Today, many people about to retire are looking at foreclosed properties and wondering if real estate investment could work for them in their retirement. If you’re one of them, consider some of these issues before deciding to invest in real estate.

At a dinner the other night, I was talking to a lovely couple who was preparing to retire in a few years.  When asked, I told them that I was a freelance writer specializing in personal finance.  “Let me ask you something, then” said the husband, “What do you think about people who want to own rental property when they retire?”

Several years ago when I lived in Florida, this strategy seemed to be all anyone could talk about.  Several very popular books were written instructing people nearing retirement age who had not saved enough money to eschew their 401(k) plans and take out mortgages on second and third houses.  The plan was to charge enough in rent to cover the mortgage payments, taxes, and insurance premiums, take a hefty tax deduction during your peak earning years, and retire with paid-off properties providing a steady stream of income.  Investors flocked to areas they wanted to retire in such as Florida, California, and Arizona and began buying up properties in the hopes of an easy retirement.

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Of course, many of them ended up in financial ruin.  Some of them ended up with adjusting mortgage payments that their rental income could not meet, some bought properties that they soon learned were unrentable (or at the very least could not be rented for the amount of their mortgage payments), and some quickly discovered that property management was not a work-one-day-a-month type of investment.  This resulted in waves of foreclosures and a tumbling real estate market.

Today, many people are looking at these foreclosed properties and wondering if real estate investment could work for them in their retirement.  If you’re one of them, consider some of these issues before deciding to invest in real estate.

Consider how much you can reasonably rent the property for.  This is where many first time investors make their mistake.  While plenty of books claim that it is possible to have someone else buy your house for you, this is actually very hard to pull off.  There are enough government programs available that young people are able to buy a home with a very small down payment, giving them no reason to want to rent at a rate as high as a mortgage payment.  Very few people have jobs that require them to move frequently.  In fact, many renters today are renting because their poor credit forces them to have to rent.  These tenants are looking for a low monthly rental payment, making it next to impossible to see positive cash flow on a fully mortgaged property.  

Consider maintenance costs.  Realize that maintenance will be higher on a rental property than with your primary residence.  Tenants usually don’t want to draw attention to problems out of fear that they will be blamed for the damage.  Between tenants you will probably need to repaint and re-carpet.  Think about major projects that will be needed as well.  A house usually needs a new roof every 20 years, a new water heater every 15, and most major kitchen appliances will usually only last about 10 to 15 years.  Furthermore, consider the costs of maintenance if you are no longer able to care for your own properties.  This area is where many retirees find themselves in trouble.  Have a well-thought out plan in place to care for your properties in case of an accident or an extended illness.  If you will be relying on family members for help, make sure they agree to a plan before there is a crisis.  Many retirees find themselves having to sell a property because they are no longer able to care for it, and sometimes the sale does not take place at an ideal time.

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The eventual sale of the property is another important detail that is often overlooked.  If your properties represent a significant portion of your assets, you must have a plan in place to draw out the equity in case of an emergency.  Real estate has never been known as a highly liquid investment, so plan now to take out a home equity loan and/or make sure you have clauses in the rental contract to allow you to evict early and sell in case of an emergency.  Typically, a tenant will request that they be offered the property first at a pre-determined price in order to agree to such a clause.