If you want to develop a secure retirement portfolio, diversify your investments by investing in a variety of assets. Investing in mutual funds rather than stocks is an excellent place to start, and adding bonds and real estate can further diversify your portfolio. If you have processes planned in place to manage the special demands of rental property over the long term, then it can be a great value addition to your retirement portfolio. Therefore, having knowledge of the 3 tips why you should include a rental property in a retirement portfolio is important.
Renting a home offers advantages and disadvantages, just like any other retirement investment. The correct rental property might supplement your retirement income with a steady supply of rent checks. However, if the house is vacant, you may find yourself with no income while still needing to pay the mortgage and property taxes.
The following are the tips why you should include a rental property in a retirement portfolio;
1. Beneficial and favorable tax treatment
Real estate is particularly important in a retirement portfolio since it receives favorable tax treatment even if it is not held in a tax-advantaged account such as a 401(k) or an IRA. Your equity grows in real estate without you having to pay taxes on it until you sell it. You can even avoid paying capital gains tax if you sell your rental property and utilize the proceeds to buy more rental property through a tax-deferred exchange. Additional write-offs that the IRS enables you to claim usually protect your rental income from some taxation. You can own rental property outside of your tax-advantaged accounts using any of these methods.
2. Minimal inflation indexing challenges
Inflation can erode the value of your investments. While some investment vehicles, such as money in the bank, often lose value in times of inflation, others, such as real estate. Real estate is an excellent inflation hedge for two reasons. First, if inflation becomes a problem, you may often compensate by boosting your rentals. Second, because people acquire real estate with money, and money loses value as a result of inflation. The price of a real estate normally rises to compensate for inflation. After all, you can always print more money, but you can’t always manufacture more land.
3. Long-term profits and returns
You can profit from a rental property in three ways. First, after collecting rents and expenses, you should receive a monthly profit. The property’s worth should therefore increase over time, giving you equity. Finally, paying down your mortgage increases your equity. Furthermore, renovating a rental property might help you build even more equity.
3 Tips why you should include a Rental Property in a Retirement Portfolio
When you own a rental property, you may have to deal with unruly tenants, nonpaying tenants, late-night complaints, and emergency repairs. You can engage a property manager to deal with the issues, but it will eat into your profits. It’s a good idea to get a rental property close to home so that you can deal with any emergencies swiftly. Rental properties can be an excellent way to diversify your retirement portfolio. Also, you may not want to own them once you’ve retired. Many investors opt to be very hands-on with their rental properties. This is so in order to make them perform properly, which may not match with your retirement lifestyle.