Some of you might not know that I have been a licensed real estate broker for the last 35 years. While I did sell a number of homes in my time, I am a far better researcher than a salesperson. That’s why I first began writing about real estate, and then eventually created my own writing business from there. And although I have written volumes about that topic over the years, I gradually transitioned into writing about other subjects I enjoy even more. Still, real estate has been very good to my family, many of our friends, and where we hold our primary retirement funds. So it always surprises me when I read so little about the advantages of real estate investment as a great strategy for retirement. Why? Maybe there aren’t enough of us pointing out how real estate investing can be a golden goose for your retirement over stocks and other investments.
So what are the benefits? Back in the 1980’s my husband Thom and I first got started in real estate as a way to make a living. As I’ve mentioned before, we were flippers before flipping real estate was cool. But at one point, Thom had a conversation with an older man he met one day painting his property. Thom first assumed he was just a worker, but quickly learned that the man did nothing but manage his own properties. And he didn’t just have one, he had something like 17 of them. Perhaps even more amazing, at least to us, was the fact that they were all free and clear of mortgages. Even with rents as low as $500 each, at the time the monthly cash flow seemed pretty enviable.
Yet even though that idea stuck in the back of our heads, it wasn’t until we decided to “rightsize” our lives back in 2008 that it became a reality for us. (Read here for more explanation.) By selling a larger and more expensive home, we rightsized into a more modest home that was nearly ½ the size and used our equity and some of our savings to buy it free and clear. We did let go of a number of amenities in the process—things like a lovely swimming pool that we seldom used, a three-car garage that held three cars we didn’t really need, and furniture in rooms we never occupied. That action allowed us to immediately cut approximately $35,000 a year off of our expenses.
Whenever people talk about downsizing I always smile because most people tend to just talk about what they are losing without considering what they are gaining. With that savings of $35,000 per year we have been able to buy another rental home free and clear, invest in a number of real estate partnerships with over 8% return on our cash investment, spend every summer (our off season) staying in cool and pleasant climates AND take a number of overseas travel adventures. And while I occasionally miss having a swimming pool in my back yard (as anyone might miss one of the amenities they love) it is far less expensive to go to a hotel with a pool and stay there for a night or two than maintain one 365 days of the year. And let’s face it, it is very comforting to watch our retirement savings grow stronger every year. Oh, and did I mention that I love my new neighborhood even better than the last?
In my opinion, there are five primary keys to making good long-term real estate investments.
#1 Buy for the cash flow—not possible future appreciation. Before the real estate crash people were buying property at any price believing the price would always go up. One of the biggest reasons that people lost those properties after the crash was the loans on the properties ended up larger than any equity left in their home. Additionally, many people qualified for higher priced homes because of ridiculously low adjustable interest rates and ignored that those rates would eventually adjust to a payment that could not be afforded. If you had a home with a loan like that, you likely lost it. Likewise, if you bought a rental where you needed every rent penny to pay bills, you had nowhere to go but down. When you buy with a good cash flow you can always lower the rent until the market recovers.
#2 Realistically evaluate your expenses in advance. Some people buy property and then realize later that there are a lot of expenses involved. You should be able to research most of these in advance. Things like special assessments, homeowner’s association dues, anticipated repairs and maintenance, taxes and ongoing utilities should all be researched in advance. Then add in a percentage for lost rents or unexpected maintenance and you should be fine. Never rely solely on the previous owner or the agent. Do you own homework and be honest.
#3 Don’t sell unless you absolutely have to sell it. Believe me. Thom and I wish we had followed this advice back when we first heard it over 30 years ago. It took a while, but we believe this is one of the most important we have taken. Of course it helps that we got very serious about it 10 years ago and with us not yet retired, we are still saving and investing for our future. But thinking of our real estate as cash flow rather than something to just buy and then sell is a big part of our strategy.
#4 Only buy property in an area or location you know very well. Not only does it help you manage your property, you will also know market conditions much better. If you don’t know the location you will forever be at the mercy of what other people tell you and that may or may not have a happy ending.
#5 Go it free and clear as quickly as you can. Like with #1 above, if you have no mortgage on your property you can nearly always ride out the whims of the marketplace. Obviously when your personal home is free and clear it likely costs you far less than living anywhere else. And if it is a rental, you can always lower the rental rate until the market recovers. Another advantage to having a rental free and clear is that you don’t have to panic if a tenant moves out. You give yourself time to pick the best possible prospect without pressure to make that mortgage payment. Remember, if you rightsize and use a bit of discipline, free and clear is not really that far away.
So what are some of the limitations? Most of the arguments we hear about not investing in real estate is that it is a long-term, non-liquid investment. True. But that might be a good thing depending upon how you look at it. I have family members who would have no savings whatsoever if they hadn’t owned a home or a rental. Some people can’t control themselves with ready cash. Plus, even if you have no retirement savings to speak of, if you own your own home free and clear you will nearly always have a place to live so that you can often live on your social security. Also keep in mind that a financial advisor wants you to stay relatively cash liquid so that you can keep buying and selling as they advise. Remember, they only make money when you move your money—and that’s regardless of whether you’ve lost money on stocks or not.
The second argument is that real estate can be complicated. It is definitely more complicated than merely turning over your investment cash to a financial advisor and taking your chances that way. I get that, just like with our health, it is tempting to put all of our trust into some “expert” believing they have both the knowledge and the ethics to do right by us. Unfortunately, as some people discover, some financial advisors don’t even have a fiduciary to their clients. (A fiduciary is a legal reason to put their client needs first.) Anytime an advisor works for a company that only sells one particular investment, there is a good chance that they are just product salespeople doing the best job they can to sell you their product. And keep in mind there is no “school” that a person goes to in order to learn how to be a well-rounded knowledgeable financial advisor. There are some good people out there, but never assume they all have your best interests in mind.
Of course there are no guarantees in real estate people either. While some agents are caring and professional, there are also a lot of order-takers as well. Again, it might feel wonderful to find an agent or advisor you trust and feel good about. However, as with anything as important as you overall health OR your finances, you are the person it will always matter to the most. If you don’t want to figure it all out by yourself then take the time to find someone who is both knowledgeable and trustworthy to help you on the path.
Of course I am not a financial counselor and don’t pretend to be. I’m only sharing what has worked well for my family and other close friends. I do know that some people have done relatively well in the stock market, but I’ve also known lots of others who are now struggling because they put all their eggs in that basket and lost. Again, with a safety-first approach (owning your real estate free and clear) and buying based on cash-flow rather than appreciation, there is far less chance of losing what you own. Your property might not be what you paid for it, but you’ll always have something you can still live in or rent, bringing in cash flow. VERY few stocks pay a dividend or offer the same security.
So what makes real estate investments a “golden goose?” Most people hope to sock away enough money so when they retire they can live off that savings for as long as they live—and you may or may not have enough. Instead real estate is a golden goose because it generates cash flow without depleting the asset. If you buy right and take care of it—your “goose” will keep on providing you income for the remainder of your life.
Let’s face it, how we choose to invest our money for retirement is a personal but very important one—very much like rightsizing. That’s why the SMART approach is to study all our options, do what we can with the information we have available, take responsibility for our choices, and ultimately enjoy the journey along the way. Oh, and never kill the golden goose looking for those golden eggs!
Okay your turn? Are you happy with your current retirement investments? Are you invested in real estate or something else? What works for you? What are your thoughts about using real estate as a vehicle for retirement investment? Please share your thoughts in the comments below.