Tenants, anyone?
When pondering how to produce an income in retirement, people tend to fixate on stocks, bonds and mutual funds. Rarely mentioned is one other option: becoming a landlord.
Many people rule out the possibility because they don’t want to spend their golden years dealing with rowdy renters and peeling paint. But, under the right circumstances, it may pay to reconsider.
“This can work well for someone who is prepared to downsize and has been debating a move to a condo or apartment,” he says. “It has certainly worked out far better than I ever expected.”
To find out whether a similar move may make sense for you, it’s important to have a realistic view of the pros and cons of property investment.
At its best, a rental property can throw off cash, much like an annuity, guaranteeing you a lifelong source of income. Better yet, the amount of that income will tend to rise with inflation since rents usually go up in tandem with prices.
The downside? Owning a rental property can leave you exposed to a downturn in the local economy. Go a few months without a tenant and the financial pain can be severe.
The only thing worse than having no tenant is having a bad tenant. If an occupant is particularly unruly, you may be forced to go to court to evict him.
Even with a good tenant, you have to be prepared for the regular grind of maintenance work. Especially as you enter your seventies, you may not want to shovel snow or fix clogged toilets.
For all those reasons, most seniors who want to derive income from the property market should look first at real estate investment trusts, or REITs. Buy units in a REIT and you receive regular payouts from a diversified, professionally managed portfolio of properties, without the hassles of actually dealing with tenants yourself.
But don’t automatically dismiss the notion of buying a rental property yourself. It all comes down to the specifics of the situation.
Becoming a landlord can be particularly attractive if you’re thinking of downsizing anyway. In that case, swapping a large home for a property with smaller living space and a rental unit can allow you to both trim maintenance expenses and generate income.
Caution is important. Since retirement is not a time to take financial gambles, you want to find a property that you can buy without going into debt.
You should be confident that it will generate a healthy return based on the cash it is generating right now, after accounting for all expenses. Sure, it’s possible that the property will be worth more than you paid for it at some point, but you shouldn’t factor such uncertain future gains into your buying equation, especially since some observers believe property prices are headed down, rather than up, in the years ahead.
Right now, some of the best values for downsizing homeowners appear to lie in small commercial buildings that are too tiny to appeal to a REIT, and that also contain a living space for a landlord.
Mr. Ballenthin says he stumbled into buying such a building largely by accident. After his kids reached adulthood, he sold his two-storey house and decided to purchase his current property because his daughter was thinking of opening a store. She later changed her mind, but by that point the deal was done.
Mr. Ballenthin has never regretted his move, though. He says dealing with commercial tenants is far easier than screening residential tenants. His renters – an accounting firm and a store – take care of minor maintenance themselves and pay the rent reliably. While one of his spaces was vacant for two months, he’s had few problems finding good tenants.
To Mr. Ballenthin’s delight, he has also found that his maintenance costs are far lower than they would be if he stayed in a house. Since his building sits between similar structures on both sides, he has only two exterior walls and a roof to worry about. And he can write off a portion of his property taxes, utilities and insurance fees as a business expense.
He calculates that his building produces as much income as a conservatively invested portfolio of $750,000 – but he paid far, far less than $750,000 for it.
“Until two years ago I never considered going this route but the income generated [while] all the while retaining ownership of the property is unbeatable,” he says.
