hire someone to do this for you, especially if you hire a property management company with automated operations.
Whether or not including real estate in your retirement plan is right for you should be considered against the fact that real estate gives you a way to catch up if you feel you don’t have enough money to retire on. Real estate is unlike many other asset classes in that it is not self-depleting. Furthermore, real estate investing offers many tangible advantages that are difficult to find with other assets.
Here are other advantages:
Earn substantial passive income
You can easily make passive rental property income by hiring a property manager. If you buy in a good location, the property can produce enough income to give you a good life throughout retirement, and you will still have an asset to leave to your heirs.
Buy using leverage
Even if you could do it, it is considered financially unwise to borrow money to buy stocks. But this is not the case with real estate; you can get started as a property investor without waiting to save 100% of the cash to buy a property.
Finance it with your home equity
If a good part of the mortgage on your home is paid up, you can take advantage of this to invest in real estate. Lenders will loan you money on the equity on your home. That way, you don’t have to wait to save enough money to make the down payment on the property.
Live in it while renting it
If you put your money in a rental property with 2-4 living units, one of the ways to get the best mortgage terms is to live in one of the units, meaning the rental property also serves as your primary residence.
There are many ways to invest
There are many ways to invest in real estate; you can own a property wholly, partly, or put your money into a fund. Regardless of your lifestyle and risk tolerance level, you can find a strategy that suits you.
What to think of before using real estate for retirement planning
Before you take the step to make real estate investing part of your retirement plan, here are things you should know:
You must be employed
Typically, you will need a job to qualify for a rental property mortgage. Most lenders want you to show them proof that you have been in paid employment or running a business for at least two years.
A property’s location determines its viability as an income-generating asset. A great home in an area where no one wants to live is no good. It is better to buy an average home if it is located in a good area.
Think of your costs
Unless you invest in REITs (real estate investment trust) or similar investment vehicles, you want to know how much it will cost you to operate the rental property.
Think of your earnings
How much money will the property potentially put into your pocket every month? This amount is how much money you have left after deducting all expenses.
Regardless of how well you lay out your plans, there will be unexpected problems with every property. There will be periods when you can’t find tenants and therefore don’t earn any income. There may be issues with tenants who don’t pay the rent on time or who don’t pay at all. There will be tenants who damage your property. Most of these issues are why you need a property manager for the home.
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