Real Estate Investments Can Guarantee Your Golden Years
Retirement planning gurus have been waving their arms frantically for the last several years trying to get your attention about saving more and/or working longer before finally retiring. Talk radio and morning show guest experts righteously proclaim the need to work until you drop dead of old age and exhaustion or selflessly pinch every penny to maximize your savings. Who needs that? After all, retirement is supposed to be your Golden Years.
When three score and ten was about the most you could expect, you could be reasonably certain that modest savings and Social Security would see you through your twilight years. Nowadays, 70 is the new 50—people are more ambitious about lifestyle expectations in retirement. You are more likely to live into your 80s and that modest savings account probably will not last long enough to supplement your pension to the end. What to do? A creative real estate investment plan could well be the answer.
If you want to retire early, such an investment plan can work as a “bridge loan” to fund early retirement. If you are already retired and your job as a Wal-Mart greeter holds no challenge, you can still begin investing in property—even with limited financial resources. If retirement is a few years away, you can boost your savings, and ultimately your retirement cash flow, through real estate investment.
3 Reasons to invest in real estate
Despite its poor liquidity, the right property is a tangible asset that will increase in value over time and supplement other retirement income. Rental income:
• Increases your monthly cash flow
• Leverages further investment
• Offers tax advantages
By far the best-known real estate investment is rental property, also known as “Buy and Hold”. Whether you convert your owner-occupied house to a rental or buy a second (or third, or fourth…) property, becoming a landlord can be the solution to supplemental income. If the prospect of becoming a hands-on landlord seems overwhelming, a good property manager can alleviate the headaches for you while you reap the rewards.
Self-directed IRAs are growing in popularity because you control the investment, not an unknown fund manager. Other options include investing in a Real Estate Investment Trust and flipping or wholesaling single- or multifamily residential property. Consult a respected real estate investment advisor, a CPA or tax expert to ensure you understand the responsibilities and liabilities, as well as the benefits.
Individual Retirement Accounts
Traditional IRAs typically focus on individual securities: stocks, bonds, mutual funds and the like managed by financial institutions. Many offer a range of investment options, while others only offer pre-set plans. You contribute pre-tax income to a professional managed investment account, up to a certain limit, and your contributions will potentially grow, tax-deferred. Depending on your tax bracket and filing status, your contributions could be tax-deductible.
Self-directed IRAs offer advantages if you are real estate or tax savvy—they allow you to invest in real estate and to manage those investments through a custodian or trustee that holds the account. They allow you to diversify your investment portfolio and to conduct a variety of real estate transactions. These IRAs also offer a number of tax advantages.
Sounds easy, right? Well, don’t be too quick to jump in. You must understand the restrictions and tax implications for every transaction you make using your self-directed IRA. The trustee acts on your behalf as you direct and handles all the paperwork, but you bear the responsibility. You cannot use a self-directed IRA to benefit yourself; your transactions must benefit the IRA account. A distinction without a difference, you say? Granted, it’s a fine point and here’s an example.
You have a self-directed IRA and you have used it to fund real estate purchases, sales and maintenance costs. You may also engage in wholesaling, flipping and development. Your IRA is growing nicely and you are enjoying the passive income it provides. Just do not use your self-directed IRA to buy a house for you to occupy—that’s self-dealing and it’s a prohibited transaction.
With self-directed real estate IRAs, you have the management burden, not the trustee. You must understand the tax implications, known and unforeseen, of every transaction you undertake.
In addition to increasing your monthly cash flow ($200 and $1,000 per month), a rental property also offers tax advantages—depreciation over 27.5 years and tax-deductible expenses. It also provides a hedge against inflation with fixed mortgage costs and increasing rental rates. In addition to single- or multifamily homes and depending on your resources, you can also consider condominiums, small or large apartment complexes and commercial real estate, such as office, retail or industrial properties.
In most cases, you will want to net an 8 percent return on your investment that will compensate you for poor asset liquidity. Remember, that is net:
You can roughly calculate your ROI by considering rental income less:
• Mortgage costs
• Vacancy allowance
• Property management fees, if applicable
Your golden years
Your retirement, whether it is already underway or you are planning an early start, depends on managing your resources to provide for a well-funded, dream retirement. Keep your expectations reasonable, understand your risk tolerance and decide how hard you want to work to manage your real estate investments. With care, your golden years may turn out to be exactly that.