Flickr photo by james.thompson
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
Things I Learned In Europe
18 Comments
Nice reasons for preferring real estate over traditional investments. There is a house down the street for sale that my wife and I have toyed with the idea of buying and turning it into a rental. I read stories like yours and am reassured that it would be the way to go. Thanks of the encouragement.
Not all houses make great investments: you have to analyze it as much as you would analyze an individual stock. Repair bids, insurance quotes, tax information, rental rates: all of this stuff needs to be collected and analyzed before you buy the property. Done correctly, you can do pretty well. Done poorly, you can lose your shirt, just like all investing.
I agree with all of this, but I think you might be ignoring the risk side of the coin. Do you trust your renters to not trash your place more than you trust the custodians of your dividend-paying stock or bond?
There’s definitely more risk but you also have a lot more control over who you select as your tenant. I’ve got a whole article planned about how we screen our tenants but I’ll give you some details here.
The tenant fills out an application which allows you to run criminal background checks, verify their employment and call previous landlords. You can collect a security deposit which will cover a lot of the damage they could do. If the person doesn’t meet all of your rental criteria from your application, you can collect an additional deposit. For pets: there’s an extra deposit and a monthly “pet rent” which is non-refundable.
There’s definitely more risk than just owning stocks and bonds but a lot of that risk can be mitigated by setting up the right business practices.
While there is some risk with tenants “trashing” your houses, there’s scarcely an investment that provides the rate of return that RE does. Risk is an accepted aspect of investing no matter what kind.
Hey DD…
just linked over from your comment on Jason’s blog. Nicely done article. Back in the day I did a bit of land lording and it was profitable for all the reasons you mention.
but it is a part time job as well and one I had neither the skills nor inclination for. Still, for those that do, it has a lot to offer.
One more advantage: as your properties increase in value over time you will have the chance to take out cash by refinancing. Unlike rents, this is tax free.
Thanks, Jim. I’d love to hear more about your real estate experiences.
It can certainly be a lot of work. One of my mentors likened it to “adult daycare” and I can definitely relate with one of our tenants. We did a good job picking the rest and so far it’s been going really well for us. I’m hoping to pick up a few more houses this year.
You’re definitely right: cash-out refinance is a great tool to get some of your initial investment back.
I’ve got two articles in the works:
How I lost money in RE before it was Fashionable
Why a house is a good investment only for the financially undisaplined.
Meanwhile, I’m in the process of trying to unload ours:
http://jlcollinsnh.wordpress.com/2012/01/17/selling-the-house-and-adventures-in-staging/
If and when I get it sold I’ll follow that with:
Why I’m thrilled to have sold my house at the bottom of the market.
Because, once I finally sell that will surely mark the bottom.
Haha, those all sound like article’s I’d want to read. A personal residence is definitely *not* an investment but my rental properties definitely are.
I’m also curious to how the staging works out for you, and most importantly: if it ends up being worth the money! Your house/property sounds exactly what I’d like to own someday – just not in the cold of the north!
Holy moly, you read my mind. These reasons — the ones you listed here — are EXACTLY why I love rental real estate. I love that I can leverage my limited money. I love that I can control the investment and make key decisions. I love that it’s a blend of investing and running a business. I love that it’s a relatively stable, low-risk route.
I love that real estate has the potential to appreciate, but I’m not relying on that potential (because I’m not flipping houses, I’m holding them). I love that if it happens to appreciate, I can borrow against that equity to buy more cash-flow-positive properties (but if it doesn’t appreciate, I won’t sweat it, because I’m still collecting a check each month.)
To me, it’s the ideal investment.
I’m really glad you liked the article! These are just a few of the *many* reasons why real estate makes a great investment. In a follow up article, I’ll talk about all that other good stuff: principle pay-down, tax benefits etc. But I’m sure you already know all that
I like to look at appreciation as the icing on the cake, where the cashflow is the cake itself. Before the crash, you could pretty much *count* on appreciation in some part of the country. Consequently, these parts were the areas which crashed the hardest!
Owning real estate has been a very powerful experience for me and my wife and something I hope to talk a lot more about in the coming months.
I would like to comment about the real estate business whether its buying and selling homes fixing them up what have you. I do not have anything against real estate investing. But lets be clear this is a business just like if I own a used car lot a health food store a convenient store any variety of businesses. Each type of business has its own little little quirks of sorts real estate is no different. To many folks look upon real estate as an investment and that is why they fail to succeed in the real estate business’ when in fact it is clearly a business thats how one should look upon real estate. A good example of this is commercial real estate. When ever I drive around I see many almost empty or completely empty stripe shopping stripes. I don’t mean big box stores that are empty. I talking about a small commercial buildings that might house ten or at most fifthteen small mom and pop businesses along a major thoroughfare. I have seen dozens and dozens of partially or completly vacant stripe shopping stripes and I don’t live in detroit. I live in the suburbs of chicago and this is not something recent. I have seen this five ten fifthteen years ago so what does that tell you about investing in commercial real estate. Their must be many problems with these type of properties.
Real estate, especially the small-time self-managed kind that I do is definitely more business than investing. However, just like all businesses, many many parts can be outsourced, leaving you to focus on the parts which are most important.
I can’t say a lot about commercial real estate but I do believe it’s more risky than residential real estate. People will always need a place to live and in markets like these, more and more people are renting.
Well it looks like you like what I invest in heavily! I own several rentals and I blog about it
I’ve written an article about what is an LLC and why it is important for real estate and I guest posted “How to be a Landlord” on Sandy’s site http://www.mytenantfromhell.com I think you should check em out
Taline recently posted..What is Equity?
I looked at your site and I’m very interested in the apartment units you own. Maybe you could guest post over here about it!
I have a great story for Sandy’s site but the story isn’t quite over yet… we’re evicting her this month. I’ll see if I can guest post over there when the dust settles.
I’ve always wanted to invest in real estate, just lacked the funds and credit score. Both of which have been improving, it’ll still be a while before I dip my toes in though.
MasterTheArtOfSaving recently posted..Where Did The Dough Go? #41
It definitely takes some money and credit to do it on your own. We saved for about a year to get our first one but after that we bumped up our savings rate by a lot to get the next two. Keep at it! And if you want it, you’ll get it!
Im totally partial to house flipping but I do it as a full time job and dont like the so if people do want to do it as less passive income or even full time, I don’t recommend it as much, agree with you there. When you say “real estate investing” though, house flips and landlording are really both real estate investing, one is far more active while the other is passive. It all depends on your personality and goals.
House Flipping Mike recently posted..Flip and Grow Rich | Definiteness of Purpose
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