(Guest article by Michelle Cornish, CPA)   Are you on track for retirement? Most North Americans aren’t. I spent sixteen years working in public accounting where I helped people with their taxes and retirement planning. Over and over, I found that people fear they haven’t saved enough for retirement. Nearly everyone wonders “Do I have enough?” and “How do I know my 401k won’t run out?” and “What happens if the stock market crashes right after I retire?” The good news is there is more than one way to retire comfortably. One of those ways is to start investing in rental properties before retirement. Consider three of the ways rental properties can ensure a comfortable retirement:
  • Steady monthly income,
  • Lump sum cash payout, and
  • Equity loans.
Stocks typically must be sold to supplement retirement income. Bonds eventually finish paying out. In other words, traditional nest eggs run the risk of running empty at a certain point. But rental properties keep paying indefinitely. Let’s dive in and take a closer look at these advantages to rentals for retirement, shall we?  

Steady Monthly Income

Rental income is a great supplement to other income you may have in retirement. It can even provide the bulk of your retirement income! Ideally you’ve owned the property long enough that the mortgage is paid in full. This increases your monthly cash flow because you don’t have to worry about paying the mortgage out of the rental income you receive. If the property has been well maintained over the years, then your only major repair bills should be CapEx (capital expenditure)-related. You can also increase the rent to give yourself a raise. Just make sure you are staying within the confines of your local and state landlord-tenant laws. There are often rules regarding how often you can raise the rent and by how much. If you feel like being a landlord is too much work, consider whether you’d rather bust your butt to contribute to that 401k… or find a job that even has a 401k plan. There are tons of great resources for landlords to help make it simple. Check out this landlord survey with lots of great tips including 5 important factors to consider when screening tenants.  

Lump Sum Cash Payout

Unlike lump sum pension payouts, when you own rental property, it’s up to you when you receive a lump sum payout. A lump sum payout from real estate investing occurs when you sell your property. The amount of the payout will depend on how much the property has gone up in value, how much of the mortgage you have left to pay, and how much capital gains tax you will owe on the sale. Here are 10 things you can do yourself to increase the value of your property as much as possible. Tax laws can vary depending on where you’re located so make sure to consult with a tax professional before your sale is complete or even before you decide to sell the property. Be sure to consider timing and taxes, before selling any properties. If you own more than one rental property, there’s a good chance you want to time the sales of these properties so they end up in different taxation years so you can save the most tax (and keep the most cash) from each sale.
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Equity Loans

If you have equity in your rental property but you’re not ready to sell yet or you’d prefer to pass the property on to your heirs, but you still need a quick influx of cash, you can always borrow against the property’s equity. This can be a risky move though, so make sure you know what you’re getting into before you do it. A major advantage of an equity loan is that it’s not considered income so you won’t be taxed on it. But you do need to pay it back, with interest, so proceed with caution. You’ll also want to make sure you know what will happen to the debt when you die, especially if your goal is to pass the property on to your heirs. A required loan payout on death (like in a reverse mortgage situation) may force your family members to sell the property which is not what you want. If you are considering borrowing against your rental property, do so with extreme caution. It’s critical to fully understand the terms of the contract, required repayments, interest rate, and what happens to the loan when the property transfers to your heirs. Work with a reputable lending professional you know and trust, or get a referral and triple check their references.  

What About Reverse Mortgages?

A reverse mortgage works differently than an equity loan. Generally with a reverse mortgage, you borrow against the equity of the property, like a home equity loan, but unlike a home equity loan, the balance of the reverse mortgage goes up over time instead of down which is why a payout is required when you die. You can’t get a reverse mortgage on a rental property, but you could get a reverse mortgage on your own home and use that to purchase a rental property if you’re late to the retirement game and wish you would have purchased a rental property when you were younger. Still, you could probably accomplish the same thing with a home equity loan at a lower interest rate. Be sure and research your options carefully. It’s important to make sure a rental property is the right investment for you. Before investing, make sure you understand how to calculate your net cash flow from the rental to make sure you don’t get into a bad investment. Of course, as a CPA, I have to mention tax consequences. They are always there lurking in the background. Rental properties come with some excellent tax deductions, but when it’s time to sell be prepared to pay the tax man. Before you get carried away with your real estate investing, be sure to read these important lessons and always check with a certified tax professional who knows the ins and outs of real estate investing to make sure you’re getting the most up-to-date tax advice possible. Tax laws change all the time and you don’t want to be caught off-guard!   Bio: Michelle Cornish is a recovering CPA with a passion for writing. Her book Keep More Money: Find an Accountant You Trust to Help You Grow Your Small Business, Increase Profit, and Save Tax was written as a result of meeting many people online who needed an accountant but didn’t know how to go about finding one (or why they should). Michelle’s current project is a thriller titled “Murder Audit”. When Michelle’s not writing, she’s hanging out with her two boys and husband in the beautiful Okanagan Valley.    

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