You’re probably well aware that the compounding nature of traditional retirement accounts, such as 401(k)s and IRAs, can make anyone wealthy over time. Even maxing out a Roth IRA each year (and nothing more), can make you pretty comfortable in retirement.
But if you want to retire early, live out all of your dreams, and leave behind generational wealth that has a positive impact on your children, grandchildren, and great-grandchildren, you’ll need more than a retirement account. You’ll more likely have to diversify your portfolio with income-producing real estate.
There’s no perfect investment vehicle for funding retirement and building wealth, but real estate — especially the income-producing variety — is about as close as anyone’s likely to get, short of owning a diamond mine. Granted, it entails more time, effort, and potential stress than placing your money in growth stock mutual funds and receiving a statement in the mail each month, but the average returns can be far greater.
If you’re looking to retire with real estate, ROI and cash flow are the two most important concepts to grasp. Not only do you want to procure a positive return on your investment, but you also need to generate a steady flow of cash in order to fund your retirement.
Rental properties offer the following advantages:
Are you familiar with the acronym OPM? It refers to “Other People’s Money.” When you invest in income-producing properties, you’re building your retirement off of OPM.
Sure, some of your money is necessary up front to secure the property, of course, but your tenants will essentially pay off the mortgages and put a little extra money in your pocket. This is what many people don’t comprehend.
Many of them presume that a person has to have millions in the bank already to generate wealth with real estate, but the truth is that you only need a little cash and a lot of patience. The first few years will seem slow, but soon the income will shift from a small trickle into a solid waterfall.
One of the beauties of rental property is that income is fairly steady and predictable. When you sign a lease agreement with a tenant — typically for 12 months — you know exactly how much cash you’ll receive every month for the coming year.
This allows you to build projections and strategize for the future. A tenant could suddenly stop paying, but if you do a decent job with screening, this will be rare.
With the stock market, you could technically lose money when the economy dips, but middle-class rental properties don’t tend to be affected much by such developments. Even in a down economy, people have to have a place to live!
The value of your property might take a temporary hit, but the cash flow should stay about the same.
Historically, the value of real estate nearly always rises. There will be peaks and valleys along the way, but the trajectory of real estate values in growing cities is firmly pointed upward.
Not only will you be getting your mortgages paid off and generating monthly income to fund your retirement, but you’ll also see the physical asset increase in value. Over a 20-, 30-, or 40-year period, this can result in tremendous gains.
Once your financial portfolio reaches a certain point, taxes become a big deal. Admittedly, it’s hard to beat a Roth IRA or 401(K) for earnings that are sheltered from taxes, real estate has its own unique advantages.
For one, you can use Section 1031 of the tax code to reinvest the capital gains from the sale of real estate into another piece of real estate without having to pay taxes on the profits. Also, expenses such as depreciation and mortgage interest can be deducted from your passive income each year to lower the amount of taxes you owe.
Leaving a financial portfolio to your children and descendants is a great thing to do. There’s nothing like being able to pass on wealth so your children will enjoy financial security, or your grandchildren may attend college debt-free, but there’s something a little risky and more impersonal about transferring a bank account into someone else’s name.
All it takes is one bad decision for all your earnings to go up in flames. Real estate operates a little differently.
With rental properties, you’re passing on something tangible. And because this tangible asset produces monthly income, your descendants are less likely to liquidate it immediately. Thus, it can continue to generate wealth long after you’re gone.
It would be remiss not to address a question that surfaces for many readers: “Can I ever truly retire when I own rental properties?”
For all the benefits that rental properties confer, one of the downsides is that they aren’t as easy to manage as a traditional financial portfolio in the stock market. Between rent collection, tenant screening, expensive property repairs, and midnight plumbing emergencies, there can be a lot to generate stress over … which isn’t likely what you intended to face in retirement.
Although this is partly the price you pay for generating wealth with income-producing real estate, you don’t have to attach your phone to your hip and spend your retirement years fielding calls from frantic tenants. Instead, you can find a good property manager to handle the day-to-day, so you can focus on the long term.
At Green Residential, property management is what we do. Whether you own a single apartment downtown, or dozens of homes across the Greater Houston area, we’re here to help you maximize ROI without all the stress and daily time demands that minor annoyances can entail.
If you’re interested in learning more about our property management services — which include such functions as tenant screening, maintenance repair scheduling, and property marketing — please don’t hesitate to contact us today!
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