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.
Dr Sock says
Hi Kathy. I agree with you that investing in real estate can be an excellent strategy. But like any financial approach, it can also go wrong if a person makes the wrong decisions.
My Dad was a realtor, and I have a brother who is a realtor. Both invested in real estate as their retirement approach. My Dad got caught in the inflationary spiral in the early 80’s when the interest rate went up to 18%. He was over-extended and lost everything except my parents’ house which they remortgaged. The problem was made worse by the fact that he had partnered with someone (a colleague whom he thought he knew well) in a big investment, and his partner turned out to be a crook. It took him twenty years to claw his way out of debt and to get over the shame of losing it all.
My brother has multiple rentals in a small town. Financially it is good, but it adds a lot of extra work managing the rentals and dealing with tenants when he is already extremely busy with his career, a young family, and looking after their hobby farm with his wife.
My husband has a friend who immigrated to Canada with his family in his early teens. They came with nothing. This friend worked hard, saved, and invested in real estate. He now owns apartment buildings, commercial buildings, a car dealership, and at least one hotel across several cities and is a very wealthy man. Meanwhile, he is still living in the same modest home where he raised his family.
I did not invest in rental properties, but I have paid off two mortgages in full and “bought up” each time I moved for work (but always staying well within my means or right-sized). As equity growth in your primary residence is sheltered in Canada, this has proven to be an effective strategy for me. (I lacked the time, interest, and expertise to manage rental properties).
Kathy Gottberg says
Hi Jude! So sorry to hear about your dad 🙁 And yes, real estate is not a sure bet by any means. I find that the “safety-first” approach is working best for us. That means that you pay off the mortgage on any property and do NOT ever leverage your life for any of it. That way you can’t lose. It is a very conservative approach so most people don’t do it–and I’m afraid many, many realtors get caught up in the frenzy of a hot market and make decisions that can bite them down the road. It sounds like that is something that happened to your dad. And I also agree that it can take a lot of work. Back when we first started buying rentals we bought as cheaply as we could and we’ve found that those inexpensive properties are often the reason they take so much work to manage As our finances have improved, we were able to buy more “class-A” type investments and those cut the management down considerably. Still, you do what you gotta do. The good news is that your brother who is still working will have a great future if he can keep them properties and get them free and clear. Such a great way to retire. And you’ve also figured out a way that works for you too. To me that is the wonder of rightsizing, no one size fits all. But making choices that work for us is always a win. Thanks so much for all your thoughts on this. ~Kathy
This has to be the BEST article you have ever written. Full of facts and the absolute truth. Kudos to you,
Kathy Gottberg says
Hi Cindy! Well, out of 300 articles I doubt this is the BEST…but I do appreciate the comment. Thanks! ~Kathy
This is very sage advice, Kathy. Real Estate is an essential part of our Retirement Plan. So far, it has worked out well for us (and is much more comfortable for me than other forms of investment).
Kathy Gottberg says
Hi Donna! Great! I think it is important for us to recognize what’s working — and then why not share it with others? Does it amaze you as well that when you read all of the hundreds of articles about retirement investing, and how much money a person needs for retirement, without even mentioning real estate? I suppose that is because most articles like that are written by financial planners/advisors and they want to keep you focused on what they sell–not something that ties up your money long term and that they can influence. While real estate investing might not be for everyone, it’s nice to know we have choices right? Thanks for sharing your experience. ~Kathy
Hi, Kathy – I had never stopped to think about the narrow focus on the retirement financial articles. Your point of view on this makes perfect sense to me.
Mary ~ Reflections Around the Campfire says
Hi, Kathy! My husband and I invested in a commercial rental property about six years ago as a way to increase cash flow and diversify our income streams in early retirement. Managing rental property is not for everyone, but it can certainly be profitable. It’s a good fit for us because Alan can build or repair just about anything. Even if we had to pay others for maintenance related expenses, the cash flow would still reduce our dependence on distributions from our IRAs.
I agree with four of your five points. As for #4, I wouldn’t say don’t buy in an area you don’t know. I would say take the time to thoroughly educate yourself about the area if there are viable opportunities available.
This is a good post with excellent information and perspective!
Kathy Gottberg says
Hi Mary! Thank you for pointing out that the property doesn’t HAVE to be local for it to be a great investment. And actually, our bank building isn’t where we live either. I’ve just found that many people get burned out and done with real estate when they own properties that are not local, so for beginners especially, I don’t recommend it. And yes, educating yourselves is the key. It sounds like you and your husband have found a formula that works for you (rightsizing again!!!) and that is what is most important. Thanks for sharing your thoughts. ~Kathy
Leanne | www.crestingthehill.com.au says
We have a couple of rental properties – originally bought because real estate was always appreciating in value. That’s not the case anymore in Australia – it’s been stagnant for the last 10 years (and has even gone backwards a little). Our plan is to sell them in the next few years and put everything into superannuation. I think (after 20 years) I’m just tired of tenants and the background costs of having the properties managed, repaired, re-tenanted etc etc. I’m looking for a nice steady 6% in super and not worrying about the ups and downs of renting to people. I might feel differently if I had your background – but I’m just “over people” now days! Definitely agree about going in with minimal debt – most Australians do it to negative gear their tax and I don’t understand how you’d want to have an investment that continually operates on a large loss???
Kathy Gottberg says
Hi Leanne! Thanks for confirming that real estate doesn’t ALWAYS appreciate in value. But as I mentioned in the post, if your expenses are low it will ALWAYS bring in cash flow and that’s why we like it so much. It can require work when dealing with tenants and/or management so I get that might not work for everyone. And we don’t have “superannuation” here in the U.S. so I can’t speak to that. I do know that with any regular type of cash investment there is no guarantee that you will get 6% per year for the remainder of your life. Right now short term cash investments in a bank are only drawing about 2% and we are doing far better with our real estate investments. If you can get a “guaranteed for life” 6% return that is pretty good. I also believe that you are quite frugal to begin so that will obviously help your retirement regardless. Again, thanks for helping point out how rightsizing is such a great way to look at things. What is a perfect plan for you is exactly what you should do. I really appreciate you sharing your perspective. ~Kathy
Janet Mary Cobb says
I was thinking of not selling, but holding on to it until we are certain that our kids are all established – in case they ever need a place to live while paying down student loans, etc. We bought at the top of the boom (a week before the crash!) so we have no equity now. Would love your high-level thoughts on the idea of keeping it (the house) in the family.
Kathy Gottberg says
I’m not sure I can offer “high-level” thought 🙂 but appreciate the idea. It really depends upon your long term goals. But I do tend to agree with Suzie Orman that you should never sacrifice your future security over the possible needs of your children. They (usually) have a lifetime ahead of them and can recover for mistakes or losses while the older we get the less we can afford to risk our finances. Of course, I have read about a number of singles and couples who so want to hold on to a bigger house that they work out a way to take in boarders to help offset costs. Have you read about that? Not sure if that is something you’d be willing to do but I think it is a brilliant solution for some. If you had any specific questions you can always email me and I’d do my best to answer. Good that you are thinking about these things. So many of us get a big wiggy about talking about our finances but I do believe it is something that we need to stay on top of.
Janet Mary Cobb says
Thanks Kathy! For the last few years we have ‘hosted’ international high school students to occupy our children’s bedrooms as they went away to school. And, of course, Air BNB is always an option. I love the ‘passive income’. I appreciate your thoughts on not sacrificing our future security – I’ll keep that in mind. And thanks for the offer to email you — I’ll do that if I have more specific questions.
Janet Mary Cobb says
I’ll spare you the saga of our retirement plans (or lack thereof) – but I totally agree that real estate is a great investment. While it is not in our current possibility, I have put the bug in my children’s heads. Our eldest son (22) has already figured this into his plan as he begins his journey towards fiscally responsible living. I also see paying off our current home instead of selling as a groundwork for the future when we hope to move into a smaller single-level environment (condo by the lake?). Thank you for this VERY thorough and balanced presentation!
Kathy Gottberg says
Hi Janet! I know life has a way with interfering with plans so I understand. Plus, you are younger than I am so your needs and goals are different. But good for you for doing your best to get your home as free and clear as possible. I think from reading your blog that you are pretty frugal to begin with and I think that makes a big difference. Unfortunately I think so many people are tempted to get into homes (not to mention cars and other things you can own) that are really far more expensive than their incomes allow for so they never get ahead. And the example you are setting for your children is also extremely important. My only recommendation is too try to sell your current place for the best price possible when the time comes, and the wait and buy when the real estate market is experiencing a “dip.” And yes, it ALWAYS happens we just have to be patient! Thanks for sharing your own experiences with us. ~Kathy
Sounds like you found the right investments for you. I like it because you already know a lot about real estate, so it’s sort of an organic approach. Real estate freaks me out. One house is about all I can stand. We have a mix of index funds and cash equivalents.
Kathy Gottberg says
Hi Donna! I agree that it obviously makes it easier for us because we are in the business. But I think you could say the same for someone who sells stocks, bonds, etc. Those of us who make it our business often see a bigger view. And if it freaks you out (I’d really like to find out why????) then you probably should stay away from it. With that said, it sounds like you do own your own home and as long as it is somewhere you seeing yourself stay in a long time, then you’ve found a way to make it work for you. Thank you for sharing your thoughts. ~Kathy
I agree with you. We also have rentals. They have been the icing on our cake for many years and continue to do so into retirement. The supplemental income during this 3rd phase of life is going to be more than helpful.
Kathy Gottberg says
Hi Laura! For those of us who have figured out a way to make them work for us it really does seem to answer so many needs. And because of the cash flow we have now along with our other regular income we don’t see any reason to take SS any time soon. I know so many people who signed up to take it at 62 but then end up being penalized for taking it early AND paying taxes on it as well. Meanwhile as you know, our income properties just keep providing extra income every month. And I didn’t even mention the benefit of being able to deduct depreciation from the income as a write off. Thanks for sharing your experience and happy landlording to you too! ~Kathy
Kathy, I didn’t know you had a real estate background!
We downsized drastically and moved into a new city in a house less than half of the one we sold. After living there for a couple of years, we realized that we had downsized too much and didn’t have enough space for our family and friends to come! I carefully studied the local market for a couple of years. I watched every single sale in our area. We decided to move and looked carefully at many properties. I developed a very good sense of what was a value and what was not. I also looked at the long term sales going back forty years in our neighborhood. We live a block from a lake in a highly sought after area. Houses have never declined in value in this area. They aren’t making any more lake property and people want to live near a lake. We sold our home in one day at a huge profit and we hadn’t invested in any upgrades.
This summer we took a leap and bought a house ( across the street!) that was double the size of our smaller home. It required a mortgage. It was in need of updating and went in with eyes wide opened about the costs those will require.
We consider this house to be a good long term investment. We plan to live here for 10-15 years. We expect to be able to sell at a good profit. I have calculated the amount we will likely spend on upgrades and we could sell at a profit in two to three years. However, we have other retirement savings and 401 K’s for living expenses.
I took a leap, but feel confident that we have done our homework. I see the potential to make a lot of money on our eventual sale, but doing so won’t make or break us.
Thanks for all of your wise advice. I have never wanted to be a landlord, so probably won’t go that route, but I do see the value in it.
Kathy Gottberg says
Hi Michele! Good for you for doing such great “homework” before selling AND buying your homes. So many people just see the romance of a place without seeing the reality. And the thing I absolutely love about rightsizing is that it recognizes how unique we all are so that there is NEVER just one solution to anything. I get that some people are madly in love with one location and are willing to pay for it. As long as we know what is important to us then we can make good decisions and choices based upon that. Thanks for sharing what has worked well for you and your family. ~Kathy
I did a few real estate investments between 2004 and 2012 in Vancouver. I did well mainly because of the Vancouver market. I sold after 5 years. In retrospect I think selling was ok because I needed the cash flow. But real estate has been a reliable source of equity that did not vary with the stock market. Wish I had put more money in real estate than the stock market. The main hassle now are condos how piutting in bylaws to prohibit rentals, either short or long term which takes housing out of the rental market, reducing supply and increasing prices which is good for the units that are rentals.
Kathy Gottberg says
Hi Ann! Thanks for sharing your personal experience with us. And yes I understand the need to sell sometimes. That was certainly the only option for Thom and I for a while. And yes to paying close attention to any bylaws and dues related to either condos or housing developments. Those costs and/or rules can definitely affect your outcomes. The vast majority of places do not prohibit long-term rentals but you really have to watch the short term rules especially with so many people jumping into that market. Cities are also pushing back due to the problems with collecting taxes AND complaints from residents. While lots of people in our area are making good money from the short term rental market they also require MUCH MORE work–effectively another job so that is something else to consider. Thanks again for your thoughts. ~Kathy
Your commercial set up sounds perfect. I didn’t even know you could have the tenant be responsible for maintenance, etc. You and Thom are very smart and I completely agree with you that real estate is the golden goose because you never have to worry about your IRA, etc running out of money. My grandmothers lived into their 80’s and 90’s. For retirement I am only invested in the stocks/mutual funds and then DO take some time and planning. I’ve spend several hours on it recently moving money to zero & low cost index funds. Don’t forget mention the fees we are all paying, regardless of earnings. I wish I would have bought a rental while prices were affordable in CA.
Kathy Gottberg says
Hi Deb! Yes, you do usually have to pay a bit more for a Triple-Net Leased property but if you buy right it can still be done. Of course, like you said, real estate is at a high right now and we aren’t buying any more at the moment. BUT…the real estate marketplace is a cycle and it goes up and it goes down. Right now the estimates are that prices are leveling and in the next few years should be going down–especially if interest rates rise. (unless you live in an area in extremely high demand.) Knowing when to buy is almost as important as knowing what to buy. Thanks for letting me know that stocks/mutual funds also take some time to manage. Safeguarding our retirement funds is simply too important to turn it over to anyone and forget about it. ~Kathy
I think Kathy downsizing to a home that is more affordable is great. Now with the tax slash of not being able to deduct over $10,000.00 in property taxes, even if your home is ‘right-sized’ but in an expensive area, may be a problem. Research like you say is critical. Is home ownership still a viable option for people in their 70’s living in an expensive area?
Kathy Gottberg says
Hi Haralee! Good question. From my perspective, many people seem to wait until it becomes far more difficult to make adjustments and then get stuck (or in trouble). I’m so glad that we were in our early 50’s when we started getting serious about how we wanted our lives to go in the future. I see many others wait until they are forced to move (the home is either costs more than they can comfortably afford in retirement) or it is incompatible with “aging-in-place” (two stories with bedrooms on on the top floor), etc. I think because Thom and I do not have children we couldn’t just hope our children would be around to help us figure out how to navigate our lives should one of those “forced moves” happen. And yes, because I’m a planner I can’t imagine any more important plan or intention than figuring out how I want my life to unfold. No matter what income you are at or have been at most of your life, things can and will change as we age so figuring out what is most important to us is a real key–and in answer to your question–a real key is deciding if living in a very expensive area is worth the cost in the long run. Thanks for your thoughts! ~Kathy
Nancy Dobbins says
Rental properties are a lot of work…we had two so we know. And we also hired a management company to do the work but they did not maintain the properties, just took our money each month.
I agree with much of what you say, but for us it was not worth it. We sold.
Kathy Gottberg says
Hi Nancy. I agree that some rentals can be a lot of work. They can also be relatively easy. One of our investments is a free and clear commercial building that is triple -net leased (meaning the tenant is responsible for all expenses including all maintenance, taxes, etc.) and we do absolutely nothing except collect rent. We’ve had that rental now for over 10 years. Perhaps because we have been doing it so long we know what to look for and avoid and that helps overcome a lot of the “work” involved. But of course, real estate, like any investment doesn’t work for everyone. I just think it is important for people to consider it as an option. Thanks for sharing your perspective. ~Kathy