Retirement isn’t the sexiest thing to think about, but unless you want to spend your golden years stuck at home watching every penny, it’s important to do just that.
I’ve been self employed for the past 15 years, which means there’s no cushy company pension to fund my retirement. If you’re a freelancer you’ll also understand that jobs can ebb and flow quite dramatically, making it difficult to keep money aside.
For the past couple of years I’ve been putting as much as I can spare into an online pension specifically designed for the self employed, but it’s not nearly enough and the reality is I’ve run out of time to build a nest egg I can live off.
OH and I have known for some time that we’d have to be a little more inventive with our pension plans, so we’ve been looking into other options.
One that keeps floating to the top is to eventually buy a rental property. But, as with any investment, there are pros and cons.
On the plus side, with careful planning, we could potentially find a property where the rental income would comfortably cover the mortgage repayments. In 15 or 20 years it would be free and clear; we could choose to keep it for the regular rental income, or sell it and invest the lump sum.
So what are the pros and cons of buying an investment rental?
On the surface, it’s a no-brainer – someone else pays your mortgage for you, and you end up with a valuable asset. What’s not to love?
Unfortunately (as this year has proven) life doesn’t always take the path you expect. Things can go monumentally wrong in a heartbeat, and when they do that money maker can end up a millstone around your neck.
First and foremost, you need to ensure the rental money you earn from the property safely covers not just your mortgage and insurance costs, but also the tax you’ll be required to pay on the income.
If you have a property manager to deal with the day-to-day tenancy issues, you’ll have to consider those costs too, and you’ll have to be committed for the long haul – otherwise, a property crash could see you plummet into negative equity. Which is not an issue over a long period of time, as the market will inevitably bounce back, but potentially devastating if you’re forced to sell before it does.
You also need to think about what to do if you end up with a nightmare tenant. Unfortunately, there are people out there only too happy to exploit someone else’s hard work. Thankfully, you can take out specialist landlord insurance to protect your income, and your investment.
Not only does this include the usual building and contents cover, you can also tailor your policy to include loss of rental income, legal costs and malicious damage caused by disrespectful tenants.
While not compulsory, having this insurance demonstrates you’re a responsible landlord, making you more attractive both to letting agencies and tenants.
Yes, it’s an extra cost to cut into your profit, but it’s also peace of mind, not to mention a financial lifeline if any of the worst-case scenarios was to unfold. As the saying goes, it’s far better to need it and not have it, than need it and not have it.
Those are some of the pros and cons of buying an investment rental, which we need to weigh up. We’re still a long way off from making a decision, but bricks and mortar is definitely at the top of our financial planning list.
With careful research and planning we hope to have a retirement we can truly enjoy.
• read about How Lockdown Helped us Whip Our Finances into Shape
Image courtesy of Annie Spratt, Unsplash