Should Real Estate be a Part of Your Retirement Strategy?
I love what I do, but I also know that it is important to consider my expected lifestyle and cash flow needs once I am retired (is that even an option). My husband and I are in agreement that an investment in real estate should be considered/included in our portfolio when building your retirement portfolio, if for no other reason than there are benefits of this type of investment for:
- long term growth
- cash flow and
- diversification
- tax advantages while we are still working
Of course the potential step up in basis for your beneficiaries is a benefit to your children, but who cares about them anyway?
If you are thinking about retirement, working with your CPA, investment adviser and estate attorney as a team will yield a game plan with specific actionable items to help you meet your future lifestyle goals.
Yes, this can be a stressful process, that is why you want to gather a team who is comfortable working together and who understand your needs and goals.
Your team will need to consider:
- age expectancy (make sure there is an actuary on board)
- lifestyle (don’t forget travel to see those grandchildren)
- maintenance cost for general living plus any additional expenses
- slush fund for unknowns and “what ifs” (some you might not be able to anticipate)
Many people ask whether real estate can be a useful asset for funding retirement. It can, but you have to be smart about it. As with any investment, there are risks, and real estate requires an upfront investment regardless of how much you ultimately make. Please consider this option while you are still working and able to make the necessary payments for mortgage and maintenance, so that the property is stable before you retire. Before you invest in commercial or residential property, you’ll need to think a few things through.
Here are some tips to getting the most out of a real estate investment to fund your retirement.
- Understand your current financial state
There’s no point in deciding how beneficial real estate will be if you don’t have a clear picture of your current financial state and your goals. If you’re only two years from retirement, investing in real estate could be risky as you’ll have a low tolerance for losses and less time to reap the rewards. If you’re early in your career the value of the investment property will have time to grow. That said, there are always fluctuations in the market and a sudden drop in housing prices could affect your investment no matter how long you have it.
You’ll need to know what you can afford to pay right away, too. You’ll have to cover a down payment and property taxes. Additionally, if your property is a rental, you’ll still have to pay the mortgage even if you have no renters. Depending on how long you own the property you may have large bills to maintain the premises.
- Know the geographic area you want to buy in
Knowing where you want to buy is vital to a more stable investment. Even in market downturns, there will always be areas of a city or the country that are in demand. Research the area and find out where housing prices are stable or increasing, where there are desirable features nearby—parks and schools, for example—and where people tend to want to live.
Buying without that information can result in investing in property in a less desirable area which will make renting the unit or selling it that much more difficult.
- Know your strengths
There are a variety of ways to invest in commercial or residential property that can earn you an income if you know how to leverage them best. Buying with the purpose of renting something out and holding onto it for a long time can earn you money, as can purchasing land and flipping it quickly. You may know contractors (or be a contractor yourself) and find it convenient to purchase a rundown home or commercial strip in need of remodeling and then sell it when you or your tenants have fixed it up. Each of these strategies has its benefits and drawbacks. Knowing which works best for you based on your financial profile and your talents will help you make the decision that’s best for you.
Final thoughts
Commercial or residential property can definitely help fund your retirement. The key working with your professional team to create a strategy that meets your needs and helps you attain your retirement goals. If you’re not sure about your financial needs in retirement or what your tolerance for losses are, reach out to your CPA. She can help you create a plan and recommend an estate attorney and financial planner to round out the team.
Our team continues learning new skills and reviews opportunities for tax saving strategies under the new law, the TCJA to bring added value to our client meetings, and we’ve been doing this for over 25 years.
If you need help with your accounting, want to create a tax minimization plan, want to discuss your business growth plan or your finances, are concerned about retirement goals or need to be held accountable for your 90 day action plan, contact us for a complimentary discovery session or an appointment to just get started.