For many of you reading this, investing in real estate has been incredibly profitable. Many Baby Boomers bought homes in the 60s, 70s and 80s, and have watched the value of their investment increase significantly over time.
For that reason, real estate investing is something you may understand and feel comfortable with. But is it still the right move later in life?
Here we look at the pros and the cons of investing in real estate as you approach or enter retirement.
The Pros
You Have a Vacation Property or Investment Property
It might make sense for you to buy a vacation property if you like to spend a significant portion of the year in a warmer climate, or if you like to ski. Having your own place makes it easier to plan your trips, allows you to invite family and friends to visit, and is an investment that grows in value over time. When you’re not there, you can rent it out to offset your costs; a vacation property management firm can handle the work for you.
It Can Provide Passive Income
If you can find a property that provides you with a monthly return on your investment, you can potentially diversify your retirement income stream away from pension payments, dividend payouts and other typical retirement income sources. You can also make the whole process passive if you hire a property management company to act as a landlord for you.
The Cons
It’s a Long-Term Investment
Part of the problem with investing in real estate as you get older is that it’s a long-term investment. Experts tend to agree that you shouldn’t buy real estate unless you plan on holding onto it for an extended period of time. That’s partly because transaction costs significantly decrease your return, and it can take years to recoup those costs.
In addition, the real estate market is cyclical. Though it generally goes up over the long term, it can be subject to large downswings. If you’re considering investing in real estate during your retirement, this can cause problems if your financial retirement plans don’t line up with the cyclical nature of the housing market.
Renting Can Be Difficult
In some hot markets, real estate prices are high but rental rates are quite low. You might be surprised to discover that if you rent out your property, you barely cover its costs. While your investment might appreciate in value, these returns are only on paper until you decide to sell the property. In the meantime, you have to be a landlord, which in itself can be a lot of work.
Real Estate Isn’t Liquid
If you need money, know that it can take months to sell a property. Real estate investments are significantly less liquid than other potential retirement investments like dividend stocks or bonds. There are also closing costs and real estate agent commissions to pay.
Your Portfolio Won’t Be as Diverse
Since real estate investments are costly, they may take up a large percentage of your investment portfolio. If you also own your own home, this means you may have a significant portion of your net worth tied up in real estate. This can be dangerous: it’s important for retirees to reduce risk and diversify investments to protect their capital.
So, Should You Invest?
Ultimately, real estate investing is probably not ideal for retirees because it isn’t liquid, it involves a significant investment, and there are headaches involved in being a property owner. Of course, if you want to invest in real estate, it’s better to do so at 65 than at 80, since the longer-time horizon will provide you with more time for the asset to appreciate.
Consider limiting your exposure to the market by investing in a different type of real estate property (e.g., commercial instead of residential) or buying in a different market than where you live. You might also consider forming an investment partnership with friends to allow you to limit your investment.
