Some retirees have found the perfect second career: landlord.
At a time when stock investments are uncertain and many homes are not selling, some retirees and near-retirees are keeping their money in rental property and banking on a steady second income.
"Real estate can be a wonderful asset to have in retirement, because when you have tenants, you have money coming in every month and, if you don't have pensions, that's important," says Barbara Pietrowski, a Certified Financial Planner in Roanoke, Va.
Ups and downs of rental properties
|•||Generates cash flow each month||•||Fluctuating maintenance expenses|
|•||Income tax advantages||•||Potential for vacancy|
|•||Income rises with inflation||•||Dealing with problem tenants|
|•||Potential of capital appreciation||•||Cash flow not guaranteed|
|•||Monthly expenses largely stable||•||Poor liquidity|
Just like any other aspect of real estate, the key to being a successful landlord is location, location, location.
A region where there are "a lot of plant closings" is probably not a good place to invest in rental property, says Ron Phipps, broker with Phipps Realty in Warwick, R.I. "If your goal is to generate income, you have to make sure the economics for the area are good," he says.
What you want, ideally, is a place where there's a strong demand for housing. For that reason, some retirees look for rental houses in college towns -- where they find a large pool of well-qualified potential tenants, says Phipps.
Along with the location, you want to look at the home itself. While not every property is ideally suited for producing a rental income, what can be considered a "good" prospect for a rental will change depending on the demand and demographics of the area.
If you've already bought the home and are leasing it successfully, relax. But if you're searching for a potential property, (and you haven't purchased it yet), a little advance research can make your new job easier.
For the most part, it's simply old-fashioned good sense, says Phipps. "Retirees just need to use the same basic rules of real estate," he says.
Elements of a successful rental
- Single family home
- Good school system
- Stable, mid-priced neighborhood
- Area with demand for housing
- Enough land -- but not too much
- Less than 10 years old
But that's only part of the story. Every area has its demographic quirks. In some places an abundance of retirees or college students may cancel out the need for good local public schools. Or a preference for a low-maintenance lifestyle could make small yards or condo-style homes a more popular option.
So start with the demographics. Who lives there, and what properties are renting? What's the vacancy rate for rental properties in the area? Local real estate agents can be a great source of information, says Phipps. And many offices have an agent who specializes in the rental market.
One landlord shops for three-bedroom ranch homes in college towns. "He rents out each bedroom for $500 a month" to students, Phipps says. But the landlord was savvy enough to first check the zoning and make sure it was legal.
When Kim and Robert Kiyosaki started investing in residential real estate, they selected homes in middle-class, moderately priced neighborhoods. The couple reasoned, "People need places to live and will probably look for middle-of-the-road rents," says Kim Kiyosaki, author of the book "Rich Woman: A Book on Investing for Women." And she believes that's still a smart strategy in the current economy.
Bottom line: Research the area, the demand, the renters, and the zoning. And listen to your gut instinct.
Not a liquid asset
Rental properties, however, also come with risks. Banks often require a larger down payment and charge higher interest rates for rental property than they do for owner-occupied homes.