Could This One Investment Cover Your Retirement? Why More Seniors Are Turning to Rental Properties

Planning for your retirement is about more than depending on a 401(k) and a pension. While Social Security can help supplement your income when you’re done working, the fact remains that you need to have other sources of income when you’re no longer working.

For seniors across the United States, one increasingly popular way of earning income in retirement involves investing in one or more rental properties. Real estate retirement income allows retirees to passively generate income by utilizing a resource that continues to climb in value across the nation.

Whether you’re a recent retiree, you’re getting close to the end of your professional career, or you’re just trying to plan for the future, evaluating retirement income strategies is crucial. Keep reading to find out more about how owning rental property in retirement can set you up for success, while also putting you in a position to create a generational income opportunity for your loved ones.

The Perks of Earning Rental Income in Retirement

There is no denying that owning rental property in retirement is a great way to supplement your income. At its most basic level, investing is about making money on things that you know people are going to spend their money on. Since the earliest days of the US real estate industry, there have been renters. For some, past financial issues have made it impossible for them to get approved for a mortgage. Others have no interest in buying a home because they plan on moving soon. Still, others don’t want to take on a mortgage because they don’t want to be responsible for the maintenance associated with homeownership.

This means that there will always be renters, which means you can capitalize on that fact by investing in rental properties in retirement.

Investing in real estate is also generally safer than investing in the stock market. For instance, if you invest in a single-family rental home in a popular area, you can virtually guarantee that you will always have renters in place. However, if you invest in a company, even if it’s the hottest company in its industry today, you run the risk of a competitor coming in and stealing its momentum. The stock market is always volatile to some degree, while the rental market is generally far more stable.

Additionally, rental properties give you a chance to build generational wealth. While a single rental home may not put your heirs in a position to become millionaires, you can set them up with a steady stream of income to enjoy after you’re gone.

Finally, rental property in your retirement plan gives you access to an asset that usually appreciates over time. Barring some sort of disaster that significantly harms the property, a home that’s worth $250,000 today will likely be worth more than that in three years. All of these factors make a rental property a great investment vehicle for retirees.

The Hidden Challenges of Being a Retired Landlord

As is the case with any type of investment, there are some challenges that you’ll want to account for. No investment comes with no risk, and that includes owning rental properties. For retired investors, one of the biggest challenges comes in the form of maintenance. As a landlord, you’re ultimately responsible for the ongoing care that the property requires. Renters are not responsible for repairs and upkeep of a property that they are never going to own, which means it falls on you, as the property owner.

Depending on the location of your home and your personal skillset, you may need to hire a professional to perform some repairs. In some jurisdictions, even if you know how to repair an issue, major repairs require permits and licensed professionals. If you can’t perform your own repairs, you’ll have to pay a professional out of your funds.

Additionally, ongoing property management can be difficult, time-consuming, and expensive. Whether you’re looking for renters, vetting applicants, advertising the property, or collecting rent, a real estate investment in retirement is also an investment of time. If you outsource this work, you’ll need to budget accordingly.

Weighing the Financial Risks

There’s no doubt that real estate retirement income has the potential to be quite lucrative. Of course, the profitability that you enjoy depends on several factors, including location, the condition of your property, and other factors. No investment comes without some level of risk, so you need to be informed about what you’re doing before you commit to owning a home as an investment.

Rising property taxes, fluctuating property values, and increases in insurance costs can all eat away at your profits, even if you’re doing everything right. Additionally, if a long-term tenant moves out, you may spend months scrambling to find a new tenant, which means that your property won’t generate an income until you find a replacement. While real estate is a proven method of building wealth, you need to understand that no investment comes without risk, and rental properties in retirement are no different.

Additionally, unlike the stock market, investing in real estate isn’t about liquid assets. If you hold multiple stocks and find yourself in a position where you need a quick influx of cash, you can sell your stocks and get access to cash. Selling a rental property takes much longer, so you need to be prepared to not have access to liquid assets.

REITs vs Rental Properties

Many people are shocked to find out that there is an investment vehicle that blends the stability of real estate with the benefits of the stock market. Real estate investment trusts, also referred to as REITs, allow investors to buy shares of a property. The trust that sells the shares is also responsible for all of the management fees associated with the property, which takes all of the responsibility off your shoulders.

Most REITs don’t invest in single-family homes, which also provides several benefits. Apartment complexes, shopping centers, medical laboratories, and other commercial properties are often available in REITs, which allows you to tap into a market that most investors would never be able to get into on their own. While you can probably afford a single-family home that you want to use as a rental, you probably don’t have access to the millions of dollars that you need to purchase a shopping center in a bustling, metropolitan area.

However, you can buy shares in the building. Much like the stock market, the number of shares that you buy is directly proportional to the amount that you make in dividends. Some REITs even allow you to customize the pace at which you receive those payouts. Monthly, quarterly, biannual, or annual payouts are all available, depending on which trust you invest in.

Of course, there are pros and cons to consider. Unless you invest a large sum of money into the REIT, you probably won’t make as much on a monthly basis as you would if you owned a single-family home outright. However, there are benefits, too. Since the REIT manages the property, you’re not responsible for upkeep, advertising, rent collection, or any of the other aspects that come with owning a single-family home. REITs also give you the chance to quickly liquidate your investment. You don’t have to go through the process of selling a property. Instead, you sell shares in the property, just like you would stocks in a business.

When it comes to REITs vs rental properties, you need to evaluate your financial status, goals, and investment strategy.

Is a Rental Property Retirement Plan Right for You?

When you’ve spent decades earning a steady income, the transition to retirement can be a challenge. Gone are the days of earning a paycheck every one to two weeks, but your need for a steady stream of cash doesn’t go away. Pensions, Social Security, and retirement accounts can help, but they rarely pay as much as you made when you worked.

Real estate is one of the most proven methods of building wealth in history. Still, it’s not the perfect way to earn retirement income for everyone. Owning rental property in retirement has the potential to be lucrative, but it’s up to you to decide if it’s the right choice for you. Consider your income, financial goals, and how involved you want to be in the ongoing management of the property. Being informed allows you to make the choice that's best for you and the future generations of your family.