Has the idea of getting into real estate as an investment ever struck you? If no, then it is worthy enough to be given a thought. Real estate can be a lucrative investment option if you wish to draw your retirement income from the rental earnings. This concept is popularizing day by day because of its ease and advantages.
You might have invested in the 401(k) and annuities as a part of your retirement planning. You do not need to be an investment expert to understand that investment in a rental property will contribute considerably towards your income post-retirement.
There are certain basics that are applicable to most of the small first-time investors. The most important thing to consider is the kind of property that should be bought. Scale of operation is another significant factor. How many properties should be bought and will you manage them yourself or hire a property manager. Make a sound decision considering these basics, because they have a cost associated with them. Let’s find out how it works.
- Keeping it small
The key is to start small. You are bound to make mistakes when you are a newbie. Keeping it small minimizes the magnitude of your mistakes and their impact on your finances. You will need to acquire the skill-set necessary to become a successful landlord. You will also need to study tax implications. It is advisable to invest into single-family homes. They are easy to manage and maintain as compared to large apartments. It is necessary to understand the market demand. People prefer to rent single-family homes. This means you can easily get tenants to rent out your property. Smaller properties can be sold of easily. You can sell off a single-family home easily if you face a financial crisis in future, whereas it will be difficult to find a buyer for an apartment complex.
- How it works?
The current property prices are at a ten-year low, making it the best time for you to buy property. You may take out mortgage loan and acquire a property and rent it out. In the beginning it is good even if you are at a breakeven point, i.e., the rent you receive is sufficient to pay off the monthly payment for the mortgage as well as the maintenance charges of the property. You may buy and rent out multiple properties in a similar fashion. After a certain number of years all your mortgages are paid-off and the rents you receive become your income. By the time you retire if you have 4 such rental properties and you receive $1200 as a monthly rent for each one of them, you make $57600 annually. After deducting the maintenance charges and taxes you can have around $48000 in hand. Value of the property and its rent goes up as inflation sets in.
- Risks associated with investment in real estate
Risks are an indispensable factor of any kind investment. Investment in real estate too has its own set of risks.
You may tend to rely on appreciation of the property. If the property does not generate a cash inflow for you by the way of rent it may soon give rise to negative cash flows. Appreciation may occur, but the negative cash flows may eat up all the benefits. Finding quality tenants to rent out your property to is not an easy task. It may also happen that you may not have tenants throughout the year and your property stays vacant. Maintenance of the property further adds to the costs.
Study the pros and cons, design a strategy that will help you make the best out of the real estate sector and have a tension-free life post-retirement.