You'll often hear that it's really important to save well for retirement and line up income outside of Social Security. In fact, a good bet is to set yourself up with at least one passive income stream that pays you on a consistent basis.
You may be inclined to invest in a rental property as part of your retirement income strategy. But while a rental property could prove to be a steady source of income, it may not exactly be passive in the classic sense of the word.
A rental property could be more work than you bargained for
It's easy to see why the idea of a rental property investment holds appeal. People will always need a place to live, so if you buy a rental property, you can not only generate monthly income, but also, in many cases, hold onto an asset whose value might appreciate over time and profit in the event of an eventual sale.
Image source: Getty Images.
The problem with owning a rental property, though, is that it may end up being a lot more work than expected. Of course, the amount of work a rental property entails hinges on what sort of property it is and its condition. It may be less work, in theory, to rent out a single family home and manage one tenant than to rent out a multi-unit property.
But either way, being a landlord isn't for the faint of heart. You have to oversee the financial end of things, like collecting rent, and you're tasked with addressing tenant complains and issues as they arise. You also have to make sure your rental property is maintained and deal with repairs as needed.
Not only might being a landlord constitute more work than anticipated, but it might also cost more money -- especially if you wind up getting unlucky with repairs. So for these reasons, you may want to reconsider your plans to invest in a rental property for passive income -- and go a different route instead.
When you set yourself up with income that's truly passive
Though it can be argued that a rental property is a form of passive income, an option that may require a lot less work and effort on your part is to invest in real estate investment trusts (REITs). REITs are companies that maintain portfolios of properties, and many trade publicly like stocks do.
The upside of investing in REITs is that these companies are required to pay out at least 90% of their taxable income to shareholders as dividends. So if you hold REITs in your portfolio, you may end up in a position where there's plenty of consistent dividend income coming your way -- without the work of being a landlord.
Of course, REITs are only one investment option you can look at for passive income. You could also look at filling your portfolio with regular dividend-paying stocks or municipal bonds, which are contractually obligated to pay you interest at preset intervals. And if you don't want to go out and purchase municipal bonds individually, you can look at a municipal bond ETF instead.
All told, it's definitely wise to have at least one passive income stream available in retirement. But being a landlord is a lot of work, and it may be more than you want to handle. So it's a good idea to look at investments that really don't require much work beyond a bit of up-front research and occasional follow-up, like REITs, dividend stocks, and municipal bonds.
