StreetSide Developments Blog

The Pros and Cons of Using an Income Property to Fund Your Retirement

Posted on October 25, 2016

pros-cons-using-income-property-fund-retirement-house-money.pngThe nest egg, the pension plan, and downsizing. If retirement has started to peek up over the horizon then it’s likely you’ve been thinking about these things more and more. But there’s another option you may not have considered.

Enter: the income property.

It goes without saying real estate is a good investment, but it doesn’t have to stop with your own home. Purchasing and renting out a secondary property or renting out your existing home when you downsize can provide a lot of the same benefits as a pension plan, and then some. It requires commitment, and there are some key considerations to take into account when weighing the costs and benefits.

First, let’s start with the benefits.

Consistent Cash Flow

Like a pension or healthy nest egg, an income property has the potential to generate consistent cash flow through your retirement. And so long as there’s demand, which is typically one constant that can be relied upon, there's no reason to worry about income running out. It’s one of the few ways to continue bringing in money after retirement. 

Continuous Demand

Another benefit to rental properties is their security. With the right selection, it’s possible to cash in on consistent demand. Urban rentals, in particular, have high upsides, as more and more people move into city centres. Single-family homes offer opportunities to be divided into bedroo
ms or floors. It’s important to consider the neighbourhood quality, convenience of location, and proximity to things like schools and public transit. With a couple key assets nearby, demand won’t be a concern.

Increasing Returns

pros-cons-using-income-property-fund-retirement-house-keys.pngIn addition to consistency in cash flow and continuity in demand, there's also the potential for increasing return over time. Provincial laws typically stipulate landlords may incrementally increase rent year-over-year. In addition, there's usually gradual inflation in market rents as well as the potential for property value to increase over time.

Outside of periodic increases in property taxes and utilities, it’s safe to say most of the costs associated with rental properties remain constant over time, especially if a fixed mortgage rate is assumed. This leaves multiple avenues for increasing income, with few rising costs.

There's certainly some very clear, unique benefits to income properties, particularly when it comes to financial potential; but it’s important to weigh the risks as well.

While there’s a lot of potential for upside when it comes to returns, there’s also potential for fallout. That’s where we're heading next. 

Tenant Risk

One of the most important factors in the success or failure of an income property is the quality of tenants. The tenant selection process is incredibly important, not only for financial returns but for the stress and well-being of the landlord as well. Certain repairs are to be expected when it comes to property management, but adding poor tenants into the mix can cause those costs to skyrocket each time there’s a transition.

Ongoing Management

Another important factor is the toll on the landlord or the person responsible for property management. Owning and operating an income property is not something to be done half-heartedly. On-going costs and inconveniences are sure to pop up, in the same way they do with your own property. If a property management team is hired, costs can rise even more.

It’s important to take all of these things into consideration. And when it’s time to jump in, it’s important to do so with both feet. It’s not a guarantee, but reason would have it that the more engaged and helpful the landlord is, the better the tenant will behave. So being fully committed stands to benefit everyone.

Initial Investment

The final consideration to take into account is the upfront cost. Buying an income property is guaranteed to cost some upfront, and we’re not simply talking about purchasing the property. To start, it’s likely some renovations will be in order to ensure your property is appealing to tenants. This may include your former home if you've decided to take advantage of the financial benefits of downsizing.

Furthermore, sometimes banks require larger down payments, charge higher interest rates, or require additional insurance coverage for a rental property. That's not to say these costs can’t be recouped over time; once your rental property is full it shouldn’t take long at all. But it’s important to be prepared for some extra costs to get things going.

Income properties offer a unique opportunity to not only secure consistent cash flow but increase returns over time. Ultimately the key lies in your commitment to finding the right property, filling it with the right people, and managing it well.

If you're looking for more information on tenant and landord rules in Alberta, you can check out the Laws for Landlords and Tenants website.

Click here to subscribe to Streetside's newsletter!

Photo credit: house priceshouse keys

Click here to subscribe to Streetside's newsletter!

Topics: downsizing, tips & tricks

Get our blog articles sent to your inbox. Subscribe now:

Click here to download your free guide now!

Recent Posts