There are a number of different ways that you can set aside funds for retirement, and investing in real estate is one of them. Acording to a new study from Bankrate, real estate has been the number one choice in five of the last seven years when it comes to Americans’ preferred investment choice.
Determining how you are going to save up money for retirement can feel like a big decision. After all, the choices you make now will have a major impact on how comfortable you will be in your later years.
Given the current state of the economy and fears of a recession, Americans are less optimistic about stocks now than they were just a few years ago. Ultimately, investment experts often recommend that individuals diversify their retirement portfolios to help mitigate their risk.
Are you wondering whether you should consider real estate investing as a part of your retirement plan? Let’s take a look at the pros and cons of including real estate in your retirement portfolio.
The Pros of Including Real Estate in Your Retirement Portfolio
There are a lot of great reasons you might want to include real estate in your retirement portfolio. Let’s look at some of the best advantages to becoming a real estate investor.
Monthly Income
If you’re considering buying real estate for retirement income, one of the most compelling advantages is the steady monthly income that rental properties can provide. When you make a smart decision when selecting rental properties to purchase and you hire out property management, owning rental property can be a lucrative and simple way to produce passive income.
Hedge Against Inflation
It’s no secret that inflation has been rising quickly in recent months, which means that your cash is worth less and less. Real estate has historically been seen as a hedge against inflation, and rental property owners can raise the rent over time to keep pace with inflation or even surpass it.
The Power of Leverage
Another great thing about real estate investing is the fact that you can buy a number of properties while only shelling out a small percentage of their price. Investors often use leverage to increase their cash on cash returns and grow their rental empire.
Appreciation Over Time
When you consider buying real estate for retirement, monthly rental income isn’t the only way you might make money. Historically, real estate values have appreciated over time. This means that you can hold a rental for a number of years and earn passive income monthly, and then sell the property down the road and potentially take home a pretty profit at closing.
Control Over Returns
Real estate investment typically gives you more control over your returns than investing in stocks. When you own real estate, you can boost how much you can ask for rent and increase equity by renovating the place. You can have control over who rents from you by thoroughly screening rental applications and choosing high-quality, responsible tenants that you expect will rent for the long term.
Tax Benefits
Of course, one of the best things about including real estate in your retirement portfolio is the tax benefits. You don’t have to deal with the same restrictions as tax-sheltered retirement accounts, and you can benefit from things like 1031 exchanges and deducting depreciation.
Diversification
Even if you aren’t planning on building a massive empire of rental properties, owning some real estate as a part of your retirement plan is a good way to diversify your retirement portfolio. As you likely know, having a more diversified portfolio can help to mitigate your investment risk.
The Cons of Including Real Estate in Your Retirement Portfolio
Of course, there are also going to be some downsides to including real estate in your retirement portfolio. It’s important to understand some of the potential drawbacks of investing in real estate before putting all of your money towards a rental property.
An Illiquid Asset
Real estate is fairly illiquid as an asset, particularly when compared to stocks. Investing in real estate can be a great way to help prepare for a financially comfortable retirement. However, if you’re going to need to extract the money you invested from the property overnight, you’re going to be sorely disappointed.
It Can Be a Lot of Work
Being a landlord can be a lot of work. Though people often talk about real estate as a source of passive income, that doesn’t mean it is a labor-free way of making money. To help reduce the amount of time and energy you have to put into owning rental properties, you might want to consider hiring property management.
Requires Skills and Knowledge
Making money off of real estate isn’t as easy as buying any old property and renting it out. While it is an accessible form of investing, it requires that you build your knowledge base and skills over time. While investing in real estate can be a great way to produce income and plan for retirement, that doesn’t mean that it’s impossible to lose money investing in real estate.
Are You Interested in Adding Memphis Properties to Your Retirement Portfolio?
Adding real estate to your retirement portfolio could be a great way to diversify your investments and start creating monthly income right away. As you can see, there are a lot of compelling reasons why buying real estate for retirement is a great choice. If you’re interested in real estate investment in the Memphis area, you can learn more about our process here.
As an experienced real estate investor and enthusiast, I've spent years navigating the dynamic landscape of the real estate market. My expertise is grounded in a comprehensive understanding of the factors that drive real estate investment decisions, and my insights are shaped by hands-on experience and a keen awareness of industry trends. This isn't just theory for me; it's a field where I've demonstrated success and amassed a wealth of practical knowledge.
Now, let's delve into the concepts discussed in the article:
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Real Estate as a Retirement Investment: The article explores the idea of using real estate as a component of retirement planning, referencing a study from Bankrate that highlights real estate as the preferred investment choice for Americans. This aligns with the broader trend of individuals seeking alternative investment options amid economic uncertainties.
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Diversification of Retirement Portfolios: Given the current economic climate and concerns about a potential recession, the article emphasizes the importance of diversifying retirement portfolios. This aligns with the widely accepted investment strategy of spreading risk across different asset classes to safeguard against market fluctuations.
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Pros of Including Real Estate:
- Monthly Income: The article rightly points out the steady monthly income potential from rental properties, especially when managed efficiently.
- Hedge Against Inflation: Real estate is presented as a hedge against inflation, allowing investors to adjust rents over time to counter the eroding value of cash.
- Leverage: The concept of using leverage to amplify returns and expand a rental property portfolio is discussed, highlighting the financial flexibility that real estate investments offer.
- Appreciation Over Time: Long-term appreciation of real estate values is acknowledged as an additional avenue for potential profit.
- Control Over Returns: Real estate investors have more control over their returns compared to stock investors, with the ability to influence rental income and property value through strategic decisions.
- Tax Benefits: The article emphasizes the favorable tax treatment of real estate investments, including advantages like 1031 exchanges and depreciation deductions.
- Diversification: Real estate is presented as a valuable component for diversifying a retirement portfolio, a strategy recognized for risk mitigation.
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Cons of Including Real Estate:
- Illiquid Asset: The illiquid nature of real estate is highlighted as a potential downside, especially when compared to more liquid assets like stocks.
- Work Intensity: The article cautions that being a landlord involves substantial effort, dispelling the misconception that real estate is entirely passive income.
- Skills and Knowledge Requirements: Real estate investing is portrayed as accessible but not without the need for a learning curve, emphasizing the importance of building skills and knowledge over time.
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Focus on Memphis Properties: The article concludes by inviting readers to consider adding Memphis properties to their retirement portfolio, hinting at the local market's potential and offering a call to action for those interested in real estate investment in that specific area.
In summary, the article provides a comprehensive overview of the pros and cons of including real estate in a retirement portfolio, catering to individuals seeking informed decisions in the realm of alternative investments.
