How To Use Real Estate As Your Retirement Plan

Whether you have put in your time and desire to retire but cannot see a practical way from a financial standpoint, or are younger and seek an early retirement plan that will have you financially well off into your later years, real estate investment is a terrific option.  In Nassau County, the average household income is $93,696 with a median home value of $494,000; in Suffolk County, the average household income is $86,196 with a median home value of $430,600. While the average incomes of the counties that make up Long Island are significantly higher than that of the United States as a whole ($53,000) and the remainder of New York State ($54,659), it is quite clear the cost of living is as well. Because of this many people do not see retirement as an option.  However, those people do not invest in real estate and should.

Passive real estate investment income can replace, and even far exceed, salary income, making retirement for both the older and younger generations possible.  But, be forewarned, it is not “easy” and requires a great deal of hard work and an entrepreneurial spirit. The good news is that most of the work is up-front, you will be your own boss, you will set your own schedule and you will be free to live your desired life.  It will take most people some time, approximately 2-5 years, before they can completely through in the towel at their job because the reality is, you need an income to purchase a home. (Not to mention, unless you plan to buy the house outright, you need to show income to obtain a mortgage!)

The first thing you need to do is decide what income you need per month to live the lifestyle you desire.  Financial experts estimate that to comfortably retire, you need twenty five times your annual expenses saved or in assets if you are not receiving a pension (so, if you’re annual expenses are $75,000, you will need $1,875,000 saved).  Unfortunately with the cost of living as it is, most people do not have the opportunity to save two million dollars from the day the start working until the day they wish to retire. Real estate grows passive income at a much larger rate than traditional assets, allowing you to live more comfortably solely off assets.  It also gives you the opportunity to grow your assets if you choose the right location to purchase a rental property.

The idea is to start off small, which is doable for both older and younger people looking to invest.  You need to decide what a comfortable monthly income is for you to live on, and acquire properties based on that desired income.  Regardless of how low or high you set your monthly income, it is feasible to purchase one property and meet your needs; or, you may need to purchase several or a complex.  Now to do it, you need to understand several things: financial options, reserve finances and how to choose the right properties.

Your financial options.  Unless you have a substantial savings account, it is most likely that you will need to take out mortgages to purchase your investment properties.  While obtaining a mortgage today is more difficult than it was prior to the market crash, it is still very feasible for almost anyone. It is important to remember to get pre-approved for a mortgage before looking at rental properties because the Long Island real estate market is very competitive.  It is possible that you can put down as low as 5% on a home (through an FHA loan) or you may have to put down as much as 30% to have the winning offer. Loan terms vary depending to the use of the property purchased and they typically are less friendly for non-owner occupied homes. This can be overcome by living in the home, or a unit in the home, for a year prior to renting it out.  (A side note: some Long Island towns require that a rental property be owner-occupied.) Although the quantity on Long Island is not very high, you can also consider purchasing a home that is in foreclosure or via short sale. While the sale price of these homes are much more attainable, they sometimes require a tremendous amount of work which can also be costly.

Reminder: If you decide you need $5,000 per month to live on, that does not mean you can purchase a two family home and rent each unit out at $2,500, as you will need to pay the mortgage, taxes, repairs, and other expenses.

Back Up Funds.  If you own a personal residence, you understand that out of the blue and usually at the most inconvenient times, unexpected expenses for repairs pop up.  If you are a landlord, you will be required to have any serious repair fixed in a timely manner so that the house does not become uninhabitable. Before you purchase a rental, set aside rental expenses in a reserve account for routine maintenance.  A window of about six months worth of routine maintenance costs will ensure that you have enough to cover emergencies when they arise.

Reminder: Be 100% certain that what you are buying is worth it.  How new is the water heater or HVAC system? Is serious flooding a concern?  Will the roof need to be replaced shortly? While unexpected costs and repairs do arise, you should be aware of what major obstacles may be down the road and try to avoid a home with many.

The Right Property. The entire point of purchasing rental properties is to turn a profit that you can live off in retirement.  When shopping for a rental property it is important to always contact a Long Island real estate agency for help and assistance to find the right fit for your needs.  As a general practice for first time landlords, it is usually best to purchase a one-family or multi-family home in a good school district. This will help alleviate the stress of having too many tenants to deal with when you are first starting out. It will also help you find ideal tenants as a family with children is less likely to cause problems or terminate a lease early.  Further, your rental income should be equivalent to at least 1% of the value of the home (meaning a $400,000 home should produce $4,000 per month in rental income). While this is hard to achieve in the competitive Long Island market, if your Long Island real estate does not believe you can come close to that, you should think twice before purchasing the home.

Real estate investment can be a big help in a retirement plan, and it is a plan that you can put into action at age 20 or age 60 with the right mindset, some savings and the help of a real estate company on Long Island.