Does real estate make a good retirement investment? It certainly can, and many people have secured a comfortable lifestyle by building a portfolio of real estate properties.
However, nothing is 100% guaranteed and some unfortunate people lose their shirt, and everything else along with it. It takes a certain amount of knowledge, skill, intuition, and guts to invest in real estate. If you have these characteristics, and you do it right, real estate can be a great investment.
- There are numerous ways to invest in real estate, including flipping properties and looking for income-producing properties.
- Keep in mind that there are recordkeeping and tax requirements to deal with when you invest in real estate.
- Leverage (borrowing to buy) can be an effective strategy for building a real estate portfolio if done with care.
Boost Your Real Estate Knowledge
Like any profession, to be good at it, you have to know what you are doing. You can turn real estate investing into a profession that allows you a lot of free time, but be ready to invest years and patience.
There are plenty of seminars advertised on how to invest in real estate, and while some are probably decent, others will end up costing you thousands of dollars for nothing more than a lot of office binders. If you are serious about turning real estate into a good investment, start by reading books on real estate investing written by a reputable expert such as John T. Reed. A good place to start is with Reed's How to Get Started in Real Estate Investing.
Robert Kiyosaki has published many well-known books including Rich Dad, Poor Dad, and Unfair Advantage. Some find that his books get you fired up and excited, and are worth reading, but may not present a completely objective view of what it takes to make good real estate investments, whereas John T. Reed’s books tend to have plenty of usable knowledge for any layperson.
Polish Your Skills
There are numerous ways to invest in real estate. Some choose to speculate, looking for a piece of land they can flip, or a house they can remodel and quickly sell in a rising market. Others consistently look for income-producing properties; either commercial office space, apartments or duplexes, or residential homes they can rent out.
Assess your skills and available capital to determine how to go about choosing your first investments. Those with close ties to the development plans for their city may have a knack for spotting attractive pieces of land. Those with contractor contacts may be able to get remodels done at a discount.
Many financially independent people have built their real estate portfolios with income-producing properties. This requires a long-term view and the ability to crunch numbers. There are several things to consider before you buy a rental property, such as the potential vacancy rate. Your property is unlikely to be rented 365 days a year, year after year. People sometimes forget to factor details like this into their calculations and can end up overstating their expected income.
There are also recordkeeping requirements and tax considerations to deal with when investing in real estate. The rental real estate tax deduction works for some, but it is not free money. Depreciation may help shelter some current income from taxation, but depreciation is recaptured later so it is not a free lunch either.
Develop Your Intuition
There are two sayings about real estate that you have most likely heard. The first one is “location, location, location.” It’s true. You need to have an intuition about what areas of town might become popular, and which areas to stay away from. In a slow economy, rental real estate properties in solid locations will remain in high demand. However, don’t jump into buying a piece of property unless you’re familiar with the area.
Avoid the mistake of confusing intuition with enthusiasm. When real estate was booming in 2004 through 2006, many people jumped right in. Interestingly enough, many of the so-called real estate gurus were quietly starting to sell their holdings at about the same time. Their intuition, combined with skill, told them to exit out and sit on the sidelines for a few years.
Sometimes, It Takes Guts
Another common saying is that “real estate takes deep pockets,” which generally holds true. You’ll have property taxes to pay, times where a rental property may be vacant while you still have a mortgage to pay, and the cost of repairs and maintenance that need to be done.
Leverage (borrowing to buy) can be an effective strategy for building a real estate portfolio if done with care. With rental real estate as with anything else, when you use leverage you are buying an asset with someone else’s money. This is great, but it does come with risk; too much leverage can be dangerous.
In the period from 2009 to 2011, many people watched their real estate portfolios suffer because they had used too much leverage, and many lost all of their properties. A typical scenario played out for many as the economy slowed, where a few renters moved out, other income sources went down, and real estate investors didn’t have the cash flow to keep paying the mortgages on their vacant investment properties while waiting out the economy. They didn't have the deep pockets that were needed.
Buying a property to flip takes guts too. The property might not sell as quickly as you thought it would, and you must have enough cash to cover the mortgage until the property sells. You'll be faced with a decision to either hang on to it and wait or sell it a lower price. Guts have to be combined with knowledge, skill, and intuition to be effective.
The Bottom line
Real estate can be a good investment if you educate yourself and go about it the right way. If you want to use real estate to build a steady source of retirement income, exercise patience and work systematically as you build a portfolio of income producing properties.