In today’s post I’m going to list a few of my favorite reasons for investing in real estate for retirement income. I’m not even going to go into some of the best reasons, or the technical reasons. These are just some of the common sense reasons, if you will, for why I like real estate more than most other investments. Put another way, these are the reasons which just about anybody can relate to.
1) Monthly Income
Probably my favorite reason for using real estate as a retirement vehicle: monthly cashflow. I don’t know about you but my bills come in monthly so it would be really nice if my income did too! Most (but not all) bonds, dividend-paying stocks, and other investments pay on a quarterly basis but households run on a monthly basis.
Some partnerships (say, on a large multi-family property) will pay quarterly but for a small-time investor like me.. it’s all about the monthly mailbox money.
Now, I’m not advocating living rent-check to rent-check and relying upon every dollar to get by. Investment income can be interrupted and so you should always plan to live on less than you earn (which is literally the basis of personal finance). I just enjoy the fact that the rental business is also on a monthly cycle just like our own monthly budgetary cycles.
2) More Control
With a dividend-paying stock or a bond, pretty much your only decisions are:
- What and When to buy
- When to sell
That’s just about it. The company whose shares you purchased makes all the decisions regarding their business, how much to pay out in dividends and when, etc. There are many strong and safe(r) companies which have been paying dividends for years (or decades) without cutting them or stopping, but you pay for this level of safety with a lower rate of return.
Real estate affords the investor much more control if they want to take advantage of it. With real estate you can control (to more or less degree):
- What properties to buy
- What repairs or capital improvements to make
- How repairs are completed (by yourself or by contractors)
- How much to charge for rent (within market limits)
- Who to rent to
- Many more aspects of property management including policies, fees, etc
The reason that real estate offers such a higher degree of control is actually, very simple: landlording is a blend of investing and business ownership. After all, you are buying an asset (house) which can be offered as a product (housing). There are not many other investments which offer the same level of control. Certainly not your 401(k)!
The caveat here is: when you are making all of the decisions, you have only yourself to blame when something goes wrong! You really need to know your stuff if you want to avoid the costly mistakes.
3) Easy Leverage
I’m going to get a bit technical here but in plain english: real estate is one of those asset classes where it’s extremely commonplace to borrow money to make a purchase. Think about it: what other asset can be purchased and controlled for a mere 20-30% of its value?
As an investor, you can purchase a house for, say $100k, then pay 25% of the cost and finance the rest. You can’t get that kind of leverage with other investments, and certainly not as easily as you can with real estate. In a lot of markets, a 20-30% downpayment is more than enough for the house to be profitable when you get it rented out.
Of course, that’s not to say that you should use as much leverage as possible… Leverage is a double edge sword: gains *and* losses are magnified. But getting a mortgage is a lot more attractive when your tenant will be paying for it with their rent.
4) Passive or Active
When people think of “Real Estate Investing”, often two things come to mind: landlording and flipping houses. I’ll cover why I think flipping is not really investing in a later post (hint: it’s a job). But the term “real estate investing” encompasses such a wide array of investing styles, all with different risk/reward profiles and levels of involvement.
Making private loans and forming partnerships can offer great returns with less work then a more hands-on approach. If you loan to experienced investors, who know the market and know what they are doing, then your risk (and involvement) can be minimized.
On the other hand, a small time landlord can manage their own properties and perform their own repairs if they want or need that level of control.
There are many ways to invest in real estate, no matter what your desired level of involvement is.
So there you have it.
These were just a few of my favorite reasons for investing in real estate. I haven’t even gone into some of the more financial reasons: the market-beating rate of return, the tax benefits, the principle pay down, or appreciation (if you’re lucky). Coupled together, real estate is a very
powerful tool to have your disposal when investing for retirement income or building wealth.
How about y’all? What are your reasons for investing (or not investing!) in real estate?
This post is part of a series:
- Part 1 (you are here)
- Part 2