If you are trying to figure out how to retire comfortably, you should consider purchasing an income property. An income property is one that you purchase with the objective of renting out spaces in it to tenants in exchange for them paying you rent. It can take the form of a house, an apartment building, a retail property or a commercial property, the four most common types of income properties.
A real estate colleague of mine is 63 years old. He is still working full-time but his wife wants him to retire and move out of Toronto. They have purchased a beautiful property in Guelph, an hour away. He has a lovely house in Toronto with an affordable mortgage, having owned it for 20 years. He plans to move to Guelph, rent out his home in Toronto for $5,500 per month, and commute to work in Toronto three days a week to begin to slow down and ease into retirement while still maintaining an employment income. Renting out his house in Toronto will cover the mortgage, utilities, property tax and maintenance on that home and still provide him with $2,000 per month towards his retirement income.
The beautiful theory of an income property is that at some point in the future, if you pay off the mortgage over a 25 year time frame, you will have free cash flow coming from that property that can provide you with an income without your having to work full-time to realize that income. It provides a form of more passive income although it is never truly passive as you’ll have to take care of the property and manage the collecting of money from your tenants. There are also tremendous income tax advantages to owning real estate that typically allow you to shelter most of the cash flow you receive from it so that you don’t pay any significant tax on it until you sell the income property.
A few of the criteria you should consider when looking at income properties are as follows:
- Can you purchase the property for an affordable price?
- Can you arrange a mortgage on the property at an attractive interest rate?
- Will the property be cash flow positive?
- Is the property location one that will enjoy appreciation over the years because the community in which it is located is growing or for other reasons?
- Can you impact the value of the property by doing some work on it, creating sweat equity?
- Are you prepared to manage your tenants and maintain your property or do you wish to hire someone to do that for you?
Assuming you can work out the above to your advantage, then I would recommend purchasing such a property. If you then put the income property on a mortgage repayment plan that matches your retirement timing, you will likely create a healthy income to help you afford retirement.