There are several ways to utilize real estate in your retirement portfolio. In this article we explore several ways owning real estate could be incorporated into your current balance sheet and become a major part of your retirement plans.
A Supplemental Income Stream
The most common way to make real estate a contributing factor in your retirement portfolio is owning rental real estate as a supplemental income stream. Let’s break down the pros and cons of such an endeavor:
- A stable, potentially rising stream of income
- An activity to keep you busy in retirement
- Potential additional tax advantages and deductions
- Great diversification from stocks and bonds
- People rarely factor in all the costs such as insurance, taxes, maintenance, bad tenants, etc.
- A large down payment or cash offer is often required to generate positive monthly cash flow
- Mortgage rates are high now compared to recent history which makes positive cash flow a bit harder to achieve
- Potential liability from an unforeseen accident
Well Worth the Trouble
Owning rental real estate can be a rewarding and wealth building experience. If you’ve never owned rental real estate before, the idea could be daunting. But many experienced real estate investors will tell you that while the first investment property may be the hardest, it will only get easier from there.
Roll Up Those Sleeves
Once you begin, you may experience a bad tenant. It’s bound to happen and it’s something every rental owner should be prepared for the occasional bad apple. Don’t let one or two bad experiences scare you from being a landlord.
The more you’re willing to roll up your sleeves and get involved the more likely you’ll succeed — just like with anything else in life. Any type of success in real estate does not happen by accident. Make sure you’re working with your financial planner and your property and casualty specialist to account for potential worst-case scenarios.
There are a lot of great opportunities in the short-term rental space. This does bring on the added responsibility of marketing, generating positive reviews and buzz, and an increased need for maintenance and attentiveness. Like any small business where some extra work is required, if done well, will pay off in the end. We have several clients who have had a lot of success with short-term rentals. There are even websites dedicated to help you generate supplemental income from your properties.
Publicly Traded Real Estate Investments
Physically owning and maintaining real estate is not the only way to go about benefiting from real estate as an investment. You might want to consider publicly traded real estate investments (REIT’s or Real Estate Investment Trusts).
These also come with their own sets of pros and cons:
- Higher stream of income vs. similar credit quality stocks and bonds
- An easy way to access specific niches (i.e., targeting warehouses and data centers, housing, offices, medical communities)
- Decent diversification from other types of stocks and bonds
- Not altogether uncorrelated — principal value will fluctuate along with the market
- Not quite the same feeling as owning a tangible asset
My personal recommendation is, if you own publicly traded real estate, make sure you own it primarily for the income, not for the principal appreciation. Yes, you could potentially make money over time but, you should think of this transaction as an income play.
Real Estate Investment Trusts (REIT)
Another option to consider is the private REIT space. A private REIT will give you an investing experience somewhere between owning real estate and owning a publicly traded real estate fund. If you’re interested in the private REIT space, you should work with your advisor to do some due diligence and keep in mind the following:
- How does the fund’s liquidity work? What is your time commitment?
- You’re paying fees to a sponsor and a property manager — not entirely different than you would pay when owning other properties.
- Understand what these costs and fees look like.
- What do they own and what do they plan to buy?
- Have they successfully gone “full cycle” before?
- How did their funds do during prior periods of real estate distress?
- Accept the fact that you’re giving up control over these decisions but mitigating against the risk of bad decision-making by relying on professionals
Owning investment real estate to generate income during retirement can be a valuable addition to your portfolio. Whether you’re physically owning it with after-tax dollars or diversifying a portion of your retirement accounts into publicly traded real to increase your existing portfolio’s level of income — there are certainly a lot of potential benefits that at least merit a conversation about how you can utilize real estate in your retirement portfolio.
Neither MML Investors Services [or MM if appropriate] nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters. CRN202507-4203198