Is real estate a good investment for retirees? It depends. Creating a real estate paycheck can be more difficult than most retirees expect.
Many investors have successfully generated real estate income to supplement retirement income, and recent statistics show that 89% of U.S. investors are at least interested in real estate investments, and 96% of those who have invested found some financial success.
Of course, that doesn’t mean it’s the right choice for everyone.
Real estate is a bigger commitment than traditional investing and comes with more responsibilities, risks, and costs that many retirees may not want to deal with later on in life. For some, it may provide the right amount of challenge and profit potential, however.
There are ways that retirees can manage real estate investments alongside other investments to supplement income successfully, though it comes down to knowing which type of investment will produce the best results and how to overcome the challenges associated with each property.
Types of Real Estate Investments
There are a few ways that investors can make money through real estate.
Real Estate Appreciation. With this strategy, investors purchase a property with the hope that over time (or thanks to improvements, location or a number of other factors) the value of the property will increase, and once sold, will make a profit. Buying and selling property in this fashion has the potential to make investors large sums of money at once, but it can be extremely risky.
Cash Flow Income. This type of real estate investment focuses on buying either multiple rental properties or multi-unit properties (like an apartment building) in order to generate cash flow from renters. Cash flow income can also be generated from commercial properties like storage units, car washes, or office buildings. This is a great option for those wanting to generate regular monthly income.
Ancillary Real Estate Income. Ancillary real estate investment income includes things like vending machines in office buildings or laundry facilities in low-rent apartments. This income is not as high as cash flow real estate strategies or real estate appreciation, but it can be used to supplement income regularly, as it serves as a sort of mini-business for investors.
While each strategy has its advantages, there are several challenges that real estate investors will face regardless of which way they decide to invest.
Challenges of Investing in Real Estate
A few of the biggest concerns when it comes to real estate investing include tenants, expenses, and upfront costs.
Tenants. Generating monthly revenue requires people who are willing to live in and pay you rent. If you’re unable to find a tenant, or there are gaps in your renting history, it can affect your bottom line. It can also be challenging to know exactly how much to charge for rent, as setting prices too low may result in a loss instead of a profit, while charging too much may drive away renters.
Repair and upkeep costs. Buildings require regular maintenance and repair over time, especially if the buildings are older and need to be brought up to code. This can result in ongoing expenses that may eat into profits, or that retirees may not want to worry about.
Down payments. Investment properties often require larger down payments than owner-occupied buildings, and they may have more stringent approval requirements (real estate investment experts suggest putting down at least 20%). Mortgage insurance isn’t always available on rental properties, so investors may also need to spend more to ensure that their investment isn’t lost should the worst happen.
High interest rates. If you don’t have the money to purchase the property outright, you will most likely need to borrow. The interest rates for investment properties will generally be higher, which may conflict with your mortgage payments as well as the amount you charge for rent.
Property not selling. For those who purchase and sell real estate outright, there’s a high risk that properties will not sell at the desired price, or won’t sell at all. This means that any money invested will not be recouped, creating additional debt and loss for the investor.
Not generating enough income. Unless conditions are right, there is a risk that the income generated from real estate won’t be enough to fully fund a robust retirement. That doesn’t mean that income can’t be supplemental, but for those wanting to live solely off investments, it may come as a disappointment if results are negative.
While these challenges may be enough to make some investors search for alternative options, there are ways that retirees can manage real estate as part of their portfolio, minimize risk and generate income relatively safely.
Tips for Managing Real Estate Investments
Making a profit from real estate takes patience, determination, and a keen understanding of the challenges listed above. Considering that so many retirees are interested in real estate despite those challenges, there are a few things that can be done to make the experience a positive (and profitable) one.
Get help where you need it. You may be able to handle much of the buying, selling, repairs, maintenance and general rental arrangements yourself, if you have a background in real estate or the desire to learn. But in cases where your expertise is limited, it’s important to seek out help from investment experts, real estate lawyers or companies that specialize in landlord and rental services.
Choose the right property. Different buildings and properties have different commitment levels. A multi-unit apartment building will be more challenging to manage than a single home. There are also issues of vacancy rates, property location, and expenses to worry about, meaning that the location and building type matters when it comes to profit. If you’re not sure which type of building you want, speak with someone who has done it before, or consult a real estate expert who can give you advice.
Pay attention to your taxes. Real estate investments receive certain tax deductions that may incentivize many investors, but remember that it’s not necessarily free money. Depreciation may help keep current income from being heavily taxed, for example, but if your overall goal is for the property to appreciate in value, you’re going to owe money in the long run.
Look into management solutions. You may require property management to deal with the day-to-day operation of your investment as well as strategic management of the property as a whole. This will come at a cost, even if you do some of it yourself, so be sure that you have the time, resources and energy to handle management concerns should they arise.
Be aware of timing. The market moves in cycles, and just because you purchased a house at a decent price doesn’t mean you’ll be able to sell it later on at a profit, especially if the market crashes unexpectedly. Consider real estate as a long-term investment strategy and be sure you’re not just in it for a quick payout.
Know how to measure success. Risk and return are easy to determine in the stock market, but measuring real estate performance can be difficult. Just because you’re generating steady income now doesn’t mean you’re going to be successfully generating income 5 years from now. Be sure you know how to manage your property over the full length of your retirement.
Real estate can be a good investment if you know what you’re doing and you go about it the right way. If you want to use real estate to build a steady source of retirement income, you need to be patient and systematic as you build a portfolio of income producing properties. It can be a good alternative asset to add to your portfolio to create greater diversification, but not a good idea to be your only investment. It is never smart to put all your eggs in one basket!
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It’s important to remember that real estate is a higher risk investment, and while the payout can be significant, there are other expenses and costs associated with rental properties or buying and selling that other traditional forms of investment don’t have (like getting people to rent from you who also won’t destroy your property).
For those interested in real estate investment, spend some time researching your options for rental properties, whether you want to buy and sell or generate cash flow, and what your options are in terms of locations, expenses, and management options.