Let’s get real about investing in real estate for retirement.
Investing of any kind can be complicated at any point in your life. However, investing in or near retirement can be especially arduous. At retirement you need your assets to be relatively free of risk while keeping pace with inflation. In many cases, you need your assets to provide income. And, you want to minimize taxes and costs.And it is not something you can afford to get wrong. Most of us need the money we have accumulated over our lifetimes to fund our golden years.So, is real estate a good investment at this stage in your life? It all depends. What are your interests? What kind of money do you have to invest? What are your financial goals? What kind of lifestyle considerations might come into play?
The Key Benefit of Real Estate for Retirement
Real estate is an asset class with high returns. It also usually offers a hedge against inflation. Since real estate has historically been inversely correlated with conventional assets, it can be a good way to diversify your investments away from the stock market. Let’s take a look at eight ways to invest in real estate for retirement:
1. Own Your Own Home
For most people, their home is their most valuable asset — worth more than their savings. However, this asset is not always thought of as a way to help fund retirement. There are so many different ways to utilize your home equity to generate retirement income or hedge against unknown risks — from downsizing to leveraging equity to fund a long term care need and more.
2. Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust (REIT) is an investment in a collection of properties or other real estate assets. They are kind of like a mutual fund but instead of a collection of company stocks, it is a collection of properties. REITs have a special tax status that requires them to pay out at least 90% of their income as dividends. There are many types of REITs — some have very high risks (mortgage REITs — investments in mortgages) but most are quite stable (equity REITs — investments in actual properties).
- Dividends: the dividends paid by a REIT can offer real income to retirees.
- Easy to Get Started: it is easy to buy a REIT — it is like buying a stock or fund.
- No Hassle: with a REIT you get the benefits of real estate without the hassle of buying and managing a property.
- Less Risk Through Diversification: instead of owning one or a few units, a REIT allows you to diversify and be invested in multiple properties which reduces risk.
- Liquid: you can sell your REIT investment almost instantly, unlike rental properties.
- Taxes: taxes can sometimes be burdensome on REIT dividends since they are taxed as ordinary income.
- Low Principal Growth: because REITs pay out 90% of their profits in dividends, your money is not getting reinvested. Furthermore, real estate is generally not an investment that explodes in growth.
- Not Much Control: if you are someone who wants hands on management, a REIT may not be appropriate.
3. Buy, Improve and Flip
“Flip or Flop,” “Love It or List It” and “Fixer Upper” are just a few of the many popular TV shows that showcase the ins and outs of buying, fixing and reselling houses for a profit.
Flipping, also called wholesale real estate investing, is when you purchase a property not to use, but with the intention of selling it for a financial gain.
Flipping can certainly be a profitable venture. It can also be a very good way to lose money, especially if you don’t have the right assets, skills and know how. You need real estate knowledge, home improvement skills, access to cash, some financial expertise and maybe a bit of luck to successfully flip properties.
4. Purchase Residential Property and Rent it Out to Long Term Renters
This is what most people think of when they think of real estate investing — buying a property and renting it out. The trick is that you need to consistently have tenants who are willing to pay enough for you to cover any mortgage you have on the property plus: insurance, taxes and maintenance.
The most important aspects to consider are property location and market rental rates.
- Opportunity for above average returns on your investment. Rental property can perform much better than investing in the stock market.
- Cash flow in the form of monthly rent.
- A hard asset: Real estate almost always has value and usually appreciates over time.
- There can be significant tax benefits to owning a rental property. Talk with an advisor, but you should be able to deduct interest, taxes, insurance and other property expenses and usually deduct losses against other income.
- Managing rental property can be time consuming and stressful. You need to be capable of taking care of problems with the home and deal with your tenants ability to pay and any vacancies that might occur.
- It requires significant upfront capital to purchase a rental property.
5. Purchase Commercial Property and Rent it Out
Experts suggest that owning commercial property can be more profitable than residential real estate. However, it can also have more risk, be more complicated (juggling multiple tenants) and require a bigger cash outlay.
6. Purchase Commercial Property and Run Your Own Business
Who has dreamed of retiring to an island and running a little grass shack bar in the sand? (It’s not really just me is it?)
Whether you have ideas about a beachside rum shack, a bed and breakfast in Ireland, a fishing shop in Belize, a bookstore in your home town or some other retirement business, the real value of your venture can often be in the real estate itself.
The biggest expense of most brick and mortar businesses is the real estate. So, owning the property could increase your long term wealth and monthly income.
7. Buy a Vacation Home and Rent it Out Part Time
Owning a vacation property as an investment usually means that you rent it out to tenants for shorter time periods. If you have the right house in a desirable location, you might be able to make as much money from a few vacation renters as you could from a year round tenant elsewhere.
And, maybe you can enjoy some time there yourself!
Besides the general pros and cons of owning rental property, there may be additional considerations for a vacation rental:
- Rentals might be more predictable in highly desirable locations than other types of rentals.
- You may be able to enjoy the home yourself.
- Vacation rentals can be particularly expensive.
- Because many vacation rentals are seasonal, your window for making money from the rental may be limited and therefore riskier.
- If you are not living in the area, you might need to hire someone for maintenance and management.
Crowdfunding is a relatively new way to raise money for a business venture. The idea is that many people invest a small amount into a particular project. The crowdfunding concept is becoming an increasingly popular and low cost way to invest in real estate.
Let’s say that you want to invest in residential rentals and think the ideal property is a 10 unit building but you have nowhere near the assets to make that kind of investment. Crowdfunding allows you participate in that type of venture — without the huge capital outlay nor the hassle of buying and maintaining the property yourself.
Matt Rodak, CEO of Fund That Flip explains crowdfunding like this: “Real estate crowdfunding provides investors the ability to individually select each property they wish to invest in. This allows investors to be more selective on a project-by-project basis and build a custom portfolio aligned to their specific investment objectives.”
Here are a few real estate crowdfunding sites for you to browse: Realty Mogul, FundRise, GroundFloor and the following options for accredited investors: Origin Investments, AlphaFlow and Equity Multiple.
- Investors get access to the real estate market with small amounts of money.
- You can choose in which real estate projects you want to invest in and sometimes have a voice in the project.
- Some crowdfunding opportunities are only available to accredited investors.
- Crowdfunding requires more industry knowledge than investing in a REIT (though less than investing in a property yourself).
- The investment risks are the same as for any real estate investor. If the market goes south, an investor will likely lose money.
- There is far less liquidity in a crowdfunding investment than with a REIT
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