What Makes Rental Property an Attractive Option for Retirement Income?
The most common types of retirement income tend to be returns from the stock market and benefits from social security. While this is what most people do, you aren’t limited to just those two options.
Owning rental property is also a good way to secure retirement income and there are many benefits that explain why….
Inflation is a Big Asset to Rental Property
For most investments, inflation is the enemy. It eats up spending power and reduces the rate of return for your nest egg. Not so for rental property owners. When you buy and rent out apartments, inflation is your best friend.
Think about home ownership for a moment. Is it bad when your sale price gets higher due to inflation? It’s one of the few assets in life we spend our time cheering on inflation. However, rental property owners have an extra reason to cheer rising prices. Rents that you charge tenants also rise with inflation and increase the revenue of property owners.
One of the biggest obstacles to any retirement plan is inflation, but property rentals can help protect your retirement income. You’ll find few investments where you are protected from inflation by asset appreciation and revenue growth.
Earn Business Income
It’s great to have a source of income that is resistant to inflation pressures, but let’s not forget that being a landlord is also an opportunity to earn extra money. There are two ways in which a landlord can earn income off of renters.
The first way is to take advantage of the natural differences in costs between renting and owning a home. This advantage varies by the area you are operating. Sometimes home prices are so high, there is little margin to be earned from market rental rates. However, when mortgage and ownership costs are close or below that of rent prices, landlords will earn income.
Landlords can also take advantage of lower costs when they own multiple units. In business, we call this an economy of scale; where fixed costs get spread out over a larger volume of units. An easy way to think about this benefit is to image the large cost it takes to put a new roof on your house. What if you had two rental units under the same roof? Now you can spread the costs between two tenants instead of one. This would allow you to charge lower rents, but also bask in higher profits as well.
One of the concerns that a lot of potential investors have is the amount of involvement they’ll have to have in their new investment property. The good news is that your involvement level is flexible and you can hire out nearly every aspect of managing your rental (although every new hire will obviously cut into your profit margin).
For example, you can hire a property management company to do repairs, maintenance and rent collections for your rentals. If you’re not handy and you need to make exterior home improvements, consider that places like Home Depot in the US and NationWide in the UK often offer installation services.
There are also rental complexes that sell units with and offer property management services. These types of properties are common in areas where tourism is frequent. You can buy a condo on the beach, then let the condo association rent out your property while you are away.
There are big advantages to adding rental property to your investment income plans. Few investments have such a large inflation benefit, offer minimal involvement and the opportunity to earn extra income. It’s definitely worth taking a look before finalizing your retirement plans.
Good luck Penny Hoarders!