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From USNews.com — Money section.
The Pros and Cons of Rental Real Estate
By TOM SIGHTINGS
September 25, 2012 RSS Feed Print
We retirees know we don’t get any interest income from our bank deposits. And who can blame us if we don’t trust Wall Street enough to invest our hard-earned savings in the stock market? Therefore, owning and renting real estate may be an investment option that looks more and more appealing to people no longer working. If you play it right, you can generate a regular, unending stream of extra monthly income. And we all know one thing: Rents never go anywhere but up.
As many as 19 percent of retirees say they receive some income from rental properties or similar types of retirement income, according to a recent Gallup poll of 344 retirees. But it will take some work to put some rental income into your retirement pocket. Here are some pros and cons:
Pro: Real-estate prices have come down a lot in the past five or six years, and mortgage rates are at historic lows. If you do your homework, you should be able to find a good deal that over time will give you substantial appreciation, especially since many experts now claim the market is finally getting better. Some people say single family homes offer the best values these days. That may or may not be true, but a one-bedroom condominium is definitely easier to rent and maintain.
Con: The days of flipping real estate for a quick profit are long gone. You have to be in it for the long haul. Also, the days of no-money-down mortgages are a distant memory. Mortgages are cheap, but it’s harder for investors to qualify for loans than it is for people who live in their own homes. As an investor, you will need to post a substantial down payment as well as have the extra cash for closing costs, legal fees, possible renovations, and maybe some carrying costs if you’re without a tenant for a period of time.
Pro: With the current low prices, and as a long-term holder, you should be able to manage a rental unit to produce a positive cash flow right from the beginning, generating extra income every month.
Con: You will be a landlord, and will have to take on the responsibilities and the extra demands on your time. You have to find tenants, check their references, collect the rent, and fix the leaks. You can hire an agency to manage your property, but an agency will likely eat up most or all of your profit.
Pro: The government offers preferential tax breaks for owners of rental properties, such as depreciation, which allows you to use paper losses to offset any profit you make on the rental. Losses generated by depreciation can also be used to offset other taxable income you might have.
Con: If you didn’t have an accountant before, you’ll need one now. And while you do benefit from tax deferral on depreciation, eventually the piper has to be paid. When you sell, you must recapture the depreciation, although that may be when you’re in a lower tax bracket.
Pro: Some people buy a place at the beach or on a golf course. They use it for vacation and rent it out when they’re not there. It’s a way to enjoy a “free” vacation, establish a retirement beachhead where you might want to live someday, and maybe even make some money while you’re at it.
Con: Profits on a vacation property are not guaranteed. If the place is more than an hour or two drive from your home, you will probably need to hire a property manager. You’ll also have to pay for the inevitable repairs that come with renting to vacationers. Plus, it’s unlikely your unit will be rented all the time. If it is rented out of season, it will bring in less money. If your property is doing double duty, it’s more likely you’ll be adding to your monthly bills rather than supplementing your monthly income.
Owning rental property can be an effective method to produce extra income. But it’s not a way to come up with fast cash. Do your homework, assess your own interests and capabilities, and have faith in the future prospects of the area you choose. Then set your sights on being a long-term holder who collects a regular and steady stream of payments to supplement your retirement income.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.
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