Retirement Planning
September 7, 2022

Being a Landlord in Retirement: A Good Idea?

Four questions to consider before you invest in rental properties
Stewart Willis
Co-Founder & Co-Owner Asset Preservation Tax & Retirement

Retirees who want passive income often turn to rental properties. But while they’re a tax-efficient way to invest, many are surprised at how non-passive owning rentals can be. It takes time, energy and money to be a landlord. That’s why you should make sure the positives eclipse the negatives before buying that first rental property. One way to do that is to consider these questions.

How much is left on my mortgage?

Downsizing is a common move in retirement, and if the mortgage on your current home only has a few years left, turning your home into a rental property could be a lucrative investment. If you have several years left on your mortgage or your interest rate is high, it may be better to sell and use the profit to buy your retirement home or start a low-risk investment like a fixed annuity.

Acquiring a new property to use as a rental is also an option. Carefully consider your price point and confirm that the typical rent rate for your area can cover your mortgage. Also, be sure you have enough funds for a down payment, typically 20% of the home price.

What kind of tax break would I get?

The greatest benefit of renting your property is the number of tax deductions you can claim as the homeowner, but only if you itemize. Repairs and maintenance, proprietary taxes, insurance , marketing, rental applications and mortgage interest can all be deducted from income tax on rentals. Deprecation tax deductions allow you to deduct the cost of the property itself, which helps spread out the cost of buying the property over time as you save money each tax season.

Although the tax breaks sound exciting, remember filing can quickly become complicated with so many moving parts. When you file, you’ll need to fill out additional forms, and most people need the help of a CPA to make sure everything is filed correctly. You’ll have to decide if your potential tax break outweighs the time and cost of filing a complicated tax return.

Will I earn an income?

Rentals can be an efficient income stream if the tenant’s rent exceeds the necessary costs. Zillow has an easy calculator to estimate the income from your rental property. Keep in mind rental properties don’t always have an excellent return on investment. In an environment with rising interest rates, people often assume property values will appreciate, but it's not guaranteed. The housing market still has market risk!

I have two rules for my clients with rental properties: don’t rent to family and don’t rent to friends. When inflation causes your expenses to increase, you have to increase rent which can be difficult with personal ties. I've worked with people nearing retirement who rented a few properties to friends and family. But they didn't feel comfortable raising rent prices on their close connections, and eventually they lost money on their rentals. If you can't charge a fair rate to cover your costs, rental properties can quickly become a money pit.

Am I ready to be the fix-it man (or woman)?

For many people, retirement is all about enjoying your golden years with ease, but being a landlord can be quite the opposite. When pipes burst or appliances need updating, you’re responsible. Not to mention, some tenants can simply be a pain in the neck to deal with. Landlords typically spend 4 hours on maintenance every month for each rental property they own.

Property management companies can be hired to handle maintenance and tenant relations, but make sure the cost of their service doesn’t cut too deeply into your income. The bottom line is this: if you want a stress-free retirement with minimal responsibilities, rental properties might not be the right investment for you.

Alternative Investments

If rental properties are off the table, there are plenty of other options to consider. A good retirement plan creates an investment strategy to reduce tax exposure. I recommend using Roth conversions to move your retirement funds away from accounts with high tax liabilities, like 401(k)s. Ideally, you want 100% of your assets in after-tax accounts, like Roth IRAs, because paying taxes up front will allow your money to grow without paying taxes when you withdraw funds.

There are fees associated with Roth conversions, but the end return typically outweighs the upfront cost. Instead of renting your home, consider selling your home and using the profit to cover the cost of a Roth conversion. When you start using those funds tax-free in retirement, you’ll be double thankful: saving on taxes and avoiding the headache of being a landlord.

Carefully weighing the pros and cons of being a landlord will keep you from making an investment you regret down the road. At Asset Preservation Tax & Retirement Services, we believe your retirement income plan should ultimately align with and provide for your retirement lifestyle and goals, whether you choose to rent as an investment strategy or not. You’ve worked hard your entire career, so make your investments work for you while you enjoy a long, happy retirement.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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