Having some passive income is the dream, right? Knowing that you’ll have to work hard for every single dollar is enough to make you need a nap. At the very least, you want to know you can retire one day. Even if you have to work hard until then, it’s important for your mental wellness to know that that day is coming. There are many ways to make that happen, like through contributing to a 401K or a Roth IRA. You can invest in the stock market, and research has found that over half of Americans do have some investment in the stock market. But should you be hanging your hopes of retirement on the stock market? Any good financial planner will tell you to diversify, and one great way to do that is to buy real estate if you can.
Real estate can give you two types of income: future income (when you sell it), and passive income today if you rent out your property. Those who count on just the stock market for retirement can have their fate in luck’s hands. Think of all the individuals who hope to retire during the years when the stock market tanks. Pulling their funds then would mean a financial loss. They had no choice but to keep on working. Meanwhile, if you have property, no matter what it’s financially valued at, it will always offer you the value of a place to live. And the real estate market doesn’t directly correlate with the stock market. You can see home buying booms in the middle of stock market plummets. If you’ve considered all of this and decided to buy a property as part of your retirement portfolio, there are some specific factors to consider and numbers to run. We spoke with Leneiva Head (below) of Welcome Home Realty and she told us what to consider when buying an investment property for your retirement.
Start from the end
“It’s something you back into a little bit, because you identify what you want your portfolio to look like, and then start addressing property matters relative to that,” Head explains. “For example, investors will often accumulate properties. They may be multi-family properties, which tend to create a higher return yield because you’ve bought one building that may have several units in it. If you’ve mortgaged it, you have that one payment but you’re getting multiple payments. One of those units is covering your expenses, the others are passive income. Of course, some of that passive income is set aside for maintenance type issues, but for the most part, it’s going to allow the opportunity to get your property paid for and start creating a decent amount of passive income.”
There is today’s payday and tomorrow’s
Head explains that there’s more to a property than what it will sell for. “So two things are happening: there is the residual you’re saving, and the property itself is accumulating value. If you have the ability to accumulate multiple properties, something to look for is you want to be able to cover the [mortgage], so identify how much you’re going to be able to make [it] off of that property. So you’re back-ending into what you’re trying to have at the end of this when you do retire. If my goal is to have half a million dollars when I get to retirement age through property, then I’m not just looking at the final value of the property. I’m looking at what I can make off the property annually. What is going to be my net operating income off of this property at the end of each year?”
Identifying a good rental property
Finding a place that will attract renters is important, but there isn’t one type that’s right in every area. “When I’m shopping, I’m looking for properties that are in places where it’ll be easy to get leased out,” Head says. “I’m looking for properties that are likely not going to require a lot of maintenance expenses. So I might not be looking at old duplexes. I may be looking at something that’s 20 years old or newer. The older it is, the more stuff starts going wrong with it. The less you have to do to a property, the better. So if it’s a bit newer, that would be ideal.”
Consider that new new
“What investors looking for a long-haul investment will do is they will actually eyeball new construction opportunities. It’s brand new, nobody has ever lived in it. It’s going to have some warranties on it for a while. You get a chance to hold it long enough before it even starts needing significant things like roof work, air conditioning work, water heater type issues, and major mechanical issues,” Head says. “You have a good amount of time to store up money on your reserves for your passive income. I say that because not everybody is going to gravitate toward multi-unit properties. Some are going to gravitate towards condos because they don’t have to do anything to the outside. The association does most things.”
Houses may attract better tenants
When we think of rental units, we may often think of apartments, townhouses, and condos, but there is a benefit to buying a house to rent out,” Head says. “Some buyers will gravitate towards single-family homes because they may believe, based on where they are geographically, they can be more popular. People tend to equate single-family homes with a different pride of ownership. They believe people will stay longer and take better care of the property. With single-family homes, the tenants may be coming out of an apartment for the first time. Or they sold their house and are renting again. If they’ve already been a homeowner, they have a different viewpoint on how to take care of your space.”
What do the real numbers look like?
How do you figure out if a place will be cash positive? What are those exact numbers? Head broke it down. “So you’ve identified a property based on where people want to live, what will give you the best return on investment (single-family, multi-family, etc.) Now, you’re trying to get your lease payments to ideally be one percent or better of what you paid for the property. It’s not that easy to do all of the time, but that is the ideal equation,” she says. “So if it’s a $300,000 property, you want to get $3,000 a month for it. Now that you’ve identified these things, you’re able to plug into your initial goal for retirement. So let’s say it was $500,000. Now you can back into that number, and this helps you determine how long you’re going to actually need to hold it to get to this goal that you have in mind for retirement. So hold time is relevant as well.”
What about when it comes time to sell?
In addition to collecting rent throughout the years, a final big payday will come when you sell the property. You’ll look at different factors when deciding if a property can sell for a profit. “Of course, since you’re going to offload these properties, that’s going to be your final push. You’ve done your passive income for many years, and now you’re selling these properties off. So you’re also looking at properties that the next investor, or person living in it, is going to want. So buying one-bedroom, one-bath units may not be the move to make if you know in your area, three-bedroom units are the most popular. So think about preparing to sell it later,” Head says.
A few other things to consider
“Some investors will spend money to get a place to how they want it to look, so also think about how much you want to spend preparing this property to rent out,” Head says. “Also be thinking about whether you want a property that’s already rented. Then you don’t have to fill it….but for long-term, when it’s time to sell it, where it is is relevant. If it’s up on a steep hill, that will be a detractor. Maybe it was a great deal when you found it, and you don’t personally want to live in it, a tenant will, so you think that’s no big deal. But you want to sell it one day, so it is a big deal.”
You can’t predict the future. Well, you usually can’t.
When it comes to properties you may hold onto for say, 30 years, “We can’t predict the future values that far ahead. But let’s say, when it’s time to sell it, if it’s only worth what you bought it for, you can at least gauge…so if I offload all the properties I acquired, let’s say for example we had 10 properties, and each one had a value of $300,000 each, when you offload that, that’s a lot. So you want to look at projecting what you can get for it when it’s time to offload it. Although, that’s a hard projection.”
Look at long-term trends
Like with the stock market, the best way to get a sense of what a property will do over the next 30 years is to see how it did over the last 30 years. “What you can do is look at the statistics of how properties have appreciated over the years,” Head says. “There was a time in Nashville when appreciation was averaging 2.5 to 3 percent a year. Your realtor can pull those averages to show you how properties appreciate in your area from one year to the next using trending. That trending will help you project what your properties will be at when you’re ready to offload them. That will give you a good idea of what to expect when you make that last push to make your retirement goal.”