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Real Estate as a Retirement Investment

Jun 17, 2020 by Maurie Backman

Real estate investing isn't something that's reserved for younger people; retirees can have great success putting their money into real estate. Rental properties can serve as an ongoing source of retirement income, thereby generating cash flow and putting less pressure on savings in a retirement plan like an IRA or 401(k). Here, we'll discuss the pros and cons of real estate as a retirement investment.

Why invest in real estate during retirement?

Retirement is a daunting prospect for a lot of people because they don't know what their senior living expenses will amount to and aren't sure how long the retirement funds in their nest egg will last. For example, you might retire with $1 million in a Roth IRA, which means you won’t even have to worry about taxes on your withdrawals -- but even with that benefit, how much annual income will that provide you with, and will it be enough?

The benefit of investing in real estate during your senior years is that it serves as an additional source of income -- and it can be passive income at that, which enjoys certain tax benefits. Imagine you buy property that generates regular rental income during your senior years. That's money you can use to supplement the withdrawals you take from your retirement savings and your Social Security benefits, so that you have more income to enjoy when you're older. In fact, you might look at income from a rental property the same way you look at dividend income from stock investments or interest income from bonds -- you get to sit back and wait for it to come in regularly without necessarily having to do much.

Another good reason to enter the real estate market during retirement? Doing so will give you something to do with your time. Retirees have a tendency to get bored after spending years in the workforce on a structured schedule. By becoming a real estate investor and taking an active role in your properties, you can not only boost your senior income, but also give yourself something meaningful to do with your days. And if you're handy and can maintain your own investment properties, you'll have fewer expenses to eat away at your profits.

Investing in real estate during retirement is also a good way to diversify your portfolio. Retirement investing is often limited to stocks and bonds, but by buying real estate, you'll have another asset class to enjoy -- not just as a source of cash but as a means of financial protection.

Imagine your retirement account, which is loaded with stocks and bonds, takes a hit during a market downturn or recession. If you're in the habit of taking regular withdrawals from that account, you may have no choice but to lock in losses by removing funds when the stock market is down or when bonds have lost value. On the other hand, if you have rental properties that generate regular income, you may not need to touch your retirement plan assets at all, thereby giving them a chance to recoup their value so you can avoid losses altogether.

Finally, investing in real estate during retirement allows you to enjoy a host of tax benefits. As a property owner who collects rental income, you can write off your mortgage interest, property taxes, and other expenses related to owning rental properties, like maintenance and repairs.

What are the drawbacks of real estate investing during retirement?

As is the case with all investments, buying rental properties comes with some risk. If you're unable to find steady renters, you could end up losing money on those properties rather than having them serve as an income source.

Also, while property values do have the potential to climb over time, the costs associated with owning property have the tendency to climb as well. Property taxes, for example, could rise from year to year, even if the value of your properties doesn't. And as properties age, additional maintenance and repairs could creep up, costing you more money than you may have bargained for.

Also, being a landlord means potentially putting in a lot of time dealing with tenant issues, upkeep, rent collection, and other matters that come with owning rental properties. Granted, you could outsource these tasks to a property management company if you'd rather not put in the time, but that will eat away at your profits.

Of course, there’s also the risk that your properties won’t gain value and add to your net worth but rather will lose value. This could happen if you have tenants who abuse your rental properties or if the neighborhoods you buy in happen to decline.

Different ways to invest in real estate during retirement

There are different ways you can invest in real estate during retirement. These include:

  • Buying rental properties and collecting income from them (including commercial real estate; you could rent out office space or storefronts just like you can rent out apartments).
  • Flipping houses and selling them at a profit.
  • Investing in a real estate investment trust, or REIT.
  • Investing in real estate mutual funds or exchange-traded funds.

So far, we've mostly focused on the first option -- collecting rental income -- but the other three are just as viable. Flipping houses, though risky, could be your ticket to financial independence during retirement, provided you're good at it. If you have experience flipping houses or a keen eye for home improvements, and you're handy enough to do much of the work yourself, then you could really do quite well with house flipping. Even if you don’t want to do the actual flipping yourself, you could still fund a house flip and enjoy some of the proceeds when the homes you invest in sell.

Meanwhile, with a REIT, you don't buy an actual property. Rather, you buy into a company that owns, operates, or finances real estate projects that produce income. REITs come in both public and private varieties. Public REITs trade on an exchange, and so they’re easier to vet in terms of performance and price. Like actual properties, REITs can decline in value, so they’re certainly not without risk. If you have a Roth IRA, you may want to hold your REIT investments there to reap added tax savings.

Similarly, with mutual and exchange-traded funds, you don't actually go out and buy a piece of real estate. Rather, you invest money into a pool that's then invested into its own collection of REITs. With this option, you may get better diversification than you would with buying up REITs individually. And with mutual funds, you’re relying on a fund manager’s expertise to invest your money, thereby sparing you the legwork. Granted, you’ll pay a fee (called an expense ratio) for that privilege, but it takes a lot of the guesswork out of the equation for you.

Is real estate the right investment for your retirement?

Real estate is a smart investment to consider if you want to diversify your assets during your senior years while continuously generating income. Just be aware of the different choices you have when it comes to real estate investing, and the risks involved. You may find that you don’t have the appetite for owning a rental property and dealing with ongoing tenant issues, but that doesn’t mean you can’t get in on the real estate action another way.

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