Senior Financial Planner Nate Ritchison, CFP® outlines some of the advantages of investing in real estate in retirement, and he briefly touches on the direct and indirect methods for using rental real estate as a part of your retirement income strategy.
Today we’re going to discuss whether investing in real estate should be part of your retirement income plan. There are many potential advantages to investing in real estate.
The first one is obvious. It’s the income advantage of investing in real estate. You can use the income to supplement your other retirement income sources like social security pension or even withdrawals from your retirement account.
Another advantage of investing in real estate would be the appreciation or growth potential of investing in real estate. But remember, not all investments are created equally, so you want to be sure you are clear about your objectives, whether that’s to invest for income purposes or for growth purposes. Oftentimes these two things can be mutually exclusive.
Tax Advantages: Depreciation and Long Term Capital Gains Shelter
Another less obvious advantage of investing in real estate is the tax advantage. Whether it’s to reduce the amount of your current income from a tax perspective through depreciation or to shelter some of the potential growth from long term capital gains, there are many different tax advantages of investing in real estate. This is why it’s so important to work with a qualified financial advisor as well as a real estate agent and a tax advisor to understand what the role is of investing in real estate within the broader context of your financial plan.
Leveraging Your Investment
Another less obvious advantage of investing in real estate is the ability to use leverage or to borrow or finance a portion of the purchase of the real estate. It’s different from most investments, where you have to invest all of your capital to buy stocks or bonds – but with real estate, you can actually carry a loan or mortgage to enhance some of your returns.
Diversification of Investments
And finally, investing in real estate offers you the ability to diversify your investments. Real estate is an asset class just like stocks and bonds and these different asset classes will behave differently in various and different market environments. So this allows you to spread your risk out into many different places.
Now if any of these advantages makes sense to you, you’ll want to look at different ways to invest in real estate. There are two primary ways. There’s direct investments – going out and purchasing, say, a residential piece of property and being the manager and the owner of that property. Or there are indirect ways to invest like through financial instruments like REITs – real estate investment trusts.
If you need any help understanding the role that real estate plays in your overall retirement income plan, please contact us at PureFinancial.com. Thank you.