Is Real Estate the Secret to Retirement Income?

Real Estate

Many of my clients have invested in real estate over the years . If done properly, you can generate consistent income from rent coming in on a monthly basis while owning hard assets that will always have value. The truth is real estate is a sexy investment with serious potential upside, however let me ask you, are you willing to be on call when the fridge breaks down? Furthermore are you interested in finding and vetting tenants, dealing with the checks that bounce, handling their complaints and keeping an eye on the property?

These factors are what I call the three T’s of real estate- toilets, tenants, and trash!

It takes a certain level of energy and free time to manage rental real estate. Of course, you do have ways to avoid dealing with such things. If you wanted you could go out and pay a property manager to handle it all for you. I caution you though, doing that might seriously eat into the income you so desperately seek during retirement to maintain your lifestyle.

Where a lot of people go wrong with real estate is in the math. We recommend that if you’re seriously interested in investing in rental properties, you start with a cash flow statement. Start with the top line- what sort of income will you generate in rent? Then subtract the expenses to support it, including renovations, and ongoing items like mortgage payments, property taxes, yard maintenance, repairs, utilities, etc. How long would it take for the rental to make a profit? And once it did, now much profit would it make?

After you get there, calculate the rate of return on the money you invested. You’ll use that number to compare to other ways of earning income in retirement.

Some people make the math on a rental property make sense by assuming that the house will be worth a lot more down the road when they sell it. This has been more or less true for the last 4 years, but as mortgage rates increase, house prices are expected to flatten out.

Plus, because it isn’t your principal residence, there will be capital gains tax to pay. Consult a CPA about the tax implications of a sale. I would recommend being conservative about what you would be able to sell the house for, and be aware of the risk that when you want to sell the property in the future, the market could be in a slump.

Now I know that this analysis is based on a lot of assumptions—interest rates, the housing market, your health and your need for cash, etc. but when it comes to a portfolio that is rental property heavy vs. a portfolio of other sorts of investments, it is often harder to manage risk.

If the rental market declines and you can’t rent your house for six to 12 months, will you have a cash buffer to tide you over until you find a new tenant? What about if you suddenly need a significant amount of money for an emergency?

Perhaps you like the idea of real estate as an investment or you’ve invested in real estate for a number of years but you’re getting older and it’s becoming too much work. You do have some interesting options. We encourage you to consider the alternative ways to own real estate. There are investments that allow you to own real estate but don’t require you to worry about toilets, tenants and trash. Furthermore, you can be a part of a group of investors that hold stakes in real estate that makes sense for an elderly population such as hospitals, dentist offices and retirement homes. Some of these investments can be very profitable sources of income during retirement.

Bottom line, we encourage you to seek out information on your options then give owning real estate and it’s different ownership options a second look.