Retirement real estate investing can be extremely beneficial, if you do it right.
With every type of investing, there are right and wrong ways to approach them.
If you think about it, the most expensive investment that most people will make throughout their lives is purchasing their own home. Real estate is big, if you play your cards right.
- 1 Pros and Cons of Real Estate Investments
- 2 History of Investing in Real Estate
- 3 Real Estate Bubbles and How to Avoid Them
- 4 Invest Better Every Day
Pros and Cons of Real Estate Investments
There’s ups and downs to everything, especially when it comes to complicated sectors of investments and personal finance. To establish a balance, look at these pros and cons of real estate investing as a whole.
Your worth, in modern American society, is valued at your income.
I’m not trying to be critical here, but the higher your monthly income is, the more power you have in the financial part of our society. With a steady income, you can garner greater buying power for additional properties or necessary loans for renovations.
Home Appreciation Values
The population isn’t getting any smaller.
Many communities are being described as “up-and-coming” because more people live in poorer areas, and they genuinely want to live in good, reputable spots.
That means crime rates don’t go up even when more people funnel in (more often than not), and the nicer homes start asking more rent. Then the cheaper homes renovate and ask for rent similar to the nicer homes.
Sometimes it can squeeze people out, but business owners see this change and build their businesses nearby, and all of these improvements to the area increase your property value.
This isn’t guaranteed, but it’s likely.
If your home does end up depreciating in value, you can get tax incentives to help protect you against the damage. This isn’t the best, but it’s a benefit that can help balance any off-set costs or depreciation values.
If you own three properties, and you hit an age where you can’t physically repair them any longer, you can always hire a property management company with their own contractors, cleaners and other services to manage it for you.
This means that you can sit back and allow others to run your properties for you, and still bring in an income while you’re retired. It does reduce your overall gross income from these properties, but with peace of mind specifically geared towards retirement.
No Liquid Assets
If you need money fast, you’re out of luck.
You can’t just go to the bank and say, “Can I borrow $5,000 out of my mortgage?” (second mortgages apply later when the house is paid off, of course). You’re locked out; that money is invested, it’s spent, and it can be overwhelming.
Renovations Can be a Loss
You’re renting out your property, but you have to renovate it first because the last tenants were slobs, or you want to charge more per month for better amenities.
The renovation time isn’t just measured by how much it costs to hire the contractors, but by how many months it takes to get the place rent-ready. Every month that you’re not making money from your rental property, you’re pulling the mortgage payments out of your pocket, and that’s not good.
Most people aren’t going to just have cash lying around, so you’re going to have to take out a mortgage. Even millionaires need to take out mortgages when they invest in properties, which can tie up your finances.
History of Investing in Real Estate
Real estate has always been on the radar for investors.
Up until World War II, it was basically buying homes, renting them out, and that was it. Since then, we’ve had improvements to the system.
In the ’40s, millions were out of their homes—something in the ballpark of 16 million Americans—as a result of the Great Depression.
Then, in the 1960s, legislation was introduced that transformed the real estate game and turn it into a profitable market. This is known as the REIT, or Federal Real Estate Investment Trust, which was passed by Eisenhower. Not to be confused with personal retirement trusts.
Flash forward to the 1970s and 1980s, and you get introduced into the DIY culture. Television channels like HGTV (which launched in 1994, but it’s still relevant) piggybacked off of this DIY, home-flipping phenomenon.
It’s become popularized, and I would even argue romanticized over the years, which is not necessarily a good thing. It means there’s more fluff for you to filter through, but if you can, you’ll be part of the next stepping stone in real estate investing history.
Real Estate Bubbles and How to Avoid Them
I don’t need to remind you about how bad 2008 was for most of America.
Housing bubbles are bad, and we want to avoid them at all costs. At no point in time, for any reason, should your housing costs be over 30% of your structured monthly income.
If you currently own a home that you’re renting out to tenants, this rule applies.
The mortgage on that home and the mortgage of your home, combined, should not exceed 30% of your income. This will help protect you against a market backlash.
Ideally, you’ll want to have a savings account in place as well, and save the income you make from your rental property to save for renovations or fixing problems with rental properties so you aren’t draining your personal income.
On average, people pay between 50% and 70% of their gross monthly income on housing. That’s one of the worst things you could possibly do. Keep this cost low to avoid another bubble or collapse.
Invest Better Every Day
Real estate can be a fruitful investment for your retirement years. Start as soon as possible and prioritize purchasing or crowdfund investing in new real estate, and watch it appreciate over the time to get the most return possible.