The milestone of retirement can be a source of stress for many individuals both young and old. Older people may be realizing they don't have enough money to retire fully and will have to keep working on a part-time basis. Younger individuals stress about whether or not they'll have enough money to keep their lifestyle. No matter what age you are, retirement can bring certain fears to the surface.
As pension rules and regulations change, retirees and others close to retirement are looking for more ways to generate income without having to put in much effort. Who wants to be working hard during their golden years, right? As an investment option, rental properties can provide an additional income source for retirees.
Related: The Four Whys of Investing
3 Advantages of Owning Rental Property During Retirement
- Control: Rental property is one type of investment where you have plenty of control over how the total investment is handled and maintained. When it comes to personal finances, many individuals want that kind of control. As an investor, you decide which property to buy, how much rent to charge, and who will become your tenant(s). Additionally, you can physically increase the value of your investment by making strategic, value-added renovations.
- Long-term capital gains: Choosing a good location for your rental property is of the utmost importance as it can determine aspects like your vacancy rate and rent. Invest in an area where growth is occurring; look for permits for new schools and hospitals, which are telling signs of where growth will explode next. As growth occurs, rent will go up, along with the appreciation of your rental property. Your expenses, on the other hand, will stay relatively the same. However, investors must understand there is a cycle. Consistent growth isn't possible; markets rise and fall. Therefore, choosing a good, growing location will ensure you receive long-term capital gains. If a rental property is held on to long enough, it can be a long-term investment vehicle that will keep giving for generations.
- More tax breaks: Another advantage of owning rental property during retirement is the more tax breaks you can receive. Most multi-family buildings are acquired under a corporation, which has a different set of tax rules. Corporations can still receive tax applicable tax benefits, though. Real estate investments can also be bought with RSP money. This can be done through special agencies and has many benefits. Once the rental property has been fully paid off, it will become tax-positive. Once this occurs, you will have to set aside some rent to cover the cost. When it comes time to sell the rental property, though, you may receive another tax break. If the property is held for more than one year, an investor can claim a 50% discount on capital tax gains.
How to Find a Good Rental Property
It may take quite a while to find a rental property or multi-family building. Don't be in a hurry; take your time to find one that best fits your needs. To help you find a suitable rental property, conduct the Money Forever Five-Point Balancing Test, and ask yourself these five questions:
- Is it a solid investment vehicle? At the age of retirement or close to it, most individuals can't afford a do-over if the investment goes wrong. Investors of this age don't have the time to get that money back again. Therefore, the investment must be low risk.
- Does it provide good income? This question must be asked and speculated about because, ideally, you want the tenant's rent to cover the mortgage and then some. Check other rental properties and apartment complexes in the neighborhood to see what similar units are charging. You'll then have a rough number to go off of.
- Is there opportunity for appreciation? While you want your rental property to make you money from rent, you also want it to make you money when it comes time to sell. Appreciation will occur in locations with growth, and when you do sell it, you'll have a huge amount of money to live off in retirement. Avoid buying rental property in run-down neighborhoods where the population is decreasing.
- Is it protected against inflation? Inflation can wipe out an investor's entire portfolio. Therefore, it's important to protect your investments and their worth.
- Is it reversible? Generally, rental properties are hard to liquidate. Selling a property can take quite a while depending on the strength of the market. You have a better chance of selling your investment if it's in an up-and-coming neighborhood or another desirable area.
Rental properties can be a great way to supplement your retirement income. With this investment, you'll have control, long-term capital gains, and tax breaks. To find a suitable rental property that can make your golden years more profitable, use the Money Forever Five-Point Balancing Test.