You’ll often hear that it’s best not to retire on Social Security alone, but rather, to have additional income streams at your disposal. And you have several options in that regard.
If you manage to save well for retirement, you can tap your nest egg for money as needed. You might also own stocks, bonds, and other assets that pay you on a regular basis.
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Plus, you might choose to hold down a job for extra cash. On top of the added money, a job might be a great way to anchor your days.
Another option for generating retirement income is to purchase a rental property. And you may like the idea of getting to collect a check from a tenant every month. But before you decide that owning a rental property in retirement is the right move, consider the drawbacks.
The upside of owning a rental property
A rental property could be a great way to diversify your income streams later in life. We don’t know if Social Security will end up cutting benefits. If it does, those monthly checks of yours could be whittled down.
It’s also a pretty common thing for the stock market to experience bouts of volatility. That could affect your retirement income, depending on how much money you keep in the market.
The nice thing about owning a rental property is that you’ll have an income stream to fall back on that may not be impacted by stock market movement. And remember, even in the worst of economic times, people still need housing. So while you’re not guaranteed to have your rental occupied each month, if you buy in the right location, you may find that the income is steady.
Plus, if you get tired of being a landlord, you could always look at selling your rental. Under the right circumstances, you could walk away with a nice profit.
The downside of owning a rental property
Before you get your mind set on owning a rental property in retirement, understand the risks involved. It’s true that your rental might provide steady income. But if you struggle to get a tenant, it could end up being an expense rather than an income source.
Also, when you own physical real estate, you take on all of the risks that come with it, from insurance premium hikes to property tax increases to repairs. You may not want to take on that risk at a time when you’re no longer bringing home a paycheck from a job.
Furthermore, you might think retirement is a great time to own a rental property because you’ll have time to manage it. But some of the work may be more than you’ve bargained for, especially if you have needy tenants or tricky maintenance. And if you can’t maintain your rental on your own, you’ll incur expenses to have someone else do it.
Should you buy a rental property for retirement income?
It’s certainly not a bad idea to include a rental property in your retirement income plans — as long as you understand the risks you’re taking on. If you’re having second thoughts but like the idea of investing in real estate for retirement income, you could consider REITs, or real estate investment trusts, instead.
REITs are similar to stocks in that you buy shares you house in your portfolio. The value of those shares can rise and fall, but a big benefit of REITs is that they’re required to pay out at least 90% of their taxable income as dividends. So if a goal of yours is to secure steady retirement income, you may find that REITs are able to do the trick just like a rental property would — only without all of the extra work and hassle.