More and more people are turning to real estate options to establish their financial future in retirement.
Real estate offers a unique array of benefits that make it the perfect, long-term investment for a happy, relaxed retirement.
Let’s look into how you can get into real estate investment for retirement and the reasons why you should get started.
Real Estate Investment Options for Retirement
Real estate presents a few options for investors to choose from:
- Property rental
- Private Equity Real Estate Funds
These three options share a few key benefits that make them ideal avenues to build a secure retirement fund. Here’s how they work.
Rental properties are one of the most well-known investment opportunities in real estate.
Investors acquire a rental property and lease the space out to tenants—usually a residential asset like a single-family home, condos, multi-family duplexes, or even office space. The property owner, or landlord, draws up a contract stipulating the rental money to be paid by the tenant as well as any additional fees like water, electric, or trash collection.
The rental properties earn the property owner an income through the rental payments made by the lessees. The total return of rental properties is determined by the income from rental payments subtracted from ownership fees, property tax, and mortgage payments.
Real estate investment trusts offer investors a more accessible option to get involved in real estate.
REITs are effectively corporations whose earnings come from income-earning real estate assets. Rental money collected, profits made on a sold property, and even mortgage interest can constitute the income earned by REITs.
Investors can buy into a REIT like they can any security on the exchange. REITs are publicly traded, like mutual funds for real estate assets. Investors can buy shares at whatever level they feel comfortable with.
REITs allow investors to diversify a retirement portfolio with real estate assets that would be almost impossible to acquire alone. REITs can include a wide range of real estate types: residential real estate, commercial real estate, or industrial real estate.
REITs can even target specific niches with the assets in their portfolio. A few examples of niche REITs include:
- Healthcare facilities
- Apartment buildings
- Retail storefronts
- Shopping malls
- Office buildings
Private Equity Real Estate Funds
Like REITs, private equity funds give investors the opportunity to access high-value real estate assets that they would otherwise be unable to acquire. They are different from REITs in that they are not publicly traded.
Private funds may have a degree of exclusivity to them.
Generally, they only allow accredited investors to participate in the fund. By retaining their privacy, private equity funds are able to wield more freedom in their operations. This allows private funds to generate more explosive growth and better returns than REITs.
Why Is Real Estate So Special?
Real estate is a compelling investment opportunity for retirement purposes because of its unique characteristics as an asset class.
These economic characteristics that define real estate are foundational to their performance, driving the many benefits that make real estate such a stable, long-term investment opportunity.
Real estate is inherently scarce.
For one, the land is a finite resource; as supply gets lower, the price of land increases. Considering that demand is regularly high for real estate, especially for residential properties, the value of the real estate will reliably rise.
In places that are already highly developed, the scarcity of the supply of property ensures that real estate retains a consistently high baseline to its value. Development is a costly, protracted operation. Even when supply is increased, it rarely outpaces demand.
The scarcity baked into real estate enforces its stability, which is exactly the characteristic that makes real estate great for retirement.
Real estate presents investors the opportunity to have a direct impact on the value of their holdings through the potential for improvement.
Whereas asset classes like stocks and bonds don’t allow investors the chance to affect their value, improvements made to property allow asset holders to increase the value of their assets on their terms.
Improvements can range from full-scale development of an empty lot to renovated kitchen cabinets. Investors have more say in the value of their assets due to the potential for improvement and, therefore, more control over their wealth.
Permanence of Investment
The permanence of improvements made to a property bakes in more stability to real estate.
When investors put more money into the development of their property, that money translates into fixed investment into the property. Foundational alterations to a property are extremely difficult to remove, securing the investment in the long run.
Building water connections or connecting a property to the local electricity grid are hardwired investments that permanently increase the value of the asset.
This high degree of permanence to the asset value gives even more stability to real estate—the kind of stability you want in a retirement fund.
The role location plays in the value of a real estate asset allows investors to make better-informed decisions and more control over their investing success.
A carbon copy of one property could have drastically different values depending on where it is located. A single-family house in New York is far more valuable than the same exact house in rural North Carolina, for example.
The effects location has on the value of an asset can give investors key insights as to where they ought to buy property for successful investments.
Christina has thrived for over four decades because our team works with some of the most hyper-prime residential real estate in the country: the Westside region in Los Angeles.
These economic characteristics unique to real estate investments translate into some compelling reasons that make it a great option for a retirement fund.
High Cash Flow
Real estate investments like property ownership have high cash flow, sustaining your retirement fund with consistently generated income.
What Is Cash Flow?
Cash flow is a financial metric that describes the amount of cash going in and out of a business or investment.
When it comes to real estate investments like rental properties, the property owner is concerned with the gross cash flow and the net cash flow of the property. Gross cash flow measures all the financial transactions of the property; money coming in from rental income or service fees and money going out for property tax, mortgage payments, and so on.
Net cash flow describes the amount of money remaining in monthly income after ownership fees and property management expenses are factored in.
Why Does Real Estate Have Good Cash Flow?
Acquiring a property to rent, for example, nets investors a steady stream of income on a monthly basis. Whereas a business may not know for certain the amount of income they will earn on a monthly basis, landlords can be fairly confident in their cash flow as outlined by their contract.
Property owners have a positive net cash flow written into their lease agreement. The rent charged to the renters necessarily generates more money than the expenses on the property. This makes rental properties a reliable source of income, perfect for a steady retirement fund.
There’s nothing more damaging to a retirement fund than inflation. Real estate investments offset inflation; in fact, they can help you increase your wealth when prices rise.
Why is Inflation Bad For Retirement?
As prices rise, the dollar’s purchasing power weakens. That means the money in your retirement fund is being corroded away as the value of the dollar decreases.
Common retirement strategies like 401ks and IRAs are particularly susceptible to the dangers of inflation. These retirement strategies rely on the fact that the stock assets in their portfolio will outpace inflation. But as inflation rises, these retirement funds lose money because they’re outpaced by weakening purchase power.
How Does Real Estate Offset Inflation?
Real estate assets are a hedge against inflation because they endure and offset the weakening dollar and keep your earnings strong.
Real estate investments bought with a fixed-rate mortgage, for example, are not subject to rising prices caused by inflation. If anything, you can pay off your mortgage faster as your dollars become more inexpensive.
You can more easily increase your home equity thanks to the weakened dollar, increasing your share of value in the property.
Rental properties are similarly immune to inflation. When prices rise, rent prices rise right along with it. The effects of inflation are generally passed on to the tenant, allowing property owners a continued stream of income.
Keep track of rising prices with Christina’s press page so you can make the investments that protect your wealth.
Real estate has one of the most reliable appreciation rates available to investors. The high appreciation of real estate makes it a quality asset to a retirement portfolio as its value is almost guaranteed to increase over time.
What is Appreciation?
Appreciation is a metric that describes the increase of value for an investment property over time. Property appreciates for a number of reasons: increased scarcity drives up value, inflation rises prices, improvements made to the property, or increased development in the community.
Why Does Real Estate Have A High Appreciation Rate?
The factors that drive property value to increase do so reliably; they can almost automatically be expected to rise. A healthy economy still has a 2% inflation rate, meaning that good times will necessarily raise the value of property over a long enough timeline.
Add to that baseline price rise improvements made on property or increased demand for housing, and the appreciation rate for properties in high-performing areas is virtually guaranteed to rise consistently.
The average sales price of a home in the United States has almost doubled within the past ten years—that kind of appreciation rate makes real estate investing ideal for long-term investments in a retirement portfolio.
Real estate investments have consistent returns that often outpace the stock market, even high-performing indexes like the S & P 500.
What Are The Returns For Real Estate Investments?
The returns from real estate investment can vary depending on the type of investment. A good ROI on rental properties is above 10%. REITs have had a commendable 11.3% annual return based on the last 20 years, outperforming the long-term historical average of 10.5% from the S & P 500.
By the year’s end in 2021, private equity funds were determined to have a median return of 14.2 percent.
Invest With The Best For Your Retirement
Retirement planning can be stressful.
With Christina, you can invest in high-value real estate assets that earn you the kind of retirement income to brighten your golden years. Get started with a passive investment in some of the country’s most valuable properties with Christina.
What Does Appreciation Mean In Real Estate? | Quicken Loans
Average Sales Price of Houses Sold for the United States | Economic Research
How to Calculate the ROI On A Property Investment | Forbes
Best-Performing REITs: How to Invest in Real Estate Investment Trusts | NerdWallet
What Is The Average Annual Return for the S&P 500? | Investopedia