One of the most common pieces of financial advice from millionaires is to invest in real estate. Many people have funded a comfortable retirement plan through their real estate investments, and some have built enormous wealth by owning property.
Real estate is the most consistent and effective way to invest. If you’re looking ahead to retirement, you should understand the benefits of real estate and how you can get started investing.
Why Real Estate Is So Valuable for Retirement
It’s difficult to compare the return on investment for real estate versus stocks because the two are so different. On average, stocks do increase in value more per year than homes. However, there are several other reasons real estate is such a good long-term investment.
Most real estate properties increase over time, so if you decide to sell your investment, you’ll have made a profit. Land is a finite resource, and property will always be valuable.
Here are some of the other benefits of real estate as a retirement investment:
If you invest in a rental property, it can also be a source of steady income. Not only do you have equity in the property itself, but you can get monthly payments from residential or commercial tenants. Once you’ve paid off the property, these payments can go right to your bank account.
If you receive enough in rent payments to cover your cost of living in retirement, you don’t even have to dip into other savings. To cut down on the amount of work you have to do, you can hire a management company to take care of the day-to-day operations.
Real estate investments provide leverage, which is the use of borrowed capital to increase your return on investment. Since the property can be used as collateral, you can finance a rental building with a mortgage. This allows you to purchase larger investments that provide bigger returns.
For example, you could pay $100,000 cash for a $100,000 property. If the property’s value increases by 3 percent, you’ve made a return of $3,000. Instead, you could finance a $300,000 property with a $100,000 down payment. If the value increases by 3 percent, you’ve now made a return of $9,000.
Investing in real estate has some tax benefits compared to other types of investments. You can claim deductions for a number of expenses, including property taxes, mortgage interest, and insurance.
The tax benefits are especially valuable if you create a limited liability company (LLC) to invest in rental properties. When you own and manage the properties through your company, you can deduct operational expenses like advertising, business equipment, and vehicle mileage.
You can depreciate the cost of the rental property, too, which lets you deduct the loss in value over the course of the property’s lifespan. The IRS considers the lifespan to be 27.5 years for a residential property and 39 years for a commercial property.
For example, if you own a rental home that costs $250,000, you can divide the cost of the home by 27.5 to get $9,090, which is the yearly depreciation. Then, you can deduct $9,090 from your income taxes each year.
If you sell the property for more than the depreciated value, you’ll have to pay taxes on your gain. In most cases, real estate doesn’t actually depreciate. Properties typically increase in value over time, so if you intend to sell your rental property after claiming depreciation, keep this tax in mind.
How to Get Started With Real Estate Investing
Investing in real estate is usually more hands-on than investing in stocks. Here are a few investment options to get started:
Tap Home Equity
Tapping into your home equity is a simple option for funding your retirement through real estate. You can use your existing home equity to sell your current home and downsize, pocketing the difference. Depending on where you move, this could also save you money on property taxes, utilities, and other expenses.
You can also access retirement funds through cash-out refinancing, which allows you to take out a mortgage for more than you owe on your first home loan. You’ll receive the difference in cash.
REITs are real estate investment trusts. They’re similar to mutual funds, but the investments are real estate properties instead of stocks and bonds. REITs are run by real estate management companies that pay out dividends regularly, which generates cash flow that you can put toward retirement.
REITs invest in a wide variety of properties, such as apartment buildings, retirement homes, warehouses, cell towers, and storage facilities. This is a great option for those who are just starting to invest in real estate. You don’t have to buy an entire property, so it’s fairly low-risk.
Crowdfunding is a new trend in real estate investing. Firms sometimes offer the opportunity to buy shares in a real estate project through a crowdfunding platform. Like REITs, this is a good way to invest in real estate without making a massive purchase.
The investment amount varies dramatically based on the platform. For example, the minimum investment with RealtyShares is $5,000, but the minimum investment with Groundfloor is only $10. A $10 investment probably won’t get you very far, but it’s a low-risk way to familiarize yourself with the process.
Buying a rental property on your own is a much bigger investment than a REIT, but owning property is one of the best ways to build wealth. If you’re ready to make a down payment on a rental property, this can quickly become a major source of cash flow. Once you’ve built up some equity in the property, the monthly rent payments will provide a substantial passive income stream.
There are options for making rental income on a smaller scale, too. For example, you could rent out a spare room on Airbnb or buy a small vacation rental and manage it yourself. People will always be looking for places to stay, so renting out spaces is a viable way to make extra income and fund your retirement.
Real estate is an excellent retirement plan. Property increases in value, and it becomes a great source of passive income that can last into your retirement. You do have to be knowledgeable about the industry, though. Before you make any investment decisions, do your research, consult with trusted professionals, and learn as much as you can about real estate. If you make wise choices, you’ll be able to comfortably retire thanks to your real estate assets.