Is income property a good retirement option?

Posted by  on Feb 09, 2017

Q: I'm going to have about a million dollars when I retire, which sounds great; but with interest rates so low, it won't produce as much income as I expected. I'm thinking of sinking a chunk of that money into some income-producing property as an alternative. Is that a good option for retirement income?

A: It could be, especially with current mortgage rates as low as they are. However, you would have to do a very careful cash-flow analysis to determine whether this might work for you.

On the plus side of this cash-flow analysis, is the rent that the property could produce. To estimate this, you should look not only at rents for similar properties in the area, but also the vacancy rate to get a feel for what percentage of the time your property may be producing no income.

On the negative side of the equation, you have the costs involved in owning the property. With your savings, you have the option of buying property outright or getting a mortgage loan. Buying outright is the least costly option, though it also ties up a portion of your money. Be sure to account for property taxes and the expense of property maintenance. Net all these out against the rent, and see whether the remaining income is sufficient for your needs.

As you point out, it can be difficult to live solely on the income produced by investments these days, which is why people often have to rely on a combination of that income and drawing down their assets over time. However, with income property, you would be putting some of your retirement savings into an asset that is not liquid, making it difficult to draw on that asset should the income come up short. That makes your cash flow analysis all the more crucial, to determine the how much net income you can count on your property to produce.

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