No one wants to work forever. But leaving a job that provides a steady paycheck can be scary. However, if you have money arriving every month from multiple sources, retirement can seem a little less nerve-wracking.

Social security, pensions and annuities can all be dependable sources of monthly income. So too can real estate. But before you cash out your retirement fund and buy a rental property, here are five things you should know.

Real Estate Comes with Risks

Real estate doesn’t come with the same volatility or risk as stocks. However, don’t make the mistake of thinking it is a sure thing. One simply has to look back 10 years to the housing bubble and crash. They will see how real estate can drop significantly in value. Even if the price of your rental property doesn’t drop, market conditions can make it difficult to find tenants.

That’s not to say real estate is a bad investment. It simply means you shouldn’t believe that buying a rental property is an iron-clad way to ensure financial security in retirement. Use the same due diligence you would with any other major investment.

Location Trumps Price When Making an Investment

You may be able to partially insulate yourself against down markets by choosing the right rental property. Homes in desirable neighborhoods and good school districts may be more likely to retain value in times of recession.

Plus, those homes are likely to attract more stable renters. Less expensive housing may be easier to fill, but low-income tenants may be in transient situations. This can leave you with a frequently vacant property.

To find the right property in the right neighborhood, talk to a real estate professional who specializes in rentals. A good broker can help you find the right property. They may also be able fill it with a tenant or connect you to a good property management firm. Plus, having an existing relationship with a real estate pro has other benefits. It can make it easier for your heirs to sell the property when the time comes to pay for final expenses or other needs.

Property Management Firms Make Rentals Easy

Some people are hesitant to buy a rental property because it seems like too much work. After all, who wants to get up at 4am to track down a professional to deal with frozen pipes, a faulty furnace or an overflowing toilet?

Fortunately, property management companies make being a landlord simple. They often charge between 8-12% of the monthly rent amount. For that price however, they may take care of everything. They may find tenants, collect monthly rent and field those night calls when something goes wrong.

Before hiring a property management company, be sure to ask all the following questions:

• How much is your management fee? Is that amount negotiable?
• What services are included in the management fee?
• Is there a vacancy fee when the rental is empty?
• Is there a separate leasing fee?
• Is there a set-up fee?
• How are extra costs, such as emergency maintenance repairs, handled?
• How do I communicate with the company? Is there a specific person I’ll work with?

Using a Property Management Company Has Some Downsides

The upside of using a property management firm is they make the rental business easy. Yes, you may pay more, but you also don’t have to devote any time or energy to generate this retirement income.

The downside is you lose out what could be a lucrative tax deduction should you have a business loss. Assuming your adjusted gross income is less than $100,000, you can deduct up to $25,000 in losses from your rental. However, the catch is you have to “actively participate” in managing your property.

If you hire someone else to do the work for you, you lose the ability to deduct the loss, unless you or your spouse are a real estate professional.

Tax laws for rentals – like so many other parts of the tax code – are anything but simple. To avoid making a mistake, it’s always best to confer with a CPA or other tax expert to ensure you don’t run afoul of the law while completing your return.

You Can Invest in Real Estate Without Buying Property

A final thing you should know about using real estate for retirement income is that you don’t have to be a landlord to make money. A number of investment options exist. You can become part-owner in developments without any of the hassle of finding and buying a specific piece of property.

These options include the following:

Real Estate Investment Trusts

Known as REITs, these are sometimes described as mutual funds for real estate. When you buy into them, you are buying into a number of real estate holdings. This can make them a less risky option that putting all your money into a single property. REIT investors receive regular dividends that depend upon the fund’s income.

Public Real Estate Funds

While REITs can be described as mutual funds for real estate, public real estate funds actually are mutual funds for real estate. If you buy shares in one of these funds, your money may be invested in a REIT or other real estate holdings.

Crowdfunding

There are websites that let people buy into what can be multi-million dollar developments. You may have to be an accredited investor to get in on the action. Also, it could be quite some time before you see a return on your money. Read the fine print carefully and consult with a trusted advisor before jumping on these opportunities.

Private Equity Real Estate Funds

These funds are generally invite-only. You may need a lot of cash (think $250,000+) to become a player. It may not be a realistic option for most retirees but appeal to high-net worth individuals. These funds are loosely regulated so be sure you understand the terms thoroughly before agreeing to join.

Real estate can add financial security and stability to your retirement, but it’s not as simple as buying a second home and sticking a “For Rent” sign in the yard. Whether you want to own a property or invest in real estate funds, be sure you get advice from tax and finance professionals. They can help ensure you’re making a smart money move.

Have you used real estate to bring in extra income during retirement? Tell us your success story, or warning tale, in the comments below. Please join the conversation!