Key Takeaways
- Real estate investments can be a key part of your retirement plan, offering diversification, steady income and a hedge against inflation.
- Selling your home to downsize can free up funds for retirement, but consider tax implications and alternative income sources.
- Owning rental properties provides income but requires a large upfront investment and ongoing management.
- Real estate investment trusts offer a more passive way to invest in real estate with greater liquidity.
When planning for retirement, real estate investments can help you build wealth and add additional income to your bottom line. Not only can real estate diversify your portfolio, can also act as a hedge against inflation.
There are plenty of ways to include real estate in your retirement plan, each with pros and cons. Some of the most common methods include:
- Selling your home
- Owning a rental property
- Purchasing and selling property
- Contributing to a real estate fund
Sell Your Home to Help Fund Retirement
If you have paid the mortgage for your current home or have built equity, you could sell it in retirement. The proceeds from the sale can be used to support you in retirement or you may choose to invest those funds to generate future returns.
“Evaluate the tax implications and the after-tax proceeds you’ll receive if you sell your real estate. Then compare that to the after-tax cash flow you can expect from other investment types,” says Dana Anspach, a certified financial planner at Sensible Money in Scottsdale, Arizona.
You can also reduce your living expenses in retirement by downsizing to purchase a smaller home that costs less and requires less maintenance, or renting an apartment.
Own Rental Property
Consider the yield on this type of investment as it relates to your involvement in property management.
“Compare that to the results you may expect if you outsource responsibilities to a property manager. However, delegating to a property manager will not alleviate the cash flow impact from periodic repairs or loss of income if the property doesn’t have a tenant,” Anspach says.
Owning a rental property typically requires a large up-front investment. You may be in a position to pay in full with cash or use your savings to make a down payment and take out a mortgage. From here, you want to consider carefully whether the property’s rental income will be enough to cover its related expenses.
A drawback of owning and renting property is that the investment is typically not very liquid. If you have a financial emergency, selling the place quickly and receiving cash when needed might be difficult.
Even if you sell, you might not get the best price if market prices are lower than average in that area. You’d also have to consider any capital gains taxes that could come due.
Buy and Sell Multiple Properties
If you live in an area where housing prices are expected to rise, you might be interested in purchasing multiple homes with the plan of selling them later for a higher price.
You could also acquire several properties with the intention to rent to tenants. As your income increases, you could build a real estate portfolio to help fund your retirement.
While owning properties may help increase retirement funds, there is often a great deal of work involved in finding places, acquiring them, making needed repairs or renovations and then renting or selling them.
The time requirement for real estate is typically much more demanding than other types of investments. Those who cannot commit much time might consider a more passive approach to investing.
Contribute to a Real Estate Fund
Rather than purchasing and renting or selling property yourself, you might include real estate in your retirement plan by contributing to a fund.
“For those seeking passive real estate investment, options like real estate investment trusts and syndicates can provide diversification and professional management, ” says Hans Ingram, a real estate and property management professional based in New York.
A REIT is a company that owns, operates or finances various types of real estate, including residential, commercial, industrial and international.
By investing in a REIT, individuals can gain exposure to real estate markets with the benefits of liquidity and ease, similar to investing in individual stocks. These investments are available to most investors through a 401(k) and traditional or Roth IRA.
Partnering with another property investor can also be a way to invest in real estate more passively. You can enter into an arrangement as a private money lender or a partner providing equity on a transaction-by-transaction basis, usually for fix-and-flips or buy-and-holds.
Like a syndicate, the active partner handles most of the legwork while you provide capital in the form of debt or equity.
It’s important to keep in mind, however, in all these scenarios, there’s a chance that values can decline or a deal doesn’t earn the projected profits.
