Investing in real estate with an eye toward retirement may be a great way to position yourself for your dream retirement. Depending on how you invest, making real estate part of your retirement plan can generate nice returns. Not only does it have great investment potential, it can also be an inflation hedge and an ideal way to diversify your investments away from stocks and bonds.
When you are investing in real estate for retirement, you need to make sure the investment accomplishes a retirement investment strategy. Before deciding on the real estate investment approach that works for you, make sure you know the answers to the following questions:
- Will the asset preserve capital?
- Will the asset create cash flow now?
- Will the asset have the potential for appreciation (but not depend on it for success)?
- Will the asset yield any tax benefits?
To help you think about the different ways to invest, below are some proven real estate investment strategies. Which approach works for you depends on how far away from retirement you are, how much time and capital you are able to invest and what the tax consequences are for your situation. Be aware that the strategies below require different levels of commitment on the part of the investors, so it will pay to do your research before making a commitment of your money and time:
Buy, Improve and Flip
This “BIF” strategy will require more expertise and confidence on your part. This strategy involves purchasing a fixer upper property at a low price. You then will have to rehab the property to make it more appealing. If you have the skills to do most of the work yourself, you will be ahead of the game. If not, you should factor in the cost of hiring contractors to do the work. Recoup your costs and build equity in the home by renting it out. You can then sell or refinance out your initial investment and do it all over again on another property.
If you are thirty years away from retirement, consider this easy strategy. Buy just one good quality property with a 30-year mortgage at a low interest rate. Hold it and keep it rented for the life of the mortgage. During that period, you will have to make repairs, replace carpet and appliances, repaint and so forth. However, at the end of the 30 years, your tenants will have paid off your 30-year mortgage. You now have a couple of options. You can continue to rent it and enjoy the income. Alternatively, you can sell it and use the proceeds on your retirement home. Or, you can move into it and have no house payments in your retirement. Sweet!
Hold on to Your Own Home
You may already have a real estate investment: your own home. It could be your most valuable asset. Think about whether it can help you fund your retirement.
One way is to use your home equity to generate retirement income. Use it to buy a rental property and generate some cash flow. Live in your home until you retire or rent it out. You can avoid all of the transaction costs that go along with settling into a move home over and over again. Wait until you retire and move into a home that is largely paid for by the sale of your original home.
Buy a Vacation Home and Rent it Out Part Time
Another proven way to invest in real estate for your retirement is to buy a vacation home and rent it out when you are not using it. You can buy it in a place you think you want to live at least part time in retirement. When you are ready to retire, sell your primary home and move into your vacation home.
If this approach appeals to you, make sure you understand the hidden expenses that may be associated with vacation rentals. You may need a property manager, and your insurance and maintenance expenses could be high if the property is near the beach.
Real Estate Investment Trusts (REITs)
A REIT is like a mutual fund consisting only of real estate assets. REITS are an easy way for beginners or very busy people to invest in real estate. REITs are attractive as investments for a variety of reasons, but primarily because they have a special tax status that requires them to pay out at least 90% of their income as dividends. As a result, REITS can be great investments for retirees and near retirees because the dividends paid can provide real income. On the other hand, the dividends are taxed as ordinary income, so be aware of the tax implications of your REIT investments.
Contact the Real Estate Professionals at the Katie Zarpas Group
Work with the real estate experts at the Katie Zarpas Group if you are thinking of investing for retirement. Their experienced agents can help you find the property that will meet your retirement goals.