How Real Estate Investing Could Rescue Your Retirement
After bouncing around the last few quarters, the markets are challenging all-time highs again. But some investors remain jittery about an overdue downturn. Concerns over trade and other economic headwinds also linger.
Retirement dreams ride this roller coaster of economic indicators. The idea of quitting work to have time to visit grandkids, travel the world and live self-sufficiently are getting farther out of reach with rising health care costs, dwindling pension resources and pressure to put off taking Social Security.
For many baby boomers confronted with living on much less than they’re used to, or having to keep working well into their 70s, retirement just isn’t what they thought it would be.
But, in the middle of this gloom, real estate has posted another banner year. According to The National Association of Realtors, 5.3 million existing homes were sold in the U.S. in 2018—and that number is expected to remain steady based on numbers for 2019. That fact alone points to a potential solution to the retirement planning crisis: rental property.
Real estate has long offered a reliable source of steady, ongoing income for property owners. Given the fact that rents nationwide have grown steadily over the last decade amid population growth and limited housing supply, this trend only looks like it will continue.
Getting into real estate is not without risk, and newcomers need to learn about this business. But for people thinking about what retirement might look like, it’s hard to ignore the many advantages of owning rental property. Here are three big ones:
Income: For seniors looking for a passive income source in retirement, rental property makes a lot of sense. By using a loan from a 401(k) or a self-directed IRA as a down payment, they can diversify their holdings from stocks into real estate quickly and easily. This is a way for current and future retirees to start building a real estate retirement portfolio now, rather than waiting to save up for one.
According to a recent study from UCLA’s Anderson School of Management, single-family rental homes in large U.S. cities have generated average returns of 9% dating back to the 1980s, making rental homes like these almost as lucrative as the stock market over that time. The overall market for single-family rental homes is worth roughly $2.3 trillion.
Retirees who are part-time landlords and make less than $315,000 a year also get an annual benefit of a 20% tax deduction (199A deduction) after expenses. That’s 20% off the net income of their rental, including depreciation.
Flexibility: Traveling around the world and visiting grandchildren in retirement doesn’t have to be a pipe dream — it just takes some planning. Consider the retirement RV. Like a car, that vehicle will depreciate in value as soon as it's driven off the dealership lot. Replace that RV with a rental property near where your kids live and you have many of the same benefits of that mobile home in the form of an appreciating asset. By operating it as a short-term rental, you’ll get passive income and the ease of scheduling when you want to come and go as you please.
Retirement should also mean less work. With kids grown, retirees can downsize from a large burdensome residence to multiple smaller rentals, whether those are condos, downtown apartments, townhouses or duplexes. Rental property with no yard or maintenance needs keeps things simple and makes life easy as a landlord when you rent the unit out.
Financial Upside: Real estate investments are particularly favorable to retirees from a financial standpoint. Beyond just the flow of income the asset provides, a rental property will appreciate in value over the years and can be handed down to heirs later on.
Rental real estate also offers inflation protection; as your costs go up so can the rent you charge. These rising rents will nicely complement a loan with a fixed payment as well. Over time, your net income will increase as the loan is paid down, and your net worth will increase as the property value goes up.
The simple fact of the matter is that today’s retirement is changing, and planning for it cannot simply be focused on stock investments. Consider the advantages of adding real estate to your retirement portfolio. It offers the flexibility today’s retirees want with the lifestyle benefits we all deserve.