Retirement looks much different today than it did a generation ago. As the last wave of Baby Boomers approach their golden years, their financial picture might be a bit blurry.
Some have come to the conclusion that they will just continue working as long as they can (or have to). Others may choose to work part-time or explore other career or volunteer opportunities.
Another money-making option that is appealing for some retirees is to retire with real estate. Investing in real estate is attractive for many since it can take many forms, allowing you to be very much hands-on or passive, and enabling you to achieve the goal of generating income.
Whether you are looking to diversify investment opportunities or want a career change, both residential and commercial real estate provides a chance to build wealth and write a new chapter in your life. Here are some ways to retire with real estate, and earn passive or long-term rewards.
Being a Homeowner
For most people, buying a home represents the largest purchase you’ll make in your lifetime. And typically, it’s a person’s first foray into the world of real estate. If you own your home, you already know the advantages that come with homeownership. In addition to significant tax advantages, most homeowners see their home has appreciated in value over the years.
According to SF Gate, national appreciation values average around 3.5 to 3.8 percent every year. Retirees who’ve seen their property appreciate in value may choose to cash out and downsize, or even rent for a while. Regardless, if you’ve gained equity in your home, the return on investment of your home is likely to be sizable and will add another dimension to your investment portfolio.
And Colorado is a great place to build equity. According to a 2021 article in the Denver Post, “U.S. homeowners gained $1.5 trillion in home equity last year (2020), which works out to an average of $26,300 per household, according to a report from real estate analytics firm CoreLogic. Colorado homeowners, reflecting the above-average home prices in the state, did even better, with home equity gains averaging $32,000 last year.”
While the real estate market it starting to shift, most people who have owned their homes for at least five years have seen significant appreciation. For people approaching retirement, this equity may help in their decision to downsize or make some home improvements.
Colorado homeowners accumulated an average of $32,000 in home equity in 2020 alone.
Second homes are very popular in Colorado and for good reason. Who doesn’t want their own piece of paradise in the mountains? For both in-state and out-of-state residents, vacation homes near outdoor recreation and cultural areas have become a hot commodity. And now, with the explosion of home-sharing and short-term rental websites, homeowners can offset their monthly expenses by renting out their properties on a short-term basis to vacationers. You determine when you’ll be occupying your vacation home and open it to travelers the rest of the time. This passive income can help finance your investment and provide funds for the home’s maintenance and upkeep costs.
Purchasing a long-term rental property is a great way to earn extra income and pay for home improvements. This is one of the most common types of real estate investment, and it’s handy to have the home in a good location and a long-term tenant. It’s much easier to manage a rental property for 12 months as opposed to three or even six months.
As the owner, you have instant cash flow each month that can either go in your pocket or be used to pay off the mortgage. As mentioned earlier, most real estate appreciates over time and there are tax benefits to owning real estate, even those you don’t personally occupy.
Make sure you have a good lease that has been approved by a real estate lawyer. You’ll need to be clear on the deposit money, responsibilities of the landlord and tenant, when payment is due, timeframe for repairs, and other fine print.
Rehabbing homes is a popular subject for reality TV but it’s not for the faint of heart. Yes, you can make money on these projects but you have to pay close attention to real estate trends in the specific neighborhood and stick to your budget. It’s very easy to get ahead of yourself and end up losing money on your investment.
The idea with a fix-and-flip is that you aren’t going to live in the house but fix it up enough to resell for a profit. It’s imperative to have a strict timeline, trustworthy contractors and a manageable budget. Keep in mind, there are many upfront costs with this type of investment and you must be prepared financially and emotionally for bumps in the road.
The good news is these projects provide much fulfillment in the end, both aesthetically and financially. There is nothing better than looking at the before and after pictures following a successful renovation and sale.
Commercial Real Estate
Don’t forget about the possibilities of owning commercial properties. If you venture into this territory, be aware there are typically more upfront costs but the payoff is larger.
If you purchase a commercial building and rent out space, you may be dealing with multiple clients and different leases, depending on the amount of space being leased. Terms may have to be negotiated and the contracts may vary widely depending on the types of businesses.
However, if you purchase a commercial property for your own business, you can control your asset directly. And just like residential real estate, the value of your purchase is likely to increase over time.
If you’re looking for a not-yet-mainstream avenue to delve into real estate, you might want to consider crowdfunding, which is a relatively new method of investing. According to Investopedia, “Some sites give everyday investors access to assets that have traditionally been reserved for the wealthy.” These sites allow individual investors to link up with developers and real estate professionals, and own a piece of the action “without the hassle of owning, financing and managing properties.”
Here is Investopedia’s “Best Of” Crowdfunding sites:
- Best Overall: CrowdStreet
- Best REIT Option: DiversyFund
- Best for Institutional Commercial Real Estate: EquityMultiple
- Best for Beginners: Fundrise
- Best for Investing in Loans: PeerStreet
- Best Property Research: RealtyMogul
A conventional approach to investing in both commercial and residential real estate is through REIT funds. Real Estate Investment Trusts are typically a collection of properties or other real estate assets that work like a mutual fund. There are many different types of REITs and quite a few have special tax status and requirements on payment of dividends. Like crowdfunding, you give up direct control on these investments but they are no-muss, no-fuss, easy to initiate, less risky, and provide instant liquidity should you decide to sell.