Are you Correctly Preparing for Your Retirement?Return to Blog
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As retirement approaches, many people are concerned about ensuring their financial stability. One way to achieve this goal is by investing in real estate. Purchasing a rental home can provide a stable source of income during retirement, but there are several things to consider before making such a significant investment.
According to Investopedia, investing in income-generating property can be a smart financial move. A rental property can provide a steady stream of passive income that can supplement other retirement savings. In addition, owning a property provides a tangible asset that can appreciate over time, increasing its overall value. However, this is not for the faint of heart, investing in rental properties requires careful consideration, education, research and planning.
Entrepreneur suggests that one way to invest in real estate for retirement is to purchase a rental property with a mortgage, then use the rental income to pay off the loan. Once the mortgage is paid off, the rental income becomes a stable source of passive income that can help fund retirement. This strategy requires a significant initial investment, typically at least 25% down, but it can pay off in the long run. But don’t forget there can be other costs too that must be accounted for such as, and not limited to: property taxes, insurance, vacancy factor, maintenance, business license, etc.
Another way to fund retirement with real estate investments is to use a self-directed IRA or a 401(k) to purchase a rental property. This option allows for tax-deferred growth on the investment and can provide a source of income for retirement. However, it's essential to understand the rules and regulations surrounding these types of accounts and to work with a financial advisor that is knowledgeable in this field. These products may not be for every investor.
We asked an expert lender and investor, Helena Jones-Kim, who’s been in the business for over 20 years what her thoughts were on utilizing your primary residence to purchase an investment property. Here are our questions and her answers:
Do you recommend utilizing the equity in your home to purchase another property?
“Yes, and there are many ways to do so. For example, let's say someone has $200K in equity. You can borrow up to 80% of the value of your primary residence. If the home is valued at $1M, the max new loan(s) can be $800K. We would need to analyze the cost of borrower from the equity in relation to the new asset’s ability to generate revenue. If the cash flow makes sense, it’s a good idea.”
What would costs normally look like when using the equity? How can Homeowners best prepare for this?
“For a standard equity line, or line of credit, the rates are now between 8-18% with minimal origination fees. The payments are usually interest only. With a cash out refinance, the cost can be between 2-3% of the new loan amount, including the title fees, notary, county, etc.” In your experience as an investor how lucrative has rental income been for you?
“When buying a rental, I analyze cash on cash returns. The cash flow many only be $300 a month net, but the cash on cash returns make sense if the out of pocket expenses are low. Equity can build quickly in some markets, which can make cash flow less important. The real answer is, it depends on what you’re investing for. Income, equity, or both? In my experience, I have had good luck with cash flow on out of state rentals, and great equity returns in CA.”
Where do I need to be in my financials for this to be a possibility?
“How much do you have saved to spend on the down payment and closing costs? What is your current salary? Can we schedule a call to run through the math? By analyzing your debt to income ratio, and amount of cash available for the down payment, I can give you a price that works. With that price, you find a suitable market and start investing now.”
Advent helps manage over 850 units in the Bay Area and beyond for a reason. That reason is there’s almost no better financial investment than that of home ownership. If you have worked on that home and reaped equity, allow that equity to work for you and make something even stronger out of it.
For any questions regarding lending, please reach out to Helena Jones-Kim. Her best contact is (510) 385-7721 and her email is HelenaJonesKim@gmail.com
Contact our lead Realtor and Broker-Associate Darryl Glass to discuss your specific situation. He has 10+ years of experience and annually sells $35+ million in real estate. Feel free to call, text or email him at 510-500-753 or email@example.com
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