Real Estate Investing for Your Retirement Plan - Should You Consider It?

Chris Maurer |

The days of fully funding retirement on a single pension are long gone. Instead, most retirees depend on several streams of income in a comprehensive approach to retirement planning. For some, this includes investment properties to generate income as a supplement to retirement accounts. Could real estate investing play a role in your retirement plan?

Reasons to Consider Real Estate Investments for Retirement

Making real estate investment part of your retirement plan may seem intimidating. However, it can be a sound strategy for many investors. Just a few of the reasons why include: 

You Can Use Your IRA to Pay for Property

Paying for property is a common hurdle to real estate investment, as not everyone has the necessary funds at hand. Financing can also be difficult. Most banks require a substantial down payment for properties that won’t be occupied by the owner. If you’ve already retired, you may not be able to provide the required proof of employment and current work history. Fortunately, your IRA makes it possible to purchase property outright with several benefits. 

IRA funds can be used to purchase a wide variety of properties, from single-family dwellings to apartment buildings and commercial sites. Your purchase must be paid for fully in cash taken from the IRA, along with the costs of any maintenance and repairs. However, all of the income generated through rent and the property’s equity will grow inside your IRA as tax-deferred funds. Essentially, it’s an ideal way to generate tax-free income.  

A Lower Tax Burden

Owning a rental is just like owning your own home – you will need to make large and small repairs over the years to keep the property in good condition. While the expenses of these improvements can add up quickly, they can also be claimed on your federal income taxes via a depreciation deduction. 

Depreciation assesses expected wear-and-tear on assets throughout their lifetime. This estimated value is used to lower your income for tax reporting purposes. Doing so makes it possible to recoup the cost of the maintenance work, repairs, and upgrades you pay for related to your real estate investment. 

A Potentially High Return on Investment

Flipping houses, or purchasing homes in need of renovation and selling them for a profit, has become popular enough to generate countless home improvement shows. This same approach, purchasing a property at a low value and using the investment to generate rental income, also works for retirement income planning. This is because the price of real estate often fails to reflect its value due to a number of reasons, from fluctuations in the market to a simple lack of buyer appeal. 

Accordingly, your rental property can potentially produce a high return on investment, making the most of your purchase price. Individuals or couples who can also take on some or all of the management and maintenance work associated with ownership can save even more money for a greater return. 

The Pitfalls of Real Estate Investment for Retirement

Like all investments, real estate investment can present challenges. It’s not the right path for every investor, and you should take all of the following into consideration before becoming a landlord: 

Periods Without Income

Income from real estate investments is generated by tenants. This can be a mutually beneficial relationship, but it’s not without hurdles. You may struggle to find tenants for the property, and you won’t be able to collect rent during changeovers between occupants. Sometimes, tenants simply do not pay the rent owed, and recovering it via the court system can be costly. In these cases, expenses associated with the property will continue while income is suspended. 

Excessive Maintenance Costs

It’s important to choose your rental property with care. Over time, expenses like new roofs, HVAC upgrades, structural issues, and more can drain your profits and diminish your retirement funds. Even if you plan to do most upkeep yourself, these projects are often outside the scope of a landlord’s abilities and quickly become expensive. 

Loss of Individual Tax Protections

Individual homeowners are eligible for a homestead exemption on the property they occupy. This ensures that in the event of the owner’s death or bankruptcy, a surviving spouse or both occupants may remain in the home. However, since your retirement investment property is not an owner-occupied dwelling, this protection is lost. As a result, creditors could force a sale, and you’ll pay a higher property tax rate. 

Many municipalities also frown on the conversion of owner-occupied dwellings to rental properties. You may find your property subject to additional fees and rigorous inspection requirements, adding expenses and hassle to your investment. 

Deciding if Real Estate Investment Is Right for You

If you determine that real estate investment could be a wise retirement planning strategy, it’s important to proceed with caution. Seek the advice of an experienced investment planner, as well as a CPA and attorney, to avoid common mistakes and make the most of your investment. 

You should also have a clear plan for how much profit must be earned from your investment to make it worthwhile. In most cases, investment planners recommend a minimum return of 8% net expense like mortgage payments, allowances for vacancy, taxes, maintenance costs, insurance, and more. This helps ensure your venture will be profitable and deliver the funds needed for a comfortable retirement. 

Could real estate support your retirement income planning? Discover our retirement planning services in Texas that can help ensure steady income after you leave the workforce no matter how your retirement income is structured. Contact us today to learn more.