We’re in our early 40s with $3 million mostly tied up in rental property – will we still be able to retire?

A lot of people buy real estate to have a home to live in themselves. But some people opt to invest in real estate.

That’s what the couple in this Reddit post has done. They’re in their early 40s with a large sum of money tied up in a rental property they own that brings in $35,000 a year, and they’re wondering if they’re on track to retire.

The good news is that real estate can be a fantastic long-term investment — one that could set anyone up for a secure retirement. But it’s also important to not to put too many eggs in one basket.

The importance of diversification

The couple in this post is in great shape. They have money in stocks and a 401(k) outside of their rental property. But because much of their wealth is tied up in a single property, I’d encourage them to branch out into other assets in the coming years.

The reality that is property is a fairly illiquid asset, and the housing market has been on fire in recent years. But we don’t know what the future has in store.

If property values take a dive, the poster could lose a lot of their net worth in a real estate crash. And if the economy takes a turn for the worse, they may not be able to pull in $35,000 a year in rental income.

So while the poster shouldn’t dump their income property, they may, going forward, want to invest additional funds in something other than real estate. They could add to their stock portfolio or even buy some broad market ETFs for more diversification.

The poster should also make sure to have plenty of cash on hand in case their rental property ends up needing repairs, or in case they end up with a vacancy on their hands. They probably rely on their rental income to cover the mortgage, but they’d potentially need to dip into their own reserves if they were to go a while without a tenant.

The plan works, but the guidance of an advisor could still be helpful

All told, I think this couple is in good shape for retirement. They could opt to keep their rental property and use the proceeds as retirement income, or they could sell it for a giant payday (even if the value of the property declines from where it is today, they’re probably still looking at a lot of money).

Selling the property once they retire could be a good bet, actually, since owning a rental means taking on the risk of having to make repairs or deal with damage caused by a tenant. Plus, come retirement, the couple may not want to deal with being landlords.

But because I’m not a financial advisor, I’d suggest that the couple here talk to a professional who can tell them whether they’re on track for retirement or not. A financial advisor may have different guidance than I do. So it’s important for this couple — and anyone concerned about their long-term financial plan — to check in with someone who helps people manage their money for a living.