Rental Properties: A Source of Retirement Income if Done Right

November 10, 2015 · Print This Article

Rental properties can be an excellent source of retirement income. But like anything that brings in income, they are quite a bit of work and should be considered a part-time job rather than something that will passively print money.

Location, location, location

There are two things to consider when buying a rental property – if they are near you, and if the location is in demand. While some landlords hire property management companies to take care of properties that they don’t live close to, these companies can eat significantly into your profits. It’s best to take care of minor repairs, paperwork and other items yourself, and only call in a service person for larger repairs.

Every city or town will have a demand for renters; find out where they like to rent, what you can charge for rent in different neighbourhoods, and pick a location that is both close to you and desirable for renters.

Do Your Research When Setting Rental Rates

Even though they are definitely work, rental properties can be a steady stream of income in your retirement – but only if they can maintain a steady positive cash flow. Setting the proper rate for rental – before your renters move in – is very important, as you are only allowed to raise rent by a certain percentage annually. If done correctly, you will be able to pay the mortgage on your rental property, pay into a contingency fund for repairs, and make a profit.

This post has a great round-up of resources for setting your rates, as well as solid advice from landlords who lost money by doing it wrong. There is no one-size-fits-all calculator or solution, but you definitely want to do your homework.

Once you set your rates, be sure to raise them annually by the percentage mandated by your local authorities. It is usually a small percentage that most renters will be able to adjust to, and make sure to let prospective renters know that they will see a regular rate increase.

Can you Afford a Second Property?

Generally, if you sit down with a mortgage broker, they can tell you if you can afford a second property. Keep in mind that there will be closing costs and incidental expenses such as utility hookups and renovations that go beyond the actual cost of the property. Once you have renters settled in, make sure you are setting aside funds from their rent for emergency repairs and general property upkeep.

See a Lawyer and Check Credit

A real estate lawyer will help you draw up a rental agreement that covers you in the event of damages to your property, a tenant’s refusal to pay, and much more. While there are boilerplate agreements out there on the Internet, paying a lawyer to draw up an agreement specific to your property is money well spent, as it may save you thousands or even tens of thousands in the future.

Be sure to check the credit of potential tenants; while some tenants may have legitimate reasons for a lower credit score, such as an outstanding amount on credit, you’ll want to look for items like frequency of missed bill payments to determine if they are a good fit. Tenants expect you to run a credit check, and those who protest generally have something to hide.

A Reverse Mortgage Can Help

While a reverse mortgage can only be taken out against your primary residence and not against a second property, it can help you get started with the down payment, renovation costs and legal fees. Many of our clients have taken out reverse mortgages for investments, and a rental property falls into that category.

Contact us today to see how a reverse mortgage can give you the financial kickstart you need to get going with your future rental property.