Can Real Estate Rentals Add to Retirement Income?

Learn why some investors are turning to home rentals for an additional retirement income stream.

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Savvy investors preparing for retirement often look to build up multiple income streams. Examples might include Social Security, annuity payments, retirement fund distributions, and even a pension.

Rental income from real estate investments is another potential income stream. A word of warning, though: real estate investing involves some pull-up-your-sleeves hard work and a little elbow grease along the way. In the end, though, some say the payoffs are worth it.

Investors Return to Real Estate

Investment-home sales in 2015 jumped 7.0%, according to the NAR's 2016 Investment and Vacation Home Buyers Survey. Investment buyers last year purchased property for a variety of reasons, with an increasing share from 2014 citing rental income as the primary reason, followed by low prices, buyers finding good deals, and for potential price appreciation, the NAR said.

House prices are rising. The median sales price of investment homes rose in 2015. The median investment-home sales price was $143,500, up 15.3% from $124,500 a year ago.

AirBNB, anyone? This year's NAR survey found that in addition to longer-term rentals, investors are most likely to attempt renting properties for less than 30 days.

Activity in the real estate investment market has increased as individuals seek investments over which they can have more control. A real estate investor has a variety of options and opportunities to both grow an investment and improve a property’s value.

"In my opinion it’s the best way to develop an income stream because you have control of valuation/return metrics when you enter the deal. The most important metrics in terms of return are capitalization rate and interest rate on financing," says Bill Brown, a Realtor from Oakland, CA, and the 2016 president-elect for the National Association of Realtors. "Real estate is usually a solid investment, and if you do your homework, it can pay off quite well," he adds.

Real Estate Cheat Sheet

Start small and close to home. Potential investment opportunities include a condo rental near a university or a starter home in a good school district. When considering a possible investment property, it’s important to do your homework. Know the market values of the area. Learn the average rents.

Crunch the numbers. Positive cash flow is the goal in purchasing a rental property. Potential investors can utilize the IRS Schedule E form as a starting point to determine the actual costs and cash flow of the property. Keep in mind that the propety’s income stream will need to cover the monthly mortgage payments, taxes, insurance, and maintenance. It's also smart to keep some cash reserves available for unforeseen repairs.

Screen and choose tenants carefully. Consider credit and criminal background checks and referrals from past rental property owners as part of the application process.

Investing in real estate is a little more hands-on than a typical stock market investment, but it doesn't have to be. There are management companies who can take care of a property. However, these firms tend to charge a percentage of monthly gross income, so be sure to factor that into the overall costs of running the property.

"Now is still a great time to buy rental properties. Interest rates are still low, and rents are still rising in a lot of areas," Brown concludes. 

Let’s Figure Out Retirement Planning

Whether you need a little guidance or a lot, we can help. Speak with a TD Ameritrade retirement consultant at 800-213-4583.

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