For most people, preparing for retirement often begins and ends with individual retirement accounts and maybe some stock market investing. While these are traditional and practical strategies, they aren’t the only investment route that you can take.
Another option is investing in real estate for retirement. It’s not as far-fetched as you might think. Individual investors own a little more than 70 percent of all rental properties.
Of course, you may wonder why you’d want to go down the road. After all, being a landlord is a difficult job, right? If you’re not sure if it’s right for you, keep reading for five reasons you should consider real estate for retirement.
1. Real Estate Appreciates
While the 2008 financial crisis tanked real estate values and soured many investors on real estate, historically, real estate has been a good investment. The key reason is that, in general, real estate appreciates or gains value over time.
Of course, the exact level of appreciation will vary by location. Real estate in urban centers like Los Angeles, Chicago, and New York City may increase in value a lot over time. Real estate values in small cities and towns will likely gain value more slowly.
The real key to maximizing value with real estate is to treat it as a long-term strategy. Unless you’re very interested in house flipping, you want properties that you can hang on to for 15 or 20 years. Even if the property values in a given location only rise slowly, that’s a long enough length of time that you would typically see a healthy return on investment simply by selling it.
There are, of course, outlier situations. Let’s say that a big company sets up a distribution hub in a town. In that situation, local land prices will probably increase sharply as people move in to take advantage of new jobs.
Sometimes, you also see outlier situations shaped by a combination of factors, such as the recent boom in residential home sales and prices. That boom was a combination of a large group of people looking to buy homes after an extended period of reduced home building.
The inventory couldn’t keep pace with the demand, so real estate prices skyrocketed. While it’s difficult to plan for such outlier situations, recognizing them can provide you with opportunities to cash out and save that money for retirement.
2. Recurring Cash Flow
Another key reason to invest in property is that it can provide a recurring cash flow. Rental properties typically pay out every month, whether you own a rental home, apartment, or even commercial rental property.
That recurring cash flow can help shore up your finances both before and after retirement. The trick is to make sure that the rent you charge is sufficient to cover recurring costs such as loan payments, taxes, and the inevitable repairs that come with any rental property.
There are arguments for and against residential and commercial properties. Commercial leases, for example, will normally run anywhere from 3 years up to 5 years. Assuming the business that’s renting the space is financially sound, that generally means more reliable payments over time.
Of course, buying or building commercial property is typically more expensive. Renting it out can also mean modifying the space for the renter before they move in. However, working with a property management business can make that easier.
With residential properties, finding and keeping good tenants is often a challenge. You’ll often face more problems with late payments and problem with tenants who damage the unit.
3. Passive Income
One key attraction to real estate as part of your retirement planning is that, when you set it up right, the real estate can operate primarily as a passive income source before retirement and even after retirement.
Passive income is revenue that you get from sources with minimal or no active participation on your part. For example, royalties from a book you published a couple of years ago are a kind of passive income.
In the case of real estate, rental properties can also generate passive income. The trick of it is that you need a middleman in place who deals with normal administrative headaches and day-to-day management of the property.
In most cases, property owners enlist the aid of property management services to serve in that middleman role. The management company can help you in several key ways.
Right at the top of the list is assigning a property manager. The property manager deals with or delegates a wide variety of tasks that would normally fall on you as a traditional landlord.
For example, the property manager will typically handle tenant screening with help from the management company. They’ll run background checks on applicants and generally make the decision about whether or not to rent to an applicant.
Property management companies also know what they can and cannot legally do. For example, they’ll know the local laws for things like evictions, as well as the state and federal laws about non-discrimination that apply to all applicants.
The company will typically hire people for regular maintenance tasks. They’ll also outsource tasks that need specialist training, such as electrical or plumbing work.
They’ll also deal with rent collection for you. That can include assigning late fees and issuing notices.
By offloading all of this kind of work, you can limit your participation in the actual management of your real estate to a minimum. While you will still need to make occasional decisions, the money you get from the properties will remain largely passive income.
4. Physical Asset
These days, so many of your assets are digital in one way or another. Your bank accounts, retirement accounts, and stock market accounts mostly exist on computer servers. That makes them vulnerable to things like hacking or social engineering scams.
Of course, those investments at least reflect potentially real things, such as stock certificates or actual cash. If you invest in areas like cryptocurrency, both the records and the investment are purely digital. Lose your key and it goes up in smoke.
With real estate, you own an actual, physical asset. You have paperwork related to the asset that proves your ownership, such as a deed, mortgage paperwork, or loan paperwork. Even if the value of the property declines, it’s still something that you can potentially sell if your financial fortunes change.
Just as importantly, it’s less vulnerable to computer frauds like hacking or social engineering scams.
One of the biggest potential downsides of owning real estate is also that it’s a physical asset with lower liquidity. In other words, it’s harder to turn that asset into a different kind of asset, such as cash.
Real estate sales take a while, even under ideal circumstances. For example, just the closing on an average home sale takes at least a month. Of course, those closing times exist as a protection for both the buyer and seller.
It prevents either party from making a rash buying or selling decision.
5. Tax Benefits
Investing in property, particularly rental property, can also provide some tax benefits to you. For example, a lot of the costs associated with owning rental properties are tax deductible. Some of the more common deductions include:
- Property Improvements
- Mortgage interest
- Property taxes
- Travel expenses
- Insurance premiums
- Professional services
These deductions let you hang on to more of what you make from your real estate investment. That’s income that you can save or reinvest elsewhere for your retirement.
It’s important that you know that the IRS regards passive investors and active investors differently. That status can alter the deductions you qualify for as the owner. You should consult with a tax professional to understand what you can deduct, cannot deduct, and the amounts you can deduct.
If you’ve never invested in real estate aside from your own home, the process can prove complicated. In most cases, it’s best if you use a real estate professional to help you identify good prospects for long-term investment.
If you want to treat the property as a source of passive income, you should research property management businesses in the area. Ideally, you’ll even meet with a few to discuss your future needs and goals with the property.
As with any investment, you should never invest money into real estate that you cannot realistically afford to lose. While real estate can generate income for you, the upfront costs will far outstrip the income gain at the beginning.
You may not really see the gains until your retirement or even after, depending on when you start.
Real Estate for Retirement and You
There are many ways you can financially prepare for retirement. Real estate for retirement does provide a number of advantages, though.
Real estate typically increases in value over time. It can provide a source of recurring and passive income both before and after retirement.
Real estate is a physical asset and one you can sell if you must. Plus, there are tax benefits that can help you hold on to earnings as you approach retirement
VerraTerra offers property management services in Seattle and the surrounding area. For more information, contact VerraTerra today.