In planning for retirement, finding extra sources of income to add to your investment portfolio can help you reach your goals more quickly. A rental property investment can be an extra source of income to add to your savings, and they can add a source of income after retirement. One thing to consider is that not all rental properties are the same, and you need to consider a few things to see the benefits and avoid the pitfalls of rental property.
Choose the Right Location
To realize a steady income after retirement from your rental properties, you need to choose the right neighborhood. You need to look at the school district. The quality of the school system is a key factor in deciding where to live for families. You need to consider that a rental property is only making money when it is rented. If the home is in an undesirable neighborhood, it could end up draining your retirement instead of adding to it.
Understand Your Financing Options
Purchasing a second property for a rental is different from purchasing a home that you plan to use as your primary residence. Many times, loan terms will not be as lucrative as for your primary home. One option you might try to find is properties where you could purchase the home and live in it for a year before renting it out. There are also special lenders called portfolio lenders who specialize in investment properties.
Set Money Aside Separate from Your Retirement Savings
Before you purchase a rental property, make sure that you have a separate nest egg set aside to handle those little things that go wrong. The last thing you would want to do is to dip into your retirement savings because you need to replace the roof on your rental property. You need to think of your rental property investment as a separate entity that must be self-sustaining and separate from your retirement savings.
Consider Rent in the Area
Many rental companies will not purchase a property where the rent is not at least 1% of the purchase price. Before deciding to buy a property, you should do some research on what the average rent is in the area. Even if you fix the place up and make it nice, you will probably not be able to get much more than the local market will bear. This means that if you purchase a property for $150,000, then you must be confident that you can get at least $1,500 for rent per month.
Consider Taxes on a Rental Property Investment
A rental property investment can have some significant tax advantages. For instance, you can take depreciation on the house, which will reduce your tax bill. You can also deduct the interest on your mortgage in some cases. This can significantly reduce your tax burden. However, if you sell the property, you might have to pay depreciation recapture.
Another tax advantage is that you can operate rental properties at a loss. You can deduct up to $25,000 per year due to expenses. This could help offset your tax burden in retirement, but make sure you understand the tax implications when choosing your rental property.
A rental property investment can be an excellent addition to your retirement portfolio, but they can also be a drain if you make the wrong decision. The best piece of advice if you decide to add this investment to your retirement portfolio is to find a good realtor who knows the local rental market. This person should know where the highest demand rentals are and which areas to avoid.
If you are thinking about adding a rental property to help you reach retirement earlier or to provide an additional income after retirement to have the lifestyle you want, it can be an excellent way to reach your goals. You need to consider the risks and make sure to purchase a property that is in a desirable area. The most important factor for success is that you do your research and make sure that it will not be a drain on your retirement.