Yahoo Finance 6 Reasons Real Estate Can Be Your Best Retirement Bet
Real estate comes with some enormous benefits for retirees. So why don’t more retirees invest in it as part of their retirement planning?
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Most retirees don’t know all the ways to invest passively in real estate. Consider these options and advantages of investing in real estate for retirement income.
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1. You Don’t Need To Become a Landlord
When most people think of real estate investing, they think of two strategies: buying rental properties or flipping houses.
There’s nothing wrong with either strategy — they’re classic methods for a reason. But they also require a lot of labor and skill, and most retirees aren’t willing or able to invest the time needed for both.
But investors have plenty of hands-off options to invest in real estate.
The easiest and best known of these is buying shares in real estate investment trusts, or REITs. REITs have delivered historically high returns (over 10% over the last 52 years), but they come with a huge downside: they have a strong correlation with the stock market at large. That means they don’t provide much diversification benefit.
Alternatively, consider passive real estate investments that aren’t publicly traded on stock exchanges. These include real estate syndications (a fancy term for group investments in large properties), private equity real estate funds, debt funds, private notes and private partnerships. More recently, you can also invest small amounts through real estate crowdfunding platforms.
Some of these passive real estate investments require a high minimum investment, on par with what you’d need for a down payment and closing costs on a rental property. To reduce the minimum, research passive real estate investment clubs.
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2. Opportunity for Asymmetric Returns
Most real estate syndications target annualized returns in the 15-20% range. Many private partnerships target similar returns.
Here’s the kicker: The risk on these investments spans the entire spectrum. Some come with high risk to match the high returns. But many come with relatively low risk.
The trick is to learn how to gauge risk when all of these investments promise high returns. Again, it helps to network with more experienced investors to ask about syndicators’ reputations and track records, and to learn how to measure risk.
3. Ongoing Income
Many real estate investments generate income from Day 1 — and never stop.
In fact, the income yield only goes up with time. Many real estate syndications start paying monthly or quarterly distributions within the first quarter of buying the property. The distribution yield (“cash on cash return,” in industry-speak) often starts modest, perhaps 4% to 6%, but as the property stabilizes, it often increases to 8% to 12%.
And that says nothing of the property’s appreciation.
You could also invest in debt investments secured by real estate. They often pay 8% to 12% interest immediately.
That income can help cover your living expenses in retirement, without you having to sell off any assets. You don’t need to worry about safe withdrawal rates if you simply live off the rental income or interest from real estate investments.
4. Diversification From Stocks
One of the reasons retirees like bonds is their lack of correlation with the stock market. If the stock market crashes, they can still count on interest payments from bonds. Perhaps they can even sell those bonds for a profit, since bonds often rise in value when stocks fall.
The same principle applies to real estate. Real estate income keeps flowing, no matter how the stock market gyrates. It provides not just ongoing income, but an uncorrelated source of retirement income that doesn’t require the stock market to perform well.
That proves particularly helpful to avoid sequence of returns risk in the early years of your retirement. If the stock market crashes, you can pull back spending and try to live on your real estate income to avoid selling off any stocks while prices are low.
5. Inflation Hedge
Real estate offers one of the best hedges against inflation. When the value of a currency goes down, people simply pay more for properties.
People will always need housing. Many businesses will always need restaurant space or industrial space or storage space. Rents don’t just rise with inflation — they’re one of the primary drivers of inflation.
And, of course, property values also tend to rise right alongside rents.
6. Tax Advantages
Real estate comes with fantastic tax benefits.
You can write off every conceivable expense as a property owner, from mortgage interest to maintenance to travel expenses. Those deductions pass through to you when you invest passively in real estate as well.
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This article originally appeared on GOBankingRates.com: 6 Reasons Real Estate Can Be Your Best Retirement Bet
