Investing in Real Estate often brings to mind images of the ultra-rich buying and selling huge tracts of land for development. But this is not the only case; smaller investors can still utilize real estate as a part of their retirement plan. In truth, retirement real estate investing can be a contributor to nearly everyone’s retirement savings.
The most overlooked use of real estate for a retirement plan is the equity in your own home. Investing in your house by paying down your mortgage is a viable and valuable method of planning for retirement. Living without a mortgage is a tax-free equivalent to earning income, because every dollar you do not have to spend on a monthly mortgage payment is just as good as a dollar earned. In fact, that dollar not spent is worth more than a dollar earned when you factor in taxes.
Vacant land is a good retirement real estate investment. Land is a unique commodity. There is a set amount of land, and no more can ever be manufactured. There are no substitutes for land. Despite the occasional market correction, vacant land always continues to appreciate substantially in the long-run. Vacant land requires relatively little expense to maintain. The most significant outlays include taxes and maintenance (mowing, etc.).
I know a man who financed a very lucrative retirement utilizing vacant real estate. He identified a small town that was poised to grow within the next decade. He purchased large tracts of rural acreage on all four sides of the town and then waited. When the town did expand, it moved primarily to the east, and he sold the land on that side for an enormous profit. The beauty of this operation is that even though the other three sides were not part of the main expansion of the town, the land still appreciated considerably during the holding period and were sold for a nice gain.
Rental property is another way of investing in real estate that can contribute to your retirement plan. Rental properties have the dual benefit of appreciating in value and providing a revenue stream. Residential rental units provide steady income and are readily convertible to cash, depending on the housing market. The downside to residential rentals is frequent turnover, management and maintenance. Using a property manager will cut down on the time and effort required to oversee the rental property, but it will also cut into your revenue stream.
Commercial rentals typically have less turnover and require less management effort than residential properties. A long-term tenant with a triple net lease take some of the hassle and expense out of owning a rental property. Commercial properties may not be as readily sold as a residential site, particularly if the building is specialized to suit a particular business.
Investing in real estate differs from many of your other investment options in several ways. Most significantly, real estate holdings are taxable every year that you hold them. Real estate taxes can never be deferred or avoided, although there are ways to limit them. Many states have laws allowing for reduced tax burdens for homestead and agricultural properties.
Real estate holdings come with other costs as well. Buildings require insurance and maintenance, the costs of which should be factored into your rent or deferred to your tenant. Rental properties always carry the inherent risk of sitting vacant. Even the most credit-worthy tenant could possibly leave for one reason or another. Choosing a highly marketable and adaptable property will minimize, but not eliminate, the risk of extended periods of vacancy. Multi-tenant properties, such as strip malls, diffuse the risk of extended vacancy across multiple lessees.
Despite the costs involved in holding real estate, real estate investments bring a stable component to your retirement portfolio. Whether you are looking for an income stream or a lump-sum payoff, real estate should compose a portion of your overall retirement strategy.