Retirement starts a new era of freed up cash for most people. You may start withdrawing funds from your savings vehicles for various reasons, such as travel, paying off debt, or replacement income. With this available cash, you may consider investing some of it to grow your retirement nest egg even larger. Property investment may be one type of route you consider. But is it a good idea?
According to Bankrate, nearly 30% of expert investors claim real estate investing is the best long-term investment strategy. The vice president of Lenox Advisors, Jeffrey Feinstein, says that the holding period of real estate investments is between four and ten years. Therefore, Feinstein says property investments are a “retirement-friendly strategy.”
The income potential of investment properties in retirement
The purpose of building an investment portfolio is to profit from the cash invested eventually; make more than you put in. Although any investment has its risks, that’s the goal. So, if you’re considering investing in real estate, decide how you’re going to grow capital gains for the transaction.
Purchase for rent
One way you can profit from property investment is by purchasing a residential property and renting it out. According to the U.S. Census Bureau, the median sales price of houses sold in the U.S. as of 2020 is $327,100, up nearly $120,000 from the housing market crash in 2008.
If you were to charge the recommended 1% rent, according to SmartAsset, for a home valued at the median price, you’d make $3,271 per month. However, you wouldn’t be able to allocate the entire rent amount towards your monthly profit since you’d have property taxes, maintenance costs, and other typical homeowning expenses. If you’re a snowbird like many retirees, you may consider renting out your winter home while staying at your summer home.
Another version of this property investment route is purchasing commercial space and renting it out to businesses. Depending on the company that rents out your property, this route may lower your risk level since the occupants will likely have collateral if they failed to pay you. Although, as long as you pick the right occupants, either option is fine.
Purchase for flipping
An investment strategy that has grown in popularity over recent years and can be considered a short-term property investment is flipping. The term flipping describes purchasing a house, remodeling it, and reselling it for profit. Flipping requires more labor than other property investments that offer a more passive income option. However, flipping is a great way to make a quick and substantial profit in retirement.
The biggest risks in property investments
Although the potential for profit can be high in the real estate investment world, there are some heavy risks you should consider before investing your hard-earned cash. According to the president of Durso Capital Management, Paul Durso, purchasing the wrong property in the wrong area and choosing the wrong occupants are the two biggest risks of property investments.
To choose the right property to invest in, you should consider its rent potential by scouting the area and finding the average rent per square foot. Doing so will help determine the worth of your property. It would help if you also considered the property’s taxes. If the taxes are too steep, purchasing the property as a rental may not be the best strategy.
Choosing the right occupants may mean interviewing several candidates before deciding. Some retirees may see this is more work than they’re wanting. If that’s you, consider hiring a property management company to take over this part of the transaction, and you worry about the income.
Do your homework
Because property investments usually require a large amount of cash, you shouldn’t make the decision lightly. Weigh the pros and cons of property investing, and if you decide it’s the right path for you, do your homework.
U.S. News & World Report says you should understand your financing options, create a cash reserve, learn the tax advantages and disadvantages, and find the right properties. If you do these four things, you could build an impressive property investment portfolio in retirement.