For many people approaching retirement, having access to multiple income streams can make life much easier and less stressful. Streams such as retirement fund distributions, Social Security payments, annuity payments, or pension plans are all potential sources to help lighten the load. However, for those who may not have all those fires burning, another option to consider is real estate investing.
However, purchasing a real estate retirement investment, unfortunately, requires more legwork than simply cutting a check to a mutual fund firm. For those willing to put the time and money into it, real estate retirement investing does provide another potential revenue stream that can generate steady returns if well managed.
With interest rates still relatively low and rent continuing to climb in many areas, this is still a positive landscape for new investors to make their mark. If there was a time to start buying rental properties, it is still now.
Before you begin, though, here are some tips to help get started on the right foot:
1. Start Saving Up Cash – The best first step is to put aside as much cash as possible for a good down payment. Showing your bank the initial capital you’ve bootstrapped will help tremendously with getting loan pre-approval, allowing you to move fast when a potential property comes on the market.
2. Research and Due Diligence – Once you have access to sufficient capital to make an offer, perform a financial analysis; run the numbers before putting down an actual offer. Research how much it will cost to renovate the property if necessary, look into comparative rental rates in the area for pricing and work with a real estate agent who has property investment experience. Just as important is assessing that the property will be able to generate enough revenue to cover continuing costs like insurance, mortgage payments, taxes, upgrades and refurbishments, maintenance, and repairs.
3. Start Small – For first-time investors, starting small is recommended. Options to consider when hunting for first properties include single-family homes or two to four-unit apartment buildings. One drawback to consider about with single family homes though is the constant vacancy; a smaller apartment building can help lower that risk by offering multiple spaces for rent. Properties that you could potentially afford yourself or a potential renter could eventually buy are excellent targets to consider. Other factors include the number of bedrooms and bathrooms, the neighborhood, and surrounding school district.
4. Location, Location, and Location – If you are looking to manage the rental yourself, including showing it to new, potential tenants and being available for maintenance/repair calls, then you may want to find a place near your personal home for convenience’s sake. As mentioned in tip three, neighborhood type is important too. Do you want to be an investor interested in undervalued but riskier areas? Or do you prefer to look at well-established places that may bring lower rates of return but are likely more consistent rental rate-wise? An experienced realtor can help a lot here with clarifying your goals and finding the right properties and areas to match.
5. Carefully Pick Your Tenants – After all, the other research and investment have taken place, the last, but most crucial, step is finding the right tenants for your property. Tenant screening is often played down but if not handled correctly, could negatively affect your returns through increased risks of default, litigation, and eviction. All of which will cost you money instead of making it. A proper screening process will include criminal background and credit checks, alongside referrals from previous landlords. Also, be aware of abiding by The Fair Housing Act, as well as state and local regulations when screening tenants.
Despite all the work listed above, real estate retirement investing is a fantastic opportunity for people looking to build their nest egg for life as well as generate a steady income to enjoy life better. Remember though that this is a long-term commitment that can’t be dumped fast like a day trade. That is why it is important to consider all the effort to put in up front.
Pay attention to how you protect your real estate retirement investments as well; land trusts and other legal entities will help better manage and protect such investments long-term. The team at Anderson understands how to set up such entities and can help you do so when it is time for you to do it finally yourself.