Today, few of us can rely solely on Social Security to carry us through retirement. Ideally, we should begin investing for retirement early and create a diverse portfolio.
When most people start to diversify, they think of equities and fixed-income securities. There are, however, other options to consider, especially given the unique opportunities they present for retirees.
One of the asset classes that you may want to consider is real estate. Not everyone agrees that real estate is a good investment, especially when planning for retirement. Indeed, real estate is not for everyone, but nowadays, there are many different ways of investing in it depending on individual preferences and goals. Some of these ways include the following:
Residential rental property
The traditional form of real estate investing involves purchasing a home and renting it out to other people. However, you will need to make sure you can generate enough rental income to cover insurance, taxes, maintenance, and mortgage. While you can make significant returns renting a property, it usually does not start until after the mortgage is covered.
Real estate also tends to appreciate over time, so that helps keep the investment in the green. You can also get significant tax benefits in addition to a monthly cash flow. At the same time, managing a property involves a lot of time and stress. Hiring a management company helps, but it also cuts into your earnings.
Commercial rental property
While most people think of residential real estate when it comes to investing, you can also purchase commercial properties. In fact, experts note that residential properties are more profitable than commercial, especially since the tenants tend to be steadier. However, juggling a commercial property is also more complicated and often involves larger sums of money, so there is a decent amount of risk involved.
Vacation rental property
Another option for retirees is to purchase a vacation home and then rent it out to other people for short periods. The location needs to be right for this sort of investment to work, but it provides you with a vacation destination while also generating income. Of course, vacation homes tend to be quite expensive and rentals are typically seasonal, which leaves you with a limited earnings window. Plus, if you do not live nearby, you will likely need to hire someone to help out with the cleaning, maintenance, and management of the property, which again cuts into profits.
Many people do not think of their own home as a retirement asset, but it is. For some, a home can be worth more than savings. You can make your home work for you in many ways during retirement.
You can borrow against the equity of a home, called a reverse mortgage, to handle some unexpected expenses. You can also look at the home as a sort of emergency fund—if the situation becomes dire, you can always sell the home and downsize while using profits from the sale to cover things like long-term care or other expenses. Of course, each of these transactions is expensive in itself, so you need to be strategic.
Real estate investment trust
A real estate investment trust (REIT) is the perfect vehicle for people who want to get involved with real estate for diversification purposes without handling the hassle that comes with it.
REITs operate sort of like mutual funds except that they are a collection of properties rather than stock. Furthermore, a special tax status requires that REITs pay out at least 90 percent of income to investors through dividends. There are several different types of REITs, so make sure to do your research before purchasing shares. Some of these options will have a very high risk, while others are quite stable.
The main attraction of REITs is their lack of hassle and easy liquidity, not to mention quick access to diversification. However, REITs are taxed as ordinary income, and they tend to have low principal growth since the money is not getting reinvested.
You may want to think of crowdfunding as the newer, less regulated version of REITs. Many people can invest a small amount in a project and then receive a return that matches their investment percentage. Crowdfunding is a great way to get involved with larger projects that are difficult to purchase individually, such as multi-tenant buildings.
There are many different crowdfunding platforms that you can use to find projects. This will allow you to get involved with real estate with relatively little money while maintaining more control over decisions than a REIT allows. There are, however, downsides. You can always lose money if something happens with the investment, and much less liquidity exists in crowdfunding than in a REIT. You should only consider this opportunity if you have significant industry knowledge.