Key Takeaways
- Investing in property is a potentially lucrative option for earning passive income after retirement.
- It’s important to be fully informed before diving into the real estate industry.
- To ensure success as a rental owner, consider partnering with a property management team.
Investing is risky at any age, but the risks increase dramatically as one nears retirement. With age, your focus shifts from high-risk investments that promise to build wealth in a reasonably short time to relatively risk-free assets that let you earn a stable income, while keeping ahead of inflation.
This is why, as they approach or enter retirement, many older folks opt for real estate over stocks and bonds as their preferred investment option to sustain them throughout retirement. Real estate has the flexibility to cater to a wide range of personal needs and lifestyles during retirement. Read this guide here by Action Properties Inc. to learn more!
Why Consider Real Estate
- Rental properties provide secure, stable, and predictable income streams during retirement.
- A rental property is an income source that doesn’t require hands-on management.
- Income from real estate complements payouts from retirement accounts or Social Security.
- As a long-term asset, real estate helps to balance the risk of market-based investments.
- By keeping pace with the cost of living, real estate acts as a hedge against inflation.
- Real estate investors can take advantage of tax deductions to reduce their tax burden.
Things to Know When Investing in Real Estate
Should you add real estate investments to your overall retirement strategy? Based on the benefits described above, adding real estate to your retirement strategy is generally viewed as a sound strategy. But there are things you should know before jumping into property investing.
- Market risk: Even though the value of real estate almost always appreciates in the long term, there can be a short-term dip in prices due to economic downturns or a declining property market.
- Illiquidity: Most real estate is illiquid . Unlike stocks and bonds, they cannot easily be converted to cash. Selling a property takes time and effort, unless you are investing in publicly traded REITs.
- Hands-on management: Rental properties are not passive assets. You have to dedicate time and energy to managing the rental’s operations. The only way to escape this burden is to hire a property manager.
- Operational costs: A significant slice of the returns from your property investment will go into maintenance, repairs, and other costs. You must be prepared for this.
That being said, real estate investing is still a reliable option for ensuring a more secure future during retirement.
Real Estate Investment Options for Retirement
Retirees can invest in real estate using a direct or indirect approach. The direct methods include rental property ownership (a long-term option) and house flipping (a short-term option). Indirect methods of investing in real estate are options like REITs and Crowdfunding.
House Flipping
This investment strategy involves buying a home below its market value, renovating it, and selling it for a much higher price within a relatively short timeframe. This is a high-risk strategy that requires a lot of expertise, a reliable team, and excellent property marketing skills.
Investors using this method must know how to spot cheap properties with good potential. They also need to know how to manage renovation costs to ensure they don’t exceed their potential profits. Some investors use the renovated property as a rental until market conditions allow them to sell at a higher price.
Retirees looking to use this method can deploy a tactic known as a Live-in flip, where they live in the home for at least two years after renovating it. This strategy lets them get better financing terms, and depending on the details of their ownership and residency, they don’t have to pay capital gains tax .
Rental Properties
Rental properties are the most reliable form of real estate investing. You find a decent and reasonably-priced property in a location with high rental demand, buy it and lease it to tenants who pay you rent every month. You can do this with both residential and commercial real estate.
Rental properties are ideal for retirees: they offer steady cash flow, the value of most properties appreciates with time, investors can benefit from a wide range of tax deductions on the rental's expenses, and unlike stocks and bonds, the owner is in full control of their asset.
However, managing a rental property is a lot of work, and most retirees don’t have the energy to keep up with the demands of managing a rental. The only way they can retain the benefits of owning a rental without the hassle of managing it is to hire a professional property manager .
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts offer retirees the benefits of owning real estate without requiring them to purchase, hold, or manage a building. A REIT is a company that finances, owns, and operates diverse types of income-producing real estate (residential, commercial, industrial, etc.).
REITs pool capital from thousands of investors and use the money to buy properties, which are used as rentals. The rental income generated from them is distributed as dividends to investors. The law requires REITs to redistribute 90% of their taxable income to investors every year.
Some REITs are publicly traded just like stocks and bonds. Other types are public non-traded REITs or private REITs. Investing in publicly traded REITs offers retirees the liquidity that comes with market-based investments. But like market-based assets, they are vulnerable to the real estate market, interest rates, and economic conditions.
Crowdfunded Real Estate Investments
These platforms let individuals pool their funds to invest in large real estate projects. Investors can dodge the higher capital requirements of buying property directly while also getting a chance to profit from real estate investment opportunities they would normally not have access to.
When investing in crowdfunded real estate, you can choose between equity investments and debt investments. Equity investments let you own a share of a property and earn dividends from the rental income. Debt investments let you act as a lender and receive regular interest payments.
Investors in crowdfunded real estate need a good understanding of the property market. They can choose the projects they want to fund and may even have a voice in the project. But crowdfunded real estate does not have the same liquidity as REITs. However, the risks are the same for both types of investment options.
Conclusion
Real estate is a powerful investment option for individuals seeking more financial freedom and security during retirement. But to ensure that your real estate investment strategy aligns with your goals and you fully understand the risks, you should talk to a qualified financial advisor before taking this step.
If you want an extra hand with your real estate investment journey, consider partnering with Action Properties Inc. Our professional team is skilled in property management and we’re dedicated to helping property owners like you thrive. Get in touch today to get started!