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Make real estate part of your retirement planning

| Oct 18, 2018 | Estate Planning, Real Estate, Retirement Planning

When you think of preparing for retirement, what comes to mind? A 401(k)? A pension? An IRA? Social Security? Other savings? What about real estate? Maybe surprisingly, some prospective retirees are looking to real estate investments to help fund their golden years.

If you are interested in the prospect, know that you have several options.

One of the simplest ways is to invest in a real estate investment trust, generally known by the acronym, REIT. A REIT is effectively the real estate equivalent of a mutual fund. They own and typically operate real property that produces income, such as apartment buildings, warehouses, hotels, shopping centers and even timberlands. Some even provide financing. They can be private or public. And, perhaps most interesting for investors, they are subject to tax rules that require at least 90 percent of all taxable income be distributed to shareholders each year.

On the other hand, it can be difficult to get into the best-managed REITs. Income can be inconsistent. And, the required payouts can limit growth, as there will simply be less capital available for reinvestment.

Another option is to create an income stream through property rental. Some people may opt to own a second (or third, fourth, or 10th) home or building for purposes of renting it out. Others may opt to live in one part of a multi-family home or apartment building and rent the other units. Or, of course, commercial buildings can garner significant rents. And vacation rentals, whether rented with the assistance of a property management company or even a rental website like Airbnb, are likely to bill weekly, providing net amounts that can be much higher than other residential types of rentals, especially in popular tourist spots.

On the other hand, all types of rental properties require some capital. You may have ongoing expenses like a mortgage, management expenses, standard upkeep and improvements, and property taxes. To come out ahead, it is imperative to do some level of cost-benefit analysis to make sure the investment is likely to be worth it.

It may be enough to simply take equity out of your home. If you’ve paid off – or even just paid down – your home in the years leading up toward retirement, this could be a good option for you. Home equity loans and home equity lines of credit will permit you to borrow against the wealth that you have built up. Loan proceeds would then be available for other investment, payment of expenses, and the like. The downside is that these funds will need to be repaid, and the repayment terms will certainly need to be weighed against available cash flow and the benefit derived.

Finally, if you or your spouse are over the age of 62, a reverse mortgage might be a good option for you. This is an alternate type of mortgage loan that allows a homeowner to access the equity built up in his or her property. The equity funds are received at the inception of the loan and usually require no monthly repayment.

Instead, interest is added to the loan balance, which will be collected at the time the home is sold or the homeowner passes away. Borrowers will still be responsible for paying property taxes and home owner’s insurance, not to mention any repairs. The loan balance can grow beyond the actual equity available in the home, especially in a down economy. However, the borrower –or his or her estate – is not typically on the hook for any overage. But, it is important to understand that no value may be left for heirs.

Unless you are going to become a property tycoon, you will probably not be able to retire on real property alone. But, if you are looking for some supplement cash flow – or a lump sum of cash– these options may help you get there.

This article originally appeared as a column for the Cleveland Jewish News.