The importance of real estate in retirement planning
SOME people hoped to build or own a retirement dream home. There are others who seek to earn retirement income from their investment properties. Unfortunately, some people abandoned their goals for various reasons, such as inadequate financial resources or the death of a loved one.
Real estate has proven to be an important asset for retirement and should be included in any retirement portfolio. It’s a store of value and can be used in wealth creation. As a hedge against inflation, real estate minimises portfolio risks and diversifies your retirement plan.
Last week I was a guest presenter at a retirement seminar. I had an insightful discussion with one of the attendees. She is a pre-retiree who had abandoned the dream of building her dream home due to the passing of her husband. A savvy investor, she had a well-resourced emergency fund in place and sought to expand and diversify investments for the long term. She owns investment property that has appreciated tremendously. The question was whether to sell or own.
Today’s column delves into the pros and cons of real estate as retirement income. Real estate is an asset that appreciates over time, but can be costly to maintain. Property taxes, maintenance fees and insurance, can be very expensive and must be weighed against the financial benefits derived. If the costs outweigh the benefits, then the option to sell and invest the proceeds in other assets would be the best choice.
In the case of the aforementioned pre-retiree, the decision to forego building on the investment property has resulted in monthly maintenance costs plus ongoing property tax payments. Her offspring is not interested in owning or inheriting the property. Though the asset is valuable, it’s not providing an income. Her best option is to sell the property and invest the funds in other assets that can be easily converted to cash, such as stocks and bonds. A major advantage for her is the location of the property. The location is in high demand, and the sale would be a profitable venture.
When it comes to retirement planning, real estate can be a major source of income for retirees. The decision to own or sell the real estate for retirement income is dependent on each person’s goals and particular situation. Retirement for some people means lots of free time. Therefore, time can be dedicated to building, renovating, and supervising the upkeep of properties. Any shortfall in pension income can be offset by rental income from rented properties.
Some people use the equity in their homes to purchase investment homes or commercial properties, which can fetch lucrative streams of income. Earnings from property rental or lease should be significant enough to cover mortgage costs and other related expenses to ensure that the venture is a worthwhile investment. Location of properties must be carefully considered at the time of purchase, as difficulties may be encountered when it is time to sell.
Some investors may consider buying properties for Airbnb purposes in resorts or tourist areas so as to benefit from lucrative earnings. But occupancy is likely to be seasonal. To make the best use of the facilities, owners can utilise Airbnb facilities for their comfort and relaxation during off-peak seasons. If planned properly, earnings from peak seasons should compensate for off-peak times.
For retirees who have multiple properties, it may be challenging to manage or supervise all these assets, especially if they are in different locations. Hiring the services of a property manager or management entity to oversee the operations and maintenance may be more convenient, but can also be costly.
Real estate, if managed effectively, can yield significant income and capital appreciation, which offer financial security for the retirement years. Downsizing your home in retirement can provide additional income, which can be used for the acquisition of investment properties. Another benefit of real estate is inheritance. Estate planning is necessary for securing your legacy.
A disadvantage of owning and renting property is running the risk of being house-rich and cash-poor. If there is a major financial crisis and adequate cash or emergency funds are not available, then selling property to fund emergencies can prove challenging. Another drawback is the forced sale of properties. In such situations, you accept a forced sale value that is lower than the fair market value of the property.
Renting properties to tenants can be a disadvantage to some retirees because of non-payment of the monthly rental or poor upkeep of the property. Also, natural disasters — such as hurricanes, floods, and earthquakes — can cause significant property damage, resulting in a reduction in property values.
Real estate investment doesn’t have to be brick and mortar. You can earn passive income from investing in real estate investment trusts (REITs). A REIT invests in a range of real estate propeties, such as in the residential, commercial, and industrial sectors. REITs offer investors liquidity and a steady and reliable stream of income. As with all long-term investments, great capital appreciation depends on time. Actor Will Rogers once said, “Don’t wait to buy real estate. Buy real estate and wait.”
Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her
at livingaboveself@gmail.com