Should you fund your retirement with property?

Story first appeared on usatoday.com.



Q: I'm 59 years old. My retirement savings includes a vacation rental property worth $500,000 without a mortgage. It takes in $20,000 a year. I also have three mortgages that total $350,000. One is my primary residence, and two others take in monthly rent of $1,500, which is equal to the monthly mortgage. Should I sell the $500,000 property to pay off the mortgages? Or should I take out a loan on that property to pay off the mortgages? Any reason not to rely on property for my retirement future?

A: Congratulations in building a portfolio of properties that appears to be generating a nice positive cash flow. As the latest real estate downturn has proved, relying upon any one asset class is quite risky, and you hopefully have other assets besides Social Security to support you in retirement.
You do not mention the interest rates on the mortgages. Most likely your existing mortgages are a lot higher than the current national average of below 4%, which would suggest refinancing. Assuming you have a high enough credit score, refinancing the package of investment properties so that you only have one property with a mortgage would be ideal. Moreover, the current cheap money environment would most likely lower the total costs in any case.
Although it's not clear how long you have owned the vacation rental property, it is generally not an ideal time to sell. Prices have gone down significantly in many parts of the country and you may not get a good return on your investment. Cheap money vs. low selling prices supports the refinancing approach.
Your properties would then be generating income to pay off the new mortgage. Your annual rental income of $38,000 ($20,000 plus $18,000) should pay off all mortgages within 15 years. Obviously the details of your loans, such as your interest rates, length of mortgages, prepayment penalties and loan-to-value ratio, will determine the exact payoff time and the amount you can use to fund your retirement living.
As you know, there will always be down time for rental property when it is vacant as well as unexpected costs for repairs and upkeep. So minimizing the fixed mortgage expense works in your favor as you approach retirement. Assuming you are managing the properties, rental property can provide a nice income as well as a hedge against inflation as most properties are at a low value today.
If you have not done so, you might also consider putting the properties inside of a legal entity (such as a limited liability company, or LLC) to protect yourself in the event of problems. Providing a legal envelope protects your other assets in the event a tenant or others sue you for a fall or other claim. An umbrella insurance policy will help pay for the attorney to defend you.
There are many unknown factors, such as your income, expenses and other issues to consider, so consulting a knowledgeable financial adviser would be helpful in evaluating your decisions.