If you’re saving for retirement, you’ve probably heard about and are actively taking part in traditional methods – contributing to an employer-sponsored 401(k), investing in your own Roth IRA, maybe even investing independently in stocks, bonds, and commodities. But for any prospective retirees seeking alternative methods of preparing for retirement, investing in real estate often comes up as a great option. If you’re considering real estate investments as part of your retirement plan, however, there’s a lot to learn before jumping in.
Real Estate Investing Methods for Your Retirement Plan
There are a lot of ways to invest in real estate, some of which are built for short-term gains while others are meant for long-term passive income. Let’s take a look at some of the most popular real estate investment methods for retirement:
- Short-Term Fix and Flips. In this method, investors often buy distressed or outdated properties, make improvements to the existing structure and aesthetic, and re-list the property on the market at an increased value to make a profit. This process can typically be completed in a timeframe between 6 months to 1 year.
- Long-term Rental Investments. Also known as landlording, this is a method in which investors purchase properties with the intention of renting them out to tenants. Whether residential or commercial, this is a great method for generating passive income.
- Short-Term Rental Properties. Don’t let the name fool you – this is a long-term investing strategy, but the rental terms themselves are short. Some investors purchase their own vacation properties and rent them out during times when they aren’t using them. Others strictly list the properties on services like Airbnb or VRBO.
- Investing in REITs. Real estate investment trusts allow you to invest in real estate on a more passive level, similar to that of a mutual fund. This is an easy method to start provided you have the liquidity necessary, provides real income through dividend payouts, and offers increased liquidity against the other methods listed above.
Each of these strategies have their own pros and cons. Investing in REITs generally brings lower but more consistent and predictable returns, for example. Fix and flips can bring very large returns, but require very careful planning and execution. In any case, it’s wise to understand what you’re getting into when picking your investment strategy.
Potential Downsides to Investing in Real Estate for Retirement
Like any method of investing, real estate investments come with certain inherent risks. Like any market, the real estate market can fluctuate pretty rapidly. In 2020, for example, the rise of COVID-19 led a lot of offices to embrace work from home policies, which meant that a lot of nine-to-five employees were free to move outside of cities. This caused major housing booms in suburban and rural areas during that time. Now, with increased inflation and mortgage rates increasing, the housing market is cooling down. In such conditions, flippers trying to sell recently finished properties may find that their ARV estimates are suddenly inaccurate, meaning that they may have to flip homes on slimmer margins, or even at a loss. Long-term investors who purchased rental properties at peak prices may find that they’ve lost equity in their investments.
A great illustration of what can happen when real estate markets sour is the housing crisis of 2008, which saw major banks and insurance companies shuttering in the wake of a rash of foreclosures due to the subprime mortgage lending crisis. Property values dropped across the board, leaving a lot of investors under water.
So, Is Real Estate Investing a Safe Plan for Retirement?
As with all questions related to retirement planning, the answer comes with a lot of caveats and ultimately boils down to, “it depends.” But, relatively speaking, investing in real estate as part of your retirement plan can be a perfectly safe and wise way to do so if you understand all of the risks of investing, and how to avoid them. Always have a plan, and always make sure you’re working with a team who has your best interests at heart.
While we’re not financial advisors here at Pimlico Capital, we always want to ensure that our partners are getting the most out of every investment. That’s why we offer low rates, high leverage, and better service. As always, you can get a free, instant online quote or give us a call at 410-855-4600 to get started on your next real estate project!