To begin, a quick disclaimer: Murray & Co. Real Estate is not an investment firm and is not licensed to give investment advice or provide financial counseling services. Some members at our office have received a certification from REBAC for successfully completing the Real Estate Investing: Build Wealth Representing Investors ad Becoming One Yourself course. All investment related questions should be discussed with a qualified professional like a Financial Advisor or Accountant.
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When considering retirement savings, the general recommendation is ten times your final salary. However, one-third of people in the United States have less than $1,000 in retirement savings. Fortunately, there are many different ways to start saving for retirement, including real estate!
Real estate can be an excellent investment. For the majority of people, their most valuable asset is their home, helping to make real estate an important part of planning for retirement.
Over the past seven years, real estate has outranked stocks, bonds, gold, and savings accounts as the best long-term investment. In fact, a recent porch.com survey found that Americans considered real estate as the safest form of investing. Additionally, the Federal Reserve Bank’s 2019 Consumer Expectations Housing Survey found that 65 percent of Americans considered homeownership a good financial investment; that percentage has increased annually for the past four years. Real estate also has the distinction of being the only type of investment that you can live in!
What is retirement real estate investing?
Retirement real estate investing is the process of accumulating real estate, such as rental properties or other assets, to provide passive income streams (primarily rent paid by tenants, but there are other forms of income generated by real estate) during your retirement. Overall, real estate investing focuses on different cash-generating activities, such as rehabbing properties and acquiring rental properties. Retirement real investing focuses mainly on accumulating rental properties that generate cash flow consistently, but do not require any additional effort.
Generally, there are four main categories of real estate investing:
- Residential real estate: this consists of single- and multi-family homes, condominiums, and townhouses. Generally, homes with more than four units are considered commercial property
- Commercial real estate: this is any property used for business purposes. This can include business offices, retail space such as restaurants, or large apartment buildings
- Industrial real estate: these properties are used for industrial purposes, and include factories, power plants, and shipping or storage warehouses
- Land; generally, this consists of undeveloped property that does not include structures. Landowners can earn money through development or sale of the land, or through land usage such as agriculture
There are many different types of property that can be a good fit for investing. Just like other types of investing, an important component of real estate investing is diversifying assets as much as possible.
Rental properties: investing in rental properties requires taking care of the mortgage payment, property taxes and insurance, as well as finding tenants, maintaining the property, and handling any issues that arise. Depending on the situation, serving as the landlord of a rental property can be significantly time consuming. Investors who are interested in rental properties can hire a property manager to help handle things like collecting rent or issues with tenants.
Flipping houses is the practice of buying properties with the intention to sell them quickly (often within a few months) for a profit. There are two main ways of flipping properties:
- Updating and repairing a property: with this approach, buyers purchase a property that they think will increase in value if certain updates and repairs are made. Ideally, this work is done quickly and enables the owner to sell the property at a cost that exceeds their initial investment and any renovation costs
- Hold and resell: in this instance, buyers purchase a property in a market that is rising quickly, and then hold it for a few months before selling it at a profit
While there are risks with flipping, such as possibly not being able to sell the property at a profit, it can still be a good option for real estate investing if done properly.
Real estate investment trust (REIT): this type of trust is created to use an investor’s money to buy, operate, and sell properties that generate income. Like stocks and exchange-traded funds, REITs are bought and sold on major exchanges. REITs are appropriate for investors who are looking for regular income, and also have opportunities for appreciation. REIT properties can include healthcare facilities, office buildings, and a variety of other properties. These investments are liquid when compared to other types of real estate investments.
Real estate investment groups (REIGs): these groups are good for investors who want to own rental property, but do not want to be a landlord. With REIGs, a company will build or purchase a set of buildings (such as apartments), and allow investors to buy them through the company, and join the REIG. An investor can own one or more units, but the company that operates the REIG manages all of the units, and takes care of advertising, maintenance, and finding tenants. Investors pay a percentage of monthly rent to the company in exchange for these services. There are different types of REIGs, but the standard is that the lease is in the investor’s name, and all units in the group pool a part of their rent in order to cover occasional vacancies. This allows investors to receive enough to pay the mortgage, even when their unit is unoccupied.
The quality of a real estate investment group depends on the company that offers it. With proper research, a group can be a good way to get into real estate investing.
Real estate limited partnerships (RELPs): these are similar to real estate investment groups, in that they are developed to buy and hold a group of properties, or sometimes a single property. RELPs only exist for a set number of years. A real estate development firm or property manager serves as the general partner, and outside investors provide financing for the project in exchange for a share of ownership as limited partners. These partners periodically receive distributions from the income generated by properties within the RELP, and then receive a portion of the profits when the partnership dissolves and the property or properties are sold.
Home construction: predictions suggest that new home construction will continue to be a significant portion of the real estate market for the next few decades. For this reason, this sector of real estate could be a smart investment
Benefits and challenges of real estate investing
There are unique benefits that real estate investing has over other investment strategies. All of the following are to help start a conversation with a qualified professional like an accountant or financial advisor. These include:
- Tax advantages with rental properties: these can include repair costs, interest, travel costs, and depreciation. Real estate investing can help reduce taxes and fees that can come along with other types of investments
- Value appreciation: generally, real estate appreciates in value. While fluctuations in market value can occur, as long as the property is in a good location and has good potential, it is likely that the property will increase in value over time
- Passive income: investing in real estate provides the opportunity to earn passive income that can be used to save for retirement, and to continue earning an income after retirement. Purchasing, and paying off, property is a great way to not only save for retirement, but to quickly increase your retirement savings. Real estate also provides the opportunity to borrow against property for more money to further invest
Please make sure to confirm with a qualified professional like an accountant or financial advisor before making any decisions.
While there are many benefits to real estate investing, there are some challenges that should be considered. These include:
- Needing capital upfront: when you purchase a property with the intent to rent it out, there may be significant capital required up front. Additionally, managing rental properties can be time-consuming, and often requires unplanned expenses
- Higher risk: some properties, like vacation rentals or commercial properties, may be more complicated and more risky investments
- Risks of flipping property: without the appropriate knowledge and assets, it is possible to lose money on properties that are bought with the intention to flip and sell
- Sales can be difficult to predict: some people may plan to sell their real estate investments either during or prior to their retirement, but it can be difficult to predict how the selling process will go. Real estate investors do not know what the state of the market will be when they try to sell, and it may take longer than they had planned to sell their property, or it may end up selling for less than they had anticipated
How much can be made from real estate investing?
The amount of passive income that can come from real estate properties depends on several factors, including the condition of the property and it’s location. Generally, as long as a rental property is paid off, and other expenses like repairs and taxes are allocated for, each rental unit can generally provide $400 to $1000 each month. The overall amount of income generated by real estate investing depends on many factors, such as the type of property and the real estate market.
For more information on investing in real estate or questions on running a rap rate analysis scenario on a particular property, please reach out to Murray & Co. Real Estate on our website at www.mcre.com