This Rental Hack Could Bring in Extra Income in Retirement

Retirement is a time of renegotiating your lifestyle and budget, as income tends to decline. For some retirees this means downsizing and even moving out of the area to places with cheaper costs of living.

However, some retirees have figured out a rental hack that can allow them to not only bring in extra income in retirement, but offer them benefits such as aging in place, the tax benefits of continued homeownership and more.

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Real estate experts Sean Phillips, the California-based founder of Otto ADU , and Dawn David, a  New York-based licensed associate real estate broker at Corcoran , explained the benefits of building or converting an accessory dwelling unit (ADU) on your property in retirement .

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Upgrade an Existing Property by Building

Phillips has found that it’s common for people to choose to upgrade their existing properties with an ADU because the mortgage interest rates are high and people don’t want to move or buy if they have a really good rate locked in.

Other times, people find that after their kids have moved out they end up with a house that’s too big for their needs in retirement. “Their options are to move — maybe into a retirement home or to move to a smaller house, but they would lose that interest rate, they would lose all the equity they have built up and then they’d have to move into a different neighborhood,” Phillips said.

Building an ADU then becomes an attractive option, because it allows retirees two options of where to live on the same lot, and an opportunity to rent out the other to help with bills.

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Convert a Garage or Shed Space

Another option, when feasible based on building codes and permit requirements, is to convert an existing garage or shed type space into an ADU.

David said, “I’ve found that more and more homeowners are taking advantage of adding to their home or making other spaces that were maybe meant for storage, trying to make them livable so that either they could live there or to bring in more income.”

Finance a Build With a HELOC

For people who want to build an ADU rather than convert a space, Phillips said it’s common to take advantage of a home equity line of credit, or HELOC, which allows homeowners to tap equity in their existing home or property.

“That way you make payments over the course of construction and you only only start paying the interest as you draw out the money,” Phillips said.

He said there are some companies that will factor in the future value of the ADU in your home value and sometimes even the future rental income potential when determining the loan amount. “So that’s for people that may not have as much equity,” he said.

Additionally, if rates drop in the future, you could also refinance the property for a better rate.

Look For State, City and County Incentives

Some cities, counties and even states may also offer incentives or assistance programs to make it easier to build an ADU, particularly in areas where there is low rental inventory. Investigate such options before you decide how you’re going to finance one.

Design Them To Age in Place

In addition to potentially bringing in rental income, many retirees are designing the ADU as their primary residence to age in place. You can then rent out your primary residence. “So that’s the cool thing about that is that you can design a lot of these age-in-place features from the start,” Phillips said.

He shared the kinds of additions they’ve built in for seniors, such as zero height thresholds and curbless spaces, where you can roll a wheelchair or walker and use the space without having to go upstairs, or wider doorways, roll in showers and cork flooring, which is softer underfoot.

Rent to a Caregiver

Another way to save money without necessarily earning rental income through an ADU is to use it to house a live-in caregiver, Phillips said. If this can prevent someone from moving to an assisted living facility, that can be a huge financial savings and include the emotional and psychological benefits of getting to stay in your own home.

If You’re Having Trouble Making Ends Meet

It can also happen that you find yourself in retirement on a limited income and still in possession of a mortgage that may be difficult to keep paying on. This is an instance where an ADU could bring in additional income to help defray those costs, David said.

Or, in general, with higher costs of living, just having an alternate income source can make all the difference, she pointed out.

“So many seniors that I’ve spoken to just have a hard time making ends meet because of rising costs. I mean, utility bills have gone up 30%, some even 40%, everything’s increasing,” David said. “These are people on a fixed income and most of them don’t want to go into assisted living facilities, which cost a fortune anyway, or even with a family member — they want to remain in their spaces.”

If You Don’t Want To Have To Keep Up a Property

By the time you reach retirement property upkeep may become more work than you’re willing to do, David said.

“A good candidate is somebody who’s having trouble keeping up the property and who just needs that extra income, but they want to remain at home,” David said.

Maximize Income by Taking the Smaller Space

While some people rent out their ADUs for the income, David pointed out, “I think it’s nice when the homeowner themselves live in the space because they can maximize their income renting the larger space.”

Either way, having an ADU gives you options.

Don’t Rush the Process

David also warned that it’s not a process you want to rush, so it might be a better idea to build an ADU before you retire or need the additional income. “You’re better off taking the time to make sure that you’ve crossed your t’s and dotted your i’s because sometimes once you get people in, you can’t always get them out and then they become a legal tenant.”

Remember These Considerations

While an ADU is a great idea for many reasons, David made clear, “It’s not as simple as slapping on a coat of paint. There [are] a lot of things that you have to do to be within code compliance with the city, whether it’s cooking gas, ceiling height, making sure that bedrooms have windows and so many other things.”

However, if you can afford to build or convert an ADU, it might just make all the difference in your financial, and physical, comfort in retirement.

This article originally appeared on GOBankingRates.com : This Rental Hack Could Bring in Extra Income in Retirement