Get Extra Income From Real Estate

Walk through these six steps to see if rental real estate can help you build a sound retirement portfolio.

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Many retirees are fed up with the paltry returns they get from bonds, the insulting interest rates paid by banks and the frenetic fits of the stock market. Owning and renting real estate may be a reasonable investment alternative that can bring in extra cash for people who are no longer working. If you play it right, you can generate a regular, unending stream of monthly income. And we all know:  Rents never go anywhere but up.

Today, close to 10 percent of retirees rely on profits from rental properties to supplement their income. You, too, can put some real money in your retirement pocket. But real estate is not for everyone. Here's a step-by-step approach:

1.  Assess your commitment. The days of buying real estate and flipping it for a quick profit are long gone. Rental real estate can provide a steady, long-term income, but it takes work. Are you prepared to do lots of research to find a property in a good location that will be attractive to people in the rental market? Are you ready to crunch numbers to figure out if a property will work out financially? Are you able to manage the property fix the plumbing, clean the carpets and apply a fresh coat of paint for new tenants or else hire someone else to do it for you?

2. Know the neighborhood.  You've heard the old maxim about three important factors in real estate:  location, location, location. If you're buying real estate you need to know what you're getting into. Is there something special about the property – a view, proximity to waterfront or public transportation? Is there a new mall going up nearby, or a new highway? You can never cover all the unknowns, but you can find out if the rental market is viable. Check with real estate agents, go online to Zillow and Craigslist and talk to people in town. You can't accurately predict what the property will be worth in five years, but you should know if you can rent it next month, and at what price.

3. Buy local. The farther away you are from your rental property, the harder it is to do your job as a landlord. If it's too far, you can't do it at all, and have to hire a property manager who will do the job but eat up your profit. I know one couple that lives in a lake community in upstate New York. They bought a small house down the street. They break even renting it for the summer, and make a profit on what comes in during the shoulder season. When it's empty they don't have to worry. They can see it from the end of their driveway.

4. Best bet: a one bedroom condo. The sweet spot in the rental market is for single people, such as young singles, divorced middle-agers and retired widows. Most of these people do not need, and will not pay for, a larger unit. The one bedroom condo is the Honda Civic of the rental market. There's nothing fancy about it, but for most people it offers the best value and is the easiest property to manage.

5. Buy at a good price. An old rule-of-thumb says if you can buy a property for 12 times the amount of its annual rent, then you're getting a good deal. These days you might even do better than that, perhaps 10 times the annual rent. There are always variations, depending on the location and type of property. But, remember, there's no pressure for you to buy. Don't pay up because you "fall in love" with a place. You should have a pretty good idea what the monthly rent will be, so don't buy a unit that will cost more than you're bringing in.

6. Make sure you have a cash reserve. If you already own your own home, you know at some point you inevitably face an unexpected expense – the dishwasher breaks, the roof leaks or the condo association hits you with an assessment. You need to keep a cash reserve to take care of surprises, including the possibility that your unit might be unoccupied for a (hopefully short) period of time. You also need to build occasional expenses into your financial equation to help you decide, in the final analysis, if the whole project is worth it.