Rental income — funding your retirement
WHAT is rental income? It’s revenue earned from the rental of property. For many retirees, rental income is a major source of providing retirement income, especially for people who do not have an approved pension plan or who have not saved enough money for their retirement.
Investing in real estate is one way of earning passive income throughout retirement. For pre-retirees, rental income is an option to supplement any shortfall in pension earnings. Careful consideration is required when deciding on investing in real estate for retirement. The earlier a plan is in place to purchase property before the onset of retirement, the more you are able to earn passive income way ahead of the retirement years.
Mortgages are good options in purchasing property for rental income, but it is best to pay them off or pay down mortgages prior to retirement. When purchasing property for rental income, location is key. Access to amenities such as entertainment, wellness facilities, restaurants and transportation is important when considering rental properties for retirement income. It is necessary for investment property owners to invest a percentage of income earned from property rental to cover unforeseen future expenses so that income disruption is minimised. A minimum of 15 per cent of monthly rental income should be put aside to cover future unforeseen expenditure. Rent and property value will go up over time, therefore rental income assists in beating inflation.
CHALLENGES FOR INVESTMENT PROPERTY OWNERS
Rental income is not always a passive investment. Some owners of property have to contend with paying high management fees to cover rental collections and property repairs. Property owners must bear in mind that recurring expenses such as insurance, taxes and maintenance remain long-term considerations. There is also the risk of tenants failing to make rental payments. Finding ideal clients is another concern for property owners. The illiquid nature of property investments can pose a challenge if owners seek to sell. Selling properties can take upwards of four months. Owners with properties vacant over a long period of time will experience loss of income.
In Jamaica, the supply of investment properties has outstripped demand. Some property owners have mortgaged properties that are used for short-term rental. The Airbnb business model is now a challenge for many property owners who have been experiencing reduced rental income as a result of the coronavirus pandemic.
Real estate professional Roger J Allen said, “A two-bedroom apartment that yielded US$85 per night prior to COVID-19 is now US$70 or US$80 per night.” Allen expressed concerns that there are mortgages taking up 75 per cent of some mortgagors’ salaries and 25 per cent of their Airbnb rental income, so there is a real dilemma of mortgagors defaulting on their mortgages. The dream of financial freedom is at risk if property owners continue to rely on short-term income to maintain long-term mortgage payments.
DON’T PUT ALL YOUR EGGS IN ONE BASKET
How much risk are you willing to take in achieving your retirement goals? Diversification is the key. The road map to retirement income indicates that diversification is the best investment strategy for retirement income. Know your time horizon. Assess your risk tolerance. Having a pension plan is important. It’s best to start early and benefit from the wonders of compound interest. Whereas young investors can take more risks since they have a longer time horizon, seniors who are nearer to retirement need to be more conservative. A balanced portfolio of assets that will increase in value such as real estate, bonds and stocks, is a strategy that will ensure a well-funded retirement plan.