Retirement is something many of us ponder but often fail to prepare for adequately. On paper, saving up for retirement should be pretty easy for those who can start off when they are young: With a reliable and disciplined compound interest strategy, for example, you could open a high-yield savings account or set up layered certificates of deposit in a way that capital gains are reinvested right back into your investing portfolio. When you combine this strategy with periodic contributions, you could realistically inject your portfolio with exponential growth, but the investment horizon would have to last decades.
The problem with saving up for retirement using compounding and other conservative strategies is that life often gets in the way. Many individual investors can start off on the right foot with instruments such as 401(k) accounts that quickly appreciate thanks to market returns. Still, these gains are often withdrawn for various purposes such as down payments for new cars or properties, capital for a business endeavor, emergencies, or even well-deserved vacations.
We all know that there is more to life than simply preparing for retirement. Our personal financial goals should always be pointed towards achieving financial independence and freedom, for this is when we can think about retiring with peace of mind. There are only a few actionable ways to reach financial independence, and investing in real estate could be one of the most reasonable. With the right property investment strategy, you could be on your way to reaching some of your financial goals before retirement. The real question here is: How can investing in real estate help you prepare for retirement?
Let's look at the three primary ways you can invest in real estate for retirement purposes.
- Real Estate Investment Trusts
- Long-Term Rentals
- Vacation Home Rentals
The descriptions below will give you an idea about how these investing strategies may fit into your retirement plans.
1. Real Estate Investment Trusts (REITs)
If you have an Individual Retirement Account or 401(k) plan, there is a good chance that the fund manager holds some REITs in the portfolio. A REIT is an investment in a collection of properties or other real estate assets. Like a mutual fund, they are instead a collection of properties. REITs have a special tax status that requires them to pay out at least 90% of their income as dividends.
To a great extent, REITs are indirect means of property investing. Instead of seeing your name on the title of a home or commercial building, you hold financial security based on the real estate portfolio's value. An exciting aspect of REITs is that they can be traded like equity securities, which means that you can acquire them as easily as shares of Microsoft on publicly traded stock exchanges such as the Nasdaq. In fact, you can treat REITs just like stock, which means that you can place short positions or sell them whenever you want.
As a REIT investor, you do not get to decide what to do with the properties; even if you acquired a significant amount of shares in the fund, the REIT managers would leave the investing strategies. Most REITs trading on Wall Street are actually exchange-traded funds (ETFs), which are pretty dynamic. When you have a Roth IRA or Roth 401(k) loaded with REITs, your tax efficiency is greatly augmented in terms of tax advantages. This is why many financial planners recommend this strategy to investors who are thinking about their retirement.
2. Purchase Residential Property and Rent it Out to Long Term Renters
This is perhaps the most common form of real estate investing. Buying a property and renting it out is a traditional strategy that has become very popular in the 21st century because Americans are not as enthusiastic about becoming mortgage borrowers as they were prior to 2008. When you have housing markets such as San Francisco, where a one-bedroom apartment can easily rent for $3,000 a month, there is no question that there is money to be made as a landlord.
Every investing strategy has a catch, and becoming a landlord has a particularly significant one. First of all, you will need to consistently have tenants willing to pay enough for you to cover any mortgages or liens you have on the property. Second, landlords cannot escape having to make payments related to insurance, taxes, and maintenance. Finally, if a homeowners association in a neighborhood or condominium rules the property, you will have to comply with certain bylaws and rules.
Rental property investing can provide an opportunity for above-average returns and may also become an excellent source of regular cash flow. Some people describe this real estate investing strategy as passive income, but this only the case when you retain a property management firm's services. Some retirees who enjoy being active and hands-on with their investments tend to gravitate towards rental properties; however, there is a learning curve that must be assimilated in order to become a landlord who is also an efficient investor.
Real estate investors who derive income from rental properties can also face risks such as the ones experienced during the COVID-19 pandemic of 2020, when federal and state housing regulators imposed a moratorium on demanding rent payments and on exercising the right to evict non-paying tenants. Something else landlords should keep in mind is that housing markets are not always constant; this was made clearly evident by the real estate crash of 2008, which devolved into a global financial crisis, but this should not dissuade you from considering this as one of your strategies for retirement.
3. Buy a Vacation Home and Rent It Out Part-Time
Owning a vacation property as an investment usually means that you can rent it out to tenants for shorter periods of time. If you have the right house in a sought-after location, you might be able to make as much money from a few vacation renters as you could from a year-round tenant elsewhere. With the advent of online booking platforms such as Airbnb, VRBO, and TripAdvisor Rentals, more retirees opt to become vacation landlords.
One of the significant advantages related to this strategy is that investors have a lovely property in a vacation destination to enjoy. Let's say you can acquire a cottage near the beach in San Luis Obispo, a California vacation spot where prospective tenants are willing to pay top dollar to stay in. With just a few months of renting out this cottage, you will be able to pay the mortgage and housing expenses while still occupying the property for the rest of the year.
Real Estate is a Good Source of Passive Income
If we define passive income as a way to generate cash revenues without too much of an effort, real estate investment could fit this description in some situations. As previously mentioned, if you acquire five apartments that you intend to rent and actively manage as a landlord, this cannot be called passive income because there will be plenty of work cut out for you. If you purchase a condo unit in a maintenance-free building where a property manager handles tenants, this is a situation that is more akin to passive income.
The key to a comfortable retirement is having enough passive income to support your needs. Investing in real estate early can supercharge your retirement. However, it is crucial to analyze the risks associated with real estate investing by doing thorough research. Finally, there is a way you can maximize and supercharge your real estate investment potential, and that is through property deed investing, which is closely related to tax lien certificate auctions.
There are ways you can assume ownership of properties sold at a fraction of their market value, and that is through tax lien auctions and sheriff's sales. Many investors have funded their retirement with this strategy, which requires learning about the process and locating the best opportunities. Deed investing is not like the traditional process of purchasing properties through real estate brokerages; it requires access to information that is not provided by the Multiple Listing Service that home sellers and realtors depend on. If you want to learn about deed investing's profit potential, you need to check out Marketplace Pro today.
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