Explaining Retirement Real Estate Income

If you plan on retiring one day, you should familiarize yourself with the concept of retirement real estate income. Income-producing real estate is a proven inflation hedge and should be a part of everyone’s retirement income plan.

When you retire, your expenses will continue, and you’re not likely to win the lottery. So, having a retirement plan and maintaining a financial wellness checklist are essential.

However, how you invest can significantly impact how you finance your retirement. And the unfortunate truth is that too many people can’t afford to retire.

Of those who can afford retirement, there are two very different philosophies on how to get it done. 

The first relies on developing a large nest egg they will consume as monthly income during retirement. The trick is to draw it down at a rate where they will die before they run out of money. 

I’m not a fan of that philosophy. Instead, I prefer developing a large nest egg that generates recurrent cash flow streams to fund retirement. 

The goal is to create financial independence through renewable passive income sources you can’t outlive. Therefore, you don’t have to consume your nest egg, and you’ll be able to preserve your assets to leave a legacy for your heirs. 

And you can achieve this through retirement real estate income.

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Investing in Real Estate for Retirement Income

There are many reasons why people invest in real estate, especially multifamily real estate. Real estate gives the investor four potential ways to make money.

  • Cash flow (recurrent income)
  • Appreciation (equity growth from increasing value)
  • Tax benefits
  • Principal paydown (equity growth from paying down the mortgage)

In this article, we’ll highlight the benefit of recurrent cash flow.

Diversification & Multiple Income Streams

A central tenet of modern portfolio theory is diversification. But don’t just think of this as sectors or asset classes. Think of classified passive income streams. 

Creating Passive Income

Google or Chat GPT “retirement income.”

What tops those lists? Rental income from real estate. 

Best Ways to Invest in Real Estate During Retirement

You can earn income by becoming a landlord and managing your rental properties. But this article is about retirement real estate income. So, we are talking about passive investing and passive income. 

Passive investing is the best option for most people, but what they decide to invest in can vary. For example, they can invest in resident-occupied real estate like single-family homes or apartments. They can also invest in commercial properties like retail, office, industrial, hospitality, etc. 

Even investing in real estate investment trusts (REITs), which some people mistakenly view as direct real estate investments, is an option. So, let’s discuss these further in the following sections.

Rental Properties (Single and Multifamily)

Residential real estate encompasses single-family homes, duplexes, triplexes, and quads. As far as the banks are concerned, five units and higher are considered commercial multifamily.

Investing in either residential or commercial multifamily real estate can be lucrative, but the main difference lies in economies of scale. 

The economies of scale associated with large properties provide cost advantages. These expenses-related savings optimize profits and increase returns for investors.

Investing in Commercial Real Estate

In addition to multifamily real estate, investors can invest in commercial real estate. Commercial real estate includes retail, office, industrial, hospitality, etc. 

Studies show that multifamily real estate has outperformed these other categories of real estate, but they remain an option. 

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are paper investments in the real estate sector. When you invest in public REITs, you invest in the stock market rather than investing directly in the real estate market. 

Like other stocks, REITs are volatile. They correlate more to the broader stock market than direct real estate ownership. Lastly, REIT investors lose several tax advantages that direct owners enjoy. 

Pros and Cons of Real Estate Investing in Retirement

All investments have pros and cons, and real estate is no different. Our webinar – Passive Investor’s Guide to Multifamily Real Estate, outlines many pros. As for the cons, I’ve compiled a list below of issues that can create problems for the real estate owner.

  • Inexperienced / Do-It-Yourself management
  • Investing in properties in the wrong markets
  • Mismatch of market, approach, and or capability
  • Failure to hold adequate financial reserves
  • Lack of a business plan
  • Over-leveraging an investment property

Let’s dive into these pros and cons in the following few sections.

Benefits of Retirement Real Estate Investing

As I discussed earlier, the benefits of retirement real estate income include creating recurrent streams of income that you can’t outlive. And if you don’t have to consume your nest egg in retirement, you can grow it further and leave a legacy for your heirs. 

Rising Equity Over Time

Another benefit is that real estate historically increases in value over time. Commercial and multifamily real estate are valued based on an income approach.

In this valuation model, value equals net operating income divided by the capitalization rate. Smart syndicators know how to drive rent growth and retention rates, which increases net operating income and increases the investment property’s value.

Residential real estate is valued based on the comparison model. In this model, whatever similar properties close to yours recently sold for (on a price-per-square-foot basis) is what your investment property is worth.

The Case Shiller Index tracks the values of single-family homes in the U.S. As the graph below shows, homes’ long-term value has gone up over time.

Source: Economic Research

Consistent Income on Rentals

Over seventy years, national rental occupancies have remained high. So you can create a consistent income when you buy and manage properties well. Then, as time goes on and rents rise, that monthly income can increase and become even more stable. 

The goal of retirement real estate income is a consistent income(s) that you don’t have to work for.  

Tax Advantages

With depreciation, that retirement real estate income can have significant tax advantages. It’s common for real estate investors to defer taxation for many years before paying taxes on the income they derive from their rental properties. 

When they decide to sell their investments, they can execute a 1031 Exchange to further defer those taxes.

Stability During Recessions and Economic Uncertainty

Multifamily real estate tends to be very stable. After all, an investment in apartments is an investment in the basic need for shelter. People have always needed a roof over their heads in good times and bad. 

There is a lot of research and data that supports the stability and recession-resistant nature of multifamily real estate. I’ve written more about this in these four articles:

Safe Haven Assets to Consider During Economic Downturns

Recession Proof Investments

How Multifamily Investing Can Resist a Recession

How Would a Recession Affect Multifamily Investing

Potential Drawbacks of Retirement Real Estate Investing

It’s important to remember that real estate is an illiquid asset class. While it can spin off recurrent, tax-advantaged income, it’s difficult, if not impossible, to tap into the equity during the investment’s lifespan. Instead, that equity comes back to you at the sale of the property. 

For that reason, it’s important to have liquid rainy-day funds that are outside of real estate.

Achieving The ‘4% Rule’ for RetiremeRetirementve developed enough retirement real estate income to pay all your monthly expenses and live the lifestyle you desire in retirement. 

You can continue to grow your nest egg and leave it to your heirs someday. However, you’ll need to tap into your retirement savings if you don’t have enough income from social security and your real estate income. 

Many financial advisors say that a good rule of thumb for drawing down your nest egg is the retiremeRetirement4% rule. In addition, if you limit your annual retirement withdrawal to no more than 4% per year, you should be able to retire and not run out of money for at least thirty years.  

Retirement real estate income from rental properties can create enough passive income to replace your earned income or make it so that you can withdraw a smaller percentage of your nest egg (3%, 2%, or 1% in retiremeRetirementving expenses so that it lasts longer.

Check out this helpful retirement calculator to see how much income you’ll need during your retiremeRetirementof Liquid Assets

As I stated earlier, real estate is an illiquid asset class. So, while it’s an essential component of a balanced portfolio, that portfolio should also contain some liquid assets. 

Your retirement portfolio should often be more conservative than when working full-time. During retirement, I aim to have a diversified portfolio of investments, including stocks, mutual funds, bonds, and real estate investments.

How can we help?

Whether you’re an experienced investor or new to direct multifamily investing, we’re here to help.

We look forward to hearing from you.