Single-Family Real Estate to Slide into Retirement
Investment Home Run: Using Single-Family Real Estate to Slide into Retirement

Too often, when we discuss retirement planning, the conversation is limited to equities and bonds. While those certainly have a place in a personal investing strategy, it is important not to overlook a different asset class that, paired with more traditional investment opportunities, can add balance and additional growth opportunities: real estate. Investment properties can be a game changer. Let’s look at some of the ways real estate can be a fantastic option for hitting a retirement-planning home run.

Appreciation

One of the best things about real estate is that it tends to increase in value over time. Cars, electronics, and many other things we spend our money on are generally depreciating assets. That means from the moment we swipe our credit card, they are actually shrinking our net worth. On the other hand, real estate tends to increase in value, making it a great way to grow wealth that can be tapped into in retirement via a sale, an equity loan, or rental income. In this case, from the moment you buy it, it has a chance to grow in value. Unlike those old vinyls sitting in your attic.

Equity

While appreciation is hopefully making your real estate worth more than the day you bought it, you are also building equity each time you make a payment.

As you pay down your mortgage principal, you are essentially purchasing equity in your home. Over time, that means your investment property has become like a savings account. Your net worth grows as the balance on your loan shrinks. This gives you an asset that can work for you, whether as a rental or collateral for a loan.

Cash Flow

Your cash flow is the remaining money once you’ve paid the mortgage and other costs associated with a property. It’s almost like a paycheck you get just for deciding to own an investment property.

A well-managed rental property should bring in a predictable fee in the form of rent every month. This reliable income is especially nice in retirement because it means you need to sell less of your other investments to cover your living expenses and enjoy your retirement years.

And, while your mortgage payment stays the same, rents will trend upwards over time, meaning the checks get bigger. This can be one hedge against inflation that can give you some peace of mind, knowing you can handle whatever may come up in your retirement years.

Tax Advantages

Owning investment properties provides a fantastic opportunity for tax breaks and deductions. The costs of owning and operating your rented properties are generally deductible. That means getting rid of the 1970’s era avocado-green tile is not only a kindness to your eyes, but also helps satisfy the tax man.

Residential investment property structures (buildings, not land) can also be depreciated over 27.5 years, so the tax perks don’t end the day or year you pay for that clean, neutral tile. You will see a difference every April for several decades, in addition to the increased rent you may get for having an updated property.

Portfolio Diversification

You shouldn’t put all your eggs in one basket or all your dollars in one asset class. Many people think of bonds and equities as a safe investment when they are planning for retirement, and while that can be part of a sound strategy, it can mean trouble if the markets are down when you need to withdraw money to pay your mortgage.

Real estate investing offers a way to put some of your money in a different type of asset, which can help hedge against drops in the stock or bond markets. Adding real estate to your retirement portfolio can lower volatility because of its low or even negative correlation to other major asset classes. This means you won’t be left with egg on your face in a bear market.

Inflation Hedge

Real estate investment can help insulate against inflation in several ways.

        Rent Growth—The rent earned from your property can increase at or above the inflation rate. When this happens, you have more cash flow as prices rise, regardless of what equities or your other investments might be doing. Having your income increase when your expenses are going up keeps some of the stress out of your retirement.
         Property Values—As prices rise with inflation, so too can the value of your property. This can help offset some of the ways inflation can erode real buying power.
         Fixed-Rate Borrowing—Inflation means that each of your hard-earned dollars buys less. But the payment on a fixed-rate loan stays the same. As the relative cost of that payment decreases when compared to increasing prices on other things, it can be less of a burden on your budget. Look at this another way: $1000 in 1972, when those green tiles seemed like a good idea, felt like a lot more than $1000 in 2022. So locking in fixed-rate debt can act as a hedge against rising prices and diminishing buying power as the relative cost of your monthly mortgage payment decreases over time. Future-you will thank you.

Leverage Opportunity

Leverage essentially means using borrowing to increase the potential return of an investment. Real estate is one of the easiest ways to use leverage because plenty of lenders are eager to issue loans secured by property.

You can put 20%, or even less, down and own 100% of a home. That means you can put that other 80% to work elsewhere, including on additional properties, rather than having it all tied up in one asset. And thanks to fixed-rate borrowing and the inflation-hedging we already discussed, borrowing to purchase investment properties is a retirement-strategy home run. Your properties will be doing all the heavy-lifting while you sip drinks on a beach, enjoy 18-holes, or spend a day at the stadium watching your favorite team.

Owning income-generating properties will allow you to hit it out of the park when it comes to retirement finances. Because the only things you should be stressing about during your retirement are whether your favorite player will come off injured reserve and if you should grab another hot dog during the 7th inning stretch.

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