Whether you’re 25 or 55, you need to be thinking ahead to retirement. Hopefully, you’ve been diligently tucking money away each month into tax-friendly retirement accounts and investments, but will it be enough? Many find that it’s not – which is where real estate comes into play.
Integrating Real Estate Into Your Retirement Plan
Let’s say you retire with $2 million in your retirement account. Assuming you move your funds over into safe, low-risk accounts, you’re probably going to average a 5 percent return per year. That equals $100,000 in pre-tax income. While that’s certainly a livable income, it might not be enough for you to travel the world, buy a beach house, or do whatever else you want to do in the golden years of your life.
Instead of leaving your money in low-risk stocks and bonds where they generate a measly ROI, you may want to put some of this money into income-producing real estate. On average, you can expect to earn twice the return (while also enjoying the benefit of asset appreciation). It’s a beautiful thing.
“One of the beauties of rental property is that income is fairly steady and predictable. When you sign a lease agreement with a tenant — typically for 12 months — you know exactly how much cash you’ll receive every month for the coming year,” Green Residential explains.
While tenants can be difficult to deal with on occasion, good screening processes will prevent you from having major issues. In fact, it’s a whole lot less stressful than watching the stock market climb and dip.
“With the stock market, you could technically lose money when the economy dips, but middle-class rental properties don’t tend to be affected much by such developments,” Green Residential continues. “Even in a down economy, people have to have a place to live!”
This isn’t to say real estate is a perfect, risk-free investment. It takes a lot more time and effort to keep a rental property operating smoothly than it does to check in on the performance of your stocks and bonds. There are maintenance issues, tenant complaints, grass that needs to be cut, and tenant turnover.
Perhaps you don’t want to be directly involved in owning properties, but would still like your portfolio to have some roots established in the real estate industry. You may want to invest in publicly traded real estate investment trusts, or REITs. These investment trusts have grown in popularity over the years and the S&P 500 index now includes it in the financial sector.
“The biggest appeal for income-oriented investors is that REITs are a special class of investment with the mandate for big dividends,” stock analyst Jeff Reeves writes. “These companies are granted special tax breaks to allow them to more easily invest in the capital-intensive real estate sector, but in exchange, they must deliver 90 percent of their taxable income directly back to shareholders.”
Set Yourself Up for Success
Whether it’s a rental house down the street from where you live, a commercial storefront across town, or a REIT on Wall Street, it’s smart to give real estate some thought as you plan for retirement. Real estate has shown over and over again that it outperforms stocks and bonds, validating its role as a powerful, income-producing mechanism.
You don’t want to dive into real estate blind, though. If the idea of investing in income-producing properties gets your wheels turning, start doing some research. Meet with experienced people who know what they’re doing and pick their brains. The more you can learn on the front end, the better your results will be once you finally get your feet wet.