As they shift from wealth accumulation to wealth preservation, freshly minted retirees might gravitate to real estate. Enjoying a steady income stream without fretting about the next stock market crash has its advantages.
Yet the life of a landlord is hardly worry-free.
If you’re entrepreneurial by nature, then spending your retirement running a rental business may seem easy-peasy. You’re willing to advertise your property, show it to strangers, hire an attorney to draft the lease and research local and state laws on everything from eviction to zoning.
“Some people say, ‘Anybody can be a landlord,’” said Ilyce Glink, chief executive of Best Money Moves, a financial wellness technology platform. “But you have to be prepared for the work.”
Perhaps you plan to use a property manager to deal with tenants. But the more you remove yourself from the process and pay others instead, the less money you’ll make.
Real estate is a cyclical business. Yes, property values have soared. But unless you view your property as a short-term investment that you intend to sell soon, gird for wild price swings.
Glink knows firsthand the ups and downs of putting money into real estate. In the late 1990s, she purchased an investment property in downtown Chicago. It has doubled in value, the mortgage is nearly paid off and it’s cash-flow positive, she says.
“We bought another property that we were going to flip,” recalled Glink, author of “100 Questions Every First-Time Home Buyer Should Ask.”
“The developer was nine months late in delivering it to us. By then, the housing crisis hit and we couldn’t sell it. So we rented it out,” Glink said. And didn’t make money on it.
For investors who dislike the volatility that comes with owning stock, owning property is not necessarily more stable. Countless events—large and small—can derail the best-laid plans.
Take the pandemic: Emergency bans on evictions have cut off landlords’ rent collection. But more mundane threats lurk as well.
“You can get hit with a housing crisis or your spouse may have a health crisis and you have to sell your property,” Glink said. “A lot can happen beyond your control.”
Many financial advisers urge clients to set aside three to six months of emergency cash in a rainy-day fund. If you’re renting property, you’ll need a separate stash to cover gaps between tenants, major repairs and other unexpected expenses.
“There’s no good rule of thumb on how much money you’ll need for fixes, updates and improvements,” said Jamie Hopkins, director of retirement research at the Carson Group, a wealth management firm in Omaha, Neb. “It varies by the type of property you own” and other factors.
He warns that some landlords figure they can keep refinancing their mortgage every decade or so to save money. But that’s one of many assumptions that can prove faulty, because interest rates will not go down indefinitely and lenders are tightening their standards.
Another dangerous assumption: Real estate values will keep increasing and, in any case, owning property will beat the inflation rate.
“On average, properties go up along with the rate of inflation,” Hopkins said. “It’s better to look at an investment in housing not as a high rate-of-return investment. It is more like a bond, not an above-inflation return.”