Securing your future through properties

Among the many plans and strategies to consider when preparing for retirement, there is one that is often overlooked. More and more millennials are looking at rental property as an option, under the impression that being a landlord can add diversity to their investment portfolios.

An ONS Wealth and Assets Survey showed that the proportion of adults that see property as a lucrative means of saving for retirement increased to the highest level since the UK Office for National Statistics started asking in 2010. But is it really a smart idea to look at real estate as an income-producing pension replacement? What are the downsides to being a property owner (if any)?

The upside

Diversification is always a good practice, especially if it concerns your future betterment. Safeguarding your investment endeavors from risk and volatility is important and investing in a variety of stocks can help safeguard you from one sector falling and investing in bonds can protect you from the more volatile stocks as they usually move in the opposite direction. Diversification can help limit the amount of risk you accumulate and put a stop to losing excessive amounts of money.

One obvious yet commonly unexpected benefit from leveraging on real estate is the sheer amount of cash that you can potentially make from charging rent. The property game, like many other investment initiatives, is a slow and steady uphill climb. In the beginning, you may find that not much by way of revenue will be generated. Mortgage payments and additional expenditure like insurance, taxes and homeowner fees can bog down the rate of returns, taking up at least 25% of the rent charged.

Putting money aside from the rent to build an emergency fund is also advisable in order to deal with any hidden costs along the way like maintenance of the property during gaps between tenants. Gradually, by the time you retire and have paid the mortgage off, you can begin reaping the rewards by continuing to rent the home which can help bring a steady stream of income or choose to sell it altogether and enjoy the profits from appreciated value.

The downside

Although there are benefits to be gained from real estate, there are also problems that need to be acknowledged so you can be better prepared for whatever may come your way. Renters may fail to pay, tenants may be difficult to handle, maintenance costs may be well above your expectations and finding someone to rent your property may prove harder than you thought.

This is where reputable real estate agents can come in handy as they often come with references to help optimise investment property exposure and build reputability among potential tenants.

There’s also the issue of municipalities and their tendency to impose drastic inspections and fees on landlords looking to turn owner-occupied properties into rentals. Potential investors need to understand that before committing to a purchase, an understanding of the possibility of higher property tax bills is necessary, due to the fact that homestead exemptions may not apply to investment properties.

This means that the assumption that rental property can represent pure passive income may not be very accurate. Owning property for the sake of this type of income is not entirely a hands-free affair. There are many factors and tactics to consider. John Braun, a real-estate attorney with the Thomas Law Group, says "If you don't want to manage the property, or can't, as in you live out of town, you will be looking at 8% to 10% of your gross rents going to a management company to cover rent collection and repair requests."

Aspiring landlords should be prepared for a flurry of surprises. Whenever a leak is found on the roof, an AC breaks or a pest problem turns up, remember that it’s your responsibility to deal with the issues. It’s worth asking yourself if you’re ready to bear the burden of being a property owner.

If that wasn’t enough to convince you that being a landlord is hard work, consider the issues of finding quality tenants, processing their applications and running background checks which can all be time-consuming and detrimental to your property’s well-being if left unchecked.

Tips to Consider

1.      Remember that real estate, just like any other investment initiative worth looking into, will take time, effort and considerable amounts of starting cash. Start as early as you can before your retirement phase in order to be as prepared as possible.
2.      Begin building an emergency fund that’s separate from personal savings. Saving at the least the amount of the highest deductible on your insurance policy is a good gauge of what you should be looking at.
3.      A little planning can go a long way. Make sure you do your research as there are different laws in different places for landlords to follow. Additionally, be prepared to put down at least 20% when buying a property for rental.
4.      If renting out a property is more responsibility than you can afford, for the time being, consider making real estate a part of your retirement savings by investing in Real Estate Investment Trusts or REITs. These are funds that invest in a variety of real estate, including residential and commercial or mortgages. They can help take a load off your shoulders if need be.

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I’m Tyrone Skipper, a fully qualified, seasoned financial advisor with over 20 years of experience assisting high net worth individuals across the UK, NZ, UAE, India and Malaysia. Over the years, it has been a great honour to have the people and families I serve rely upon me as a steady hand, guiding them across the financial landscape. I specialise in investment planning including trust, education, insurances and retirement.