The 'Couv'

The 'Couv'

Tuesday, November 27, 2018

Is Real Estate a Good Retirement Investment?

This is a challenging question. Anyone considering investment opportunities for retirement of otherwise should always consult both a professional in the field of either real estate or securities as well as a tax professional.

Real estate can be an excellent investment vehicle for retirees as well as just about anyone in a position to buy property. For retirees or those looking beyond now to the retirement years, it has both pros and cons and both sides should be analyzed before investing.

Over the years I have been both a Realtor® and a financial adviser. I have always been surprised by the number of people that think real estate is a safe investment. Let's be clear, real estate as an owner occupied property is almost always a good thing. But venturing into investment real estate is a whole different animal. Real Estate is neither safe, nor is it stronger as a long term cash investment than many other vehicles. In my 2010 book, 'Don't Panic' I have a chapter dedicated to debunking some common myths about the security and investment value of real estate.

Some might think, "Geez, you're a Realtor®, you should be all in on real estate." I am all in on real estate, but I am also all in on truth and having my clients go in 'eyes wide open'. Historically, real estate has appreciated in value at a rate of about 6.5% annually. Blue chip large cap stocks average about 8%. As a cash investment the large caps are going to perform better and have less risk. There is a bit more short term volatility with the large cap stocks, but that is tempered by better liquidity. For long term investing large cap stocks are almost a buy and forget deal. Maybe a quarterly review and portfolio rebalance, but really not a lot of "work." real estate will keep you busy and can nickle and dime the checkbook with repairs, maintenance, etc.

The biggest advantage to real estate as an investment has much less to do with market gains and much more to do with leverage. Investment real estate is a high value asset that can be easily acquired with only 20% down. Even the richest people in the world can only leverage half of their stock portfolio, but real estate can leveraged to 80% pretty easily. Only the wealthiest among us can afford to buy stocks and other market securities in the $300,000 plus range, yet ordinary Americans, can often by investment properties in the $300k range.

The ability to take 50,000 in cash and leverage an asset worth $250k is the real power of real estate. Typically real estate values grow faster than the rate of interest on the purchase loan. But an investor is getting an average 6.5% rate of return on a $250,000 asset with only $50,000 invested. This is where real estate is king. The property is generating income in the form of rent while enjoying a modest growth in appreciation over time. The one-two punch of real estate is hard to beat when leveraging it with loans, however even as a cash investment, real estate is still solid. The issue with rental properties is much more complex than most people want to deal with, especially in their retirement years. One can always have a professional manage the properties but then that erodes the profit. Real estate is a busy activity for investors, but those that choose it rarely are disappointed.

For retirees or those looking ahead to retirement, real estate has some additional advantages. At age 62, reverse mortgages become an available option, and in some cases investment real estate can be converted to IRA funds. These are complicated systems that should always be discussed with proper professionals before action is taken. A reverse mortgage allows a qualifying senior the opportunity to draw the equity out of their primary residence as cash income for the rest of their lives. This is in effect an real estate annuity. With rates over the last several years being so low, this has been a solid tool for seniors. However rates may reach a point in the future where the reverse mortgage loses appeal.

People in their late 30s to early 40's willing to carry a few rental properties may find themselves in an excellent position upon retirement. Check with your trusted pros and see how you might fare with a real estate portfolio as you prepare for retirement. 

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