Investing in real estate is one of the many ways to set aside funds for retirement. If you are looking to diversify your savings, you might consider including real estate in your retirement plan. Real estate investments have their pros and cons, as well as different options to consider.
Including real estate in your retirement plan can consist of:
- Sell your house.
- Own a rental property.
- Purchase and sale of goods.
- Contribution to a real estate fund.
Read on to find out more about what to expect if you include real estate in your retirement plan.
Sell your home to help fund retirement
If you’ve paid off the mortgage on your current home, you could sell it in retirement to earn money. You could then use the proceeds of the sale to finance part of your retirement lifestyle or invest the funds to generate future returns. You can rent an apartment or buy a smaller place that requires less maintenance to lower your living costs.
Before listing your home for sale, it’s worth doing your research into the real estate market both where you currently live and in the new location. “Under certain circumstances, reducing the square footage can still cost the same price, depending on the location of the new home,” says Ross Cohen, financial advisor at Bartlett Wealth Management, which has offices in Cincinnati and Chicago. . If you move to a cheaper neighborhood, you may find that housing costs are lower in the new location.
Even if you sell your home, you will likely need other sources of income to support your retirement lifestyle. These funds could come from other accounts like a traditional or Roth IRA, an annuity or a pension. “While some people want to downsize their primary residence in retirement, it is not wise to rely on the proceeds from the sale of a primary residence,” Cohen says.
A rental property can generate retirement income
Buying a second property in the city where you live or owning a home in a popular vacation spot can help generate income to use in retirement. You can buy an apartment, rent it to tenants, and receive monthly rent. If you buy a cabin in the mountains, you can use it as a getaway and rent it to others when you’re not using it.
Owning a rental property usually requires a significant initial investment. You can pay for the home in cash or use your savings to make a down payment and take out a mortgage. If you have funds in a self-directed IRA, you can use the money in the account to invest in real estate, but there are various requirements that you will need to meet. “The investor should buy the real estate strictly for investment purposes,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan. You will need to pay cash from the IRA and will also need to use the IRA to pay for all expenses associated with owning the property.
Consider carefully whether the rental income generated by the property will be sufficient to cover the related expenses. “To make an investment property a profitable business, you have to calculate the expected income and subtract the costs,” says Cohen.
One downside to owning and renting a property is that the investment is usually not very liquid, which means that if you have a financial emergency, it might not be possible to sell the place quickly and receive money. money when needed. Even if you are selling, you might not get the best price if market prices are below normal in that area.
Buy and sell multiple properties
If you live in an area where house prices are expected to rise, you may be interested in purchasing multiple homes with the intention of selling them later for a higher price. You could also acquire several properties that you rent out to tenants. As your income grows, you could build a real estate portfolio that could help fund your retirement.
While owning property can help boost your retirement funds, there is often a lot of work to be done in finding homes, acquiring them, making any necessary repairs or renovations, and then renting or selling them. The time requirement is usually much more onerous than what is needed for other types of investments. “Real estate, unlike stocks, requires ongoing management and upkeep,” says Pam Krueger, Founder and CEO of Wealthramp, an advisor matchmaking platform that connects consumers with trusted financial advisors and paying. Hiring a property manager can ease some of the burden of maintaining multiple properties, but you will have to pay for the service, which will reduce your profits.
Contribute to a real estate fund
Rather than buying and renting or selling property yourself, you could include real estate in your retirement plan by contributing to a fund. “In 401 (k) s or other retirement plans, there will usually be some type of indexed real estate mutual fund available for the investor to invest in a large basket of real estate investment trusts,” Milan said. . “Within a traditional or Roth IRA, the investor will have more options to invest in real estate ETFs or other vehicles offering more focused or thematic real estate exposure.”
These arrangements allow you to invest in real estate without buying and owning a home yourself. Thus, you will not have the responsibility of managing real estate or collecting rents, and the investments you make are more liquid. However, one potential downside is the risk that the fund will lose value. “You see more volatility in the real estate traded because it is subject to the vagaries of the stock markets and not necessarily the net asset value of the underlying real estate held,” said Milan.