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January 11, 2023
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?
Real estate can be 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:
For most people, their home is their most valuable asset – worth more than their savings. If you own your home, you are invested in real estate.
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.
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).
How to Model a REIT investment into your NewRetirement Retirement plan: Log in to Your Plan. You will want to treat a REIT as an investment – enter the asset as one of your savings (either tax advantaged or not, as appropriate). And, you can document the projected dividends as passive income (rather than as a rate of return) so they are taxed as ordinary income.
“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.
How to Model: NewRetirement PlannerPlus users can model doing a real estate flip as part of your retirement plan by documenting a future real estate purchase and also a future change to your real estate holdings — liquidate the asset and specify which account to deposit your profits.
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.
How to Model: To model rental property in the NewRetirement Planner, you can document your real estate on the Your Plan > Home and Real Estate page, including any outstanding mortgages. And, you can document rental income as “passive income.” If you have multiple tenants, you may want to list each one separately.
You can also plan to sell or liquidate the asset at some point in the future.
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.
How to Model: Use the NewRetirement Planner to model a commercial rental in the same way you would do a residential property.
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.
How to Model: Use the Home and Real Estate page in the NewRetirement Planner to document the commercial property and any relocation you might undergo. You can model the income (or losses) and additional expenses from the venture as either passive income or work income.
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:
How to Model: Use the NewRetirement Planner to model your vacation rental in the same way you would do a residential property.
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.
How to Model: Log in to Your Plan. You will want to treat your crowdfunding outlay as either an investment – you can enter the asset as one of your savings – or you can enter it as an “Other Real Estate Holding.” You can document any dividends or income as “Passive Income.” And, any future liquidation of the investment should also be considered.
The NewRetirement Planner and PlannerPlus are some of the only tools online to handle real estate modeling as part of your financial plans.
Check it out today and see if real estate is a really good idea for your retirement. Instantly find out what your finances look like with a real estate investment.
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