Investing In Real Estate For Retirement

Last Updated October 30, 2021
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Making sure that you’re appropriately prepared for retirement can be one of the most stressful parts of life.

Education and forethought is the solution to this!

And the sooner you start, the better.

In this article, we’re going to take a look at everything you need to know about investing in real estate for retirement.

Intro: Investing In Real Estate For Retirement

Investing stress is often caused by the uncertainty that surrounds investments. For example, when you keep your wealth in stocks you have no guarantees that the stock market won’t collapse.

A sudden drop in the market could leave your nest egg 20-30% smaller than you were planning. If this happens in your 60s or 70s then it could force you to delay your retirement. This cannot happen!

While this is rare, it’s definitely always a possibility.

For this reason, many people like to consider other assets when planning for their golden years.

In particular, real estate has numerous benefits that make it attractive as a retirement investment (as discussed in our real estate category). Unfortunately, buying an investment property is much more complicated than buying stocks.

The Benefits of Real Estate Investing

Real estate is one of the most versatile assets that you can invest in. There are plenty of benefits that come along with owning a piece of property.

As usual, the first step to investing in any asset is making sure that you understand all of the benefits and risks associated with owning that asset. With that said, let’s examine a few of the benefits that come with investing in real estate for retirement.

You Can Make Money In Two Ways

Real estate is a unique asset because it allows you to earn a profit in two different ways. The first way is through asset appreciation.

Asset appreciation – Asset appreciation is the increase in the value of an asset over time. For example, if you buy a home in 2020 for $300,000 then that same home might be worth $350,000 or even $400,000 in 5-10 years. It’s important to note that there are no guarantees. This is because the appreciation rate depends on a lot of different factors. However, it’s usually safe to assume an appreciation rate of 3-4%, which is the national average.

If you own a home in an incredibly popular city like San Francisco then your home might appreciate much faster. On the other hand, if you live in Kalispell, Montana where your closest neighbor is 5 miles away then your home will appreciate much more slowly.

Cash flow – Owning property also gives you the ability to generate cash flow. You can do this by renting out some or all of the property. Once you find a tenant then they will pay you the agreed-upon amount each month in exchange for being able to use the property. Once you have paid off all of the expenses associated with the property then the rest of this is pure profit.

Below, you can see information from the Federal Reserve about the steady rise in home prices each year. The gray bars showcase years that homes decreased in value. However, these are dwarfed by periods of growth (white bars).

Lots Of Control And Flexibility

For the most part, when you own a stock, there is little that you can do except sit around and hope that the price goes up. Unless you are a majority shareholder, you do not have any say in the management of the company. Instead, you just have to trust that they will do a good job.

However, when you own a piece of property, you are in full control. If you want to, you can try to add value to the property and flip it for a profit. You could also improve the quality and charge a higher rent. If you really wanted to, you could even remodel the property and change its purpose entirely.

Tax breaks

In general, investing in real estate for retirement gives you plenty of tax breaks.

For example, you are usually able to depreciate the cost of buying or improving an investment property over the course of its “useful life”. Doing this will result in decades of tax deductions that can help lower your taxable income.

You can also use your property as collateral to help secure a loan which you can then use to buy another rental property.

With that said, no asset is perfect. Owning real estate definitely also comes with plenty of downside risks. Let’s take a look at what some of those are.

The Downsides Of Real Estate Investing

Very Illiquid

When you want to buy a stock, you just need to wait for the stock market to open during the weekdays.

Once it’s open, you can log into your brokerage account and buy any stock that you want!

No matter how much you buy, the entire process will probably take a few minutes (if not seconds). When it’s time to sell, the process is just as quick. At a moment’s notice, you can get sell your stocks and get your invested cash back.

This is not the case with real estate. Real estate deals are notoriously complex and have tons of moving pieces that must be finalized before a deal is closed. This includes things like home inspections, property appraisals, negotiations, etc. Even if you make a cash offer on a property, it can still take a few weeks for a deal to be reached. If there is a lack of sellers/buyers in the market then the process can stretch to months or even years. Patience is a virtue after all…

This means that you should expect your money to be tied up in your rental property for quite some time. It’s never a given that you can just sell the property and get your money back right away.

Additionally, since it’s expensive to own property, there’s a chance that you could be losing money for months before you are able to sell your property. Let’s take a closer look at that.

High Costs And Barriers To Entry

Real estate is probably one of the most expensive asset classes to get started in. Conversely, when it comes to buying a stock you can get started with just $5!

If you want to buy an investment property then you will usually need to put down anywhere from 10%-20% of the property’s value. If you’re buying the property as a home, this percentage is usually smaller.

Assuming an average property value of about $350,000, this means that you will need to fork up anywhere from $35,000-$75,000 to buy your property. This is just for the down payment and doesn’t include broker fees, taxes, and other closing costs.

Additionally, if you thought that your expenses ended once you bought a property, think again. Real estate probably has the highest expenses of any asset class.

To name just a few:

Debt service – You took out a hefty loan to pay for the property. Even if you don’t find a tenant, you are still on the hook to pay back the loan.

Taxes – As usual, Uncle Sam will be there every step of the way to collect a fee. This means property taxes every year as well as a capital gains tax when you sell the property.

Property upkeep – If you have ever owned a property then you know that maintenance is a never-ending task. If you rent then think about how many times you’ve called your landlord to complain about something that doesn’t work. Everything that you’ve had your landlord replace comes out of their income.

Neighborhood Decline

One of the last risks of investing in real estate for retirement is your neighborhood declining in value over time. This is one of the scarier risks because it’s pretty much outside of your control.

For example, let’s say that you get a great deal on a property. However, over the next 2-3 years a massive gang problem forms, and drugs follow shortly after.

The neighborhood becomes undesirable to live in, your property falls in value, and you can’t find a tenant who wants to live there. This is a worst-case scenario but it’s still entirely possible. If this happened, you would most likely lose a lot of money and have a difficult time selling your property.

With all of that said, you’re probably now wondering whether real estate is actually worth it.

Is Real Estate A Good Option For Retirement?

There is no golden goose when it comes to retirement. All assets are going to have different pros and cons.

This means that the right investment vehicle for you will depend on your preferences. With that said, we would recommend getting started investing in real estate for retirement if:

You prefer to have control over your investment
You don’t mind putting in extra work during your golden years
You have a sizable nest egg to invest
You want an investment with a relatively low risk level.

On the other hand, we would not recommend getting started investing in real estate for retirement if:

You prefer to be a hands-off investor
You don’t want to spend your retirement working
Being a landlord doesn’t appeal to you
You need liquid cash or the option to take your money out as soon as you need it

If you have a strong interest in investing in real estate for retirement then let’s take a look at how you can get started.

Options For Getting Started In Real Estate Investing

The first way to get started in real estate investing is to find and buy your own property.

The process of doing this is a little bit beyond the scope of this article as there are tons of different strategies that you can use. For example, some investors deal exclusively with renting single-family homes while others try to buy distressed properties and flip them for a profit. There are dozens of different strategies that you can try. It just depends on what your goals are. If you are planning on using real estate to fund your retirement then it’s probably a good idea to find properties that will create sufficient income in your golden years.

A good starting point is to first identify the type of property you’d like to buy as well as a neighborhood that you think has lots of potential.

From here, you can use tools like Zillow to help narrow down potential properties.

Keep in mind that the most successful real estate investors evaluate dozens if not hundreds of properties before finding one that they like. It takes time and experience to get used to spotting deals so don’t get discouraged if your first deal doesn’t work out.

Luckily, there are also plenty of options for investing in real estate that do not involve buying and managing a property yourself. Here are just a few:

Fundrise – Fundrise is a new platform that makes it incredibly easy to invest in real estate. They have built up a portfolio of properties that generate returns for investors. Additionally, their technology makes the management process easy, which means lower fees for you.

Buying shares in a REIT – A Real Estate Investment Trust (or REIT) is essentially a company whose business is buying income-producing properties. Just like any company, you can buy shares in a REIT. This allows you to get access to the benefits of owning property through the REIT. Additionally, most REITs pay out about 90% of their income to investors each month. This makes REITs a good option for cash flow.

Concreit – Concreit is a little bit similar to Fundrise and a REIT. The biggest difference is the type of real estate that they specialize in. Concreit mainly focuses on commercial real estate to drive returns.