A SUM180 member recently emailed us this question, and I wanted to share both her question and my response with the rest of the community.

The member, whom I’ll call Lela, wrote: “After my divorce becomes final, I will have a little money to invest – not a lot, but enough for a modest down payment on a house. Instead of buying another single family home, I’m considering investing the down payment in a multi-residential property that I can live in, and that will also provide some rental income as I get older. I’ve never been a landlord before, but I’ve been reading on SUM180 about creative solutions to retirement and this seems like it might be a good idea. What issues should I be aware of from a financial planning perspective?”

Here’s my response to Lela.

  1. This is great, spot-on thinking. Here’s why:
    • If you do the math, you’ll find that in general, the income support you receive from a rental property is greater than the interest income from investing the same amount in the stock market over the next few years. Bottom line, the steady stream of income from the rental will have a bigger impact on your quality of life in retirement.
    • It’s particularly smart to have a rental property that is also your primary residence. That’s because a portion of your primary home mortgage is tax deductible, a benefit that wouldn’t apply to a separate rental property. This makes the investment more attractive overall.
    • Plan to put some or all of the rental income into mortgage prepayments now, before retirement, and you could have little or no mortgage to worry about when you do retire.
  1. Smart investment aside, you should also be prepared for the costs and headaches associated with being a landlord. Some things to think about:
    • Make sure you have current, reliable information about the rental rates in the specific area where you are buying. In other words, don’t make a home purchase assuming that you will earn a certain amount in rent later. Assess both the home purchase and its rental prospects at the same time.
    • Your realtor can help you evaluate the investment by creating a detailed model for the rental (including management costs) based on the specifics of the property and area in which you’re considering buying.
    • Expect to pay taxes on the rental income, even though it’s from renting part of your primary residence. The taxes are the same as if it were a completely independent property. So, taxes on the rental income should be part of the equation as you assess this investment.
    • Consider hiring a management company to manage and maintain the rental on your behalf. There’s a cost involved, of course, but you will be freed from the day-to-day headaches of being a landlord. Your time will be your own and you’ll be free to work and travel, etc.
    • When selecting the property, you may want to ask your realtor show you only properties that are move-in ready. Homes that require construction or renovation can easily turn into a time suck and money pit – often costing twice what you estimate up front. Not a smart investment or a relaxing way to spend your retirement!

Have you ever rented out part of your primary residence? Do you have any advice to add? I’d love to hear from you!

Leave a Reply