Expenses can eat up a large chunk of profits. Some types of maintenance -- such as repairing or replacing systems like central air conditioning and water heaters -- can be costly. Fortunately, the Internal Revenue Service allows tax deductions for certain expenses related to investment property.
A decent cost-benefit analysis can help you figure out how much profit to expect from the property. A financial adviser can help crunch the numbers.
Rent a room in your homeRenting a room in your home may make sense for empty nesters who need to bolster retirement income. The option is especially appealing for people who live in college towns where room rentals are in demand.
Before offering little Timmy's room to a stranger, check the applicant's credit history and criminal background.
As with any rental, state the rental terms clearly in a written lease. Things like kitchen privileges and common area usage should be spelled out. Generic lease forms can be found at local office supply stores or online. You'll also need to bone up on your state's fair housing laws to find out what your responsibilities are as a landlord.
Check local ads to get a feel for what room rental rates are in your area. Then, determine how you compare, remembering to consider any amenities that might factor into your rental rate.
For example, amenities like a private entrance, a pool or off-street parking are all excellent selling points that may garner a higher rent.
Consider a reverse mortgageWith housing prices tumbling back down to earth and retirement accounts remaining bruised, retirees are looking to other sources to squeeze income out of real estate.
Enter the reverse mortgage.
If you're 62 years or older and own your home outright or have a small mortgage to pay down, you may qualify for a reverse mortgage. The older you are, the higher the amount you can generally borrow.
For 2009, homeowners can borrow up to $625,000, depending on how much your home is appraised for, your age and current interest rates. In 2010, the amount reverts to $417,000.
The U.S. Department of Housing and Urban Development, or HUD, recently announced a new effort called the Home Equity Conversion Mortgage for Purchase Program that allows seniors to purchase a new principal residence using loan proceeds from a reverse mortgage without having to sell the old residence.
Reverse mortgages have pros and cons. On one hand, they provide a steady income stream for those who remain in their primary residence. On the other hand, closing costs and fees can be expensive.
Such costs may add up to thousands of dollars, potentially negating the benefits of reverse mortgages, especially if you don't expect to stay in your home for a long time.
Reverse mortgages have other potential negatives, says Julie Jason, president of Jackson, Grant Investment Advisers in Stamford, Conn., and author of "The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad."
"People may not be aware (that) some reverse mortgages have default provisions," she says. "Let's say somebody needs to go into a nursing home and they're out of the house for more than one year -- that could be a default."
For this reason and others, Jason believes reverse mortgages are not a great option for most homeowners.
"Who are they good for? I would say very few people," she says. "It would be someone who has no other options."
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