When it comes to retirement, multiple streams of income may be the magic phrase. Perhaps you will have Social Security payments, retirement fund distributions, annuity payments or, if you are really lucky, a pension.
For those looking to beef up their retirement income stream, real estate investing is another option to consider.
But investing in real estate isn’t like writing a check to a mutual fund company. This one requires legwork, maintenance and perhaps a few headaches along the way. Think broken pipes, bad tenants or vacant rental units.
Investors willing to pull up their sleeves and invest time along with money may find real estate could be another pipeline toward the multiple streams of income that we all desire. Real estate can be another form of diversification.
“Rental properties can be an excellent way to balance an investment portfolio, since real estate does not correlate highly with stock market fluctuations. Real estate, if purchased correctly and managed properly, can provide a steady stream of income regardless of economic conditions, and can appreciate in value over time, leaving a nice nest egg for retirement,” says Lukas Krause, CEO of Real Property Management in Salt Lake City.
Growth in renting. The current landscape is still positive for real estate investors. “Now is still a great time to buy rental properties,” says Bill Brown, a Realtor in Oakland, California and president-elect of the the National Association of Realtors.
“Interest rates are still low and rents are still rising in a lot of areas. I do, however, think we are closer to the end of the cycle of dramatic rent increases than we are to the beginning,” he says. “We probably have another two to three years of strong-to-moderate rent growth.”
Here are some steps to get started.
Start saving cash. When you have an adequate down payment, get pre-approved for a bank loan so you can act quickly when a great property becomes available, Krause says.
“Do your financial analysis before placing an offer,” he says. “Confirm likely rental rates, the cost of making the property rent-ready, and work with a real estate agent well versed in investment properties.”
The trick for making real estate investing profitable is making sure the numbers work. Make sure there is a large enough rental income stream to cover the mortgage, insurance, taxes, upgrades, refurbishing between tenants, maintenance and repairs.
“Do your due diligence to see if the actual market rent that can be achieved is at or above current rental rates. Real estate is usually a solid investment and if you do your homework, it can pay off quite well,” Brown says.
One method to assess if an investment property is worth purchasing is to utilize the IRS Income Tax Schedule E. Put the numbers on the tax schedule to see if you can cover expenses with the property’s income stream.
Also, ask the current owners for the previous two years of detailed profit and loss statements and current year-to-date statements, Brown says.
First-time real estate investors may want to start small. Options to consider include a single-family home or a small- two or four-unit apartment building. One drawback for a single-family home is that if the rental is vacant, you will be stuck with a 100 percent vacancy rate. A small apartment building can spread the vacancy risk.
Find a property that is affordable to the buyer and to potential renters, Krause says.
“Properties near the average or median property value – $210,000 – tend to be the least risky and can command a good rental rate. Houses with three bedrooms, two bathrooms in a good neighborhood, in a strong school district and in good shape are the most desirable. Think opportunistically. Be on the lookout all the time, because good deals come and go quickly,” Krause says.
Location, location, location. If you plan to manage the property yourself, which will include showing the unit to potential tenants and being on call for maintenance and repairs, you may want to consider a property near your own home for convenience.
Other considerations are types of neighborhoods. Are you willing to be an aggressive investor looking at property in perhaps undervalued but potentially more risky neighborhoods?
“If you’re conservative, do you want a well-established area that will have a lower rate of return but one that you can consistently count on compared to an area you think is in the path of progress where rents will significantly rise in the next three to five years? A Realtor can help you determine what your goals are and what your comfort level is, and then help you find the right area and property for you,” Brown says.
Last but not least, pick your tenants carefully. “Tenant screening is a critical step that is often discounted. If not managed correctly, a whole host of issues could be created to significantly damage your returns, such as increased risk of tenant default, eviction and litigation. Proper screening will include credit and criminal background checks and referrals from past rental property owners. The Fair Housing Act and local and state regulations also must be considered when setting selection criteria,” Krause says.
Investing in real estate should be considered a longer-term commitment. You can’t exit a real estate investment by clicking the sell button on your brokerage house account screen. Take the time to consider all aspects carefully before jumping in.
“The investment is not necessarily liquid, because it is not always easy to sell a house,” Krause says. “However, rents continue to increase and housing appreciates very well in the long term. There are also potential tax benefits.”