For many, retirement isn’t just about putting up one’s feet and enjoying the sunset years. It’s also a period that requires meticulous financial planning to ensure comfort, security, and the freedom to enjoy those long-awaited adventures or simple pleasures.
One of the strategies that has been a staple among retirement planners is including real estate in one’s portfolio. But why?
Here are some of the best reasons to include real estate in retirement.
1. Steady Income Stream
Owning a rental property can provide retirees with a consistent income stream. Think of it as receiving monthly dividends from an investment. According to a recent National Association of Realtors report, the median gross rental yield in some prime areas averaged around 6-8% in 2023. This means for a property worth $300,000, a retiree could potentially earn $18,000 to $24,000 annually. It’s a tidy sum, especially when considering the uncertainty surrounding Social Security or the volatility of stock markets.
2. Hedge Against Inflation
A dollar today might not have the same purchasing power tomorrow, thanks to inflationReal estate has traditionally served as a safeguard against inflation. According to the U.S. Bureau of Labor Statistics, consumer prices increased by approximately 3.7% in the past year.
During the pandemic, median home prices increased by 12% between 2020 and 2021 and by an additional 15% between 2021 and 2022. Looking back, average home prices have increased by 88% in the last decade and 125% in the last 20 years.
In essence, real estate not only keeps pace with inflation but often outpaces it, ensuring that one’s hard-earned money doesn’t erode in value.
3. Tangible Asset and Emotional Security
There’s something deeply reassuring about owning a physical piece of property. Unlike stocks or bonds, which are abstract and can be hard for some to grasp, real estate is a tangible asset. You can experience it with all your senses, interact with it, and even reside within it. This tangibility can bring a sense of emotional security, which is often essential for retirees. Knowing there’s a home that can be sold or leveraged in times of need provides a safety net many cherish.
4. Legacy and Estate Planning
Real estate is not just about the here and now; it’s also about the future. For retirees keen on leaving a legacy for their loved ones, real estate presents an ideal opportunity. Often, property is passed down from generation to generation, potentially increasing in value over time. This transfer of wealth can ensure the financial security of loved ones long after one’s time.
5. Flexibility in Living Arrangements
In retirement, flexibility can be crucial. Perhaps there’s a desire to downsize, live closer to family, or even experience a new environment. Owning real estate provides retirees the option to switch things up. They can choose to live in one of their properties, rent out another, or even sell one to fund travel or other pursuits. The real estate market, according to Redfin, has been buoyant, with houses selling, on average, in less than a month after listing. This quick turnaround time offers retirees the agility to make life decisions on their own terms.
Challenges to Consider
While real estate offers numerous advantages, it’s not without its challenges. Property management can be time-consuming and requires attention to detail. There are maintenance, tenant-related issues, and the ongoing cost of property taxes and insurance. For those who might find this daunting, hiring a property management company is an option, albeit at a cost.
Further, real estate, unlike stocks or bonds, is not immediately liquid. While the market might be brisk now, there’s no guarantee it will remain so. Selling property can take time, and there might be occasions when it’s not feasible to get the desired price.
In retirement, real estate can play a crucial role, offering a balance of income, security, and potential for appreciation. However, as with all investments, it’s crucial to approach real estate with a well-researched plan, considering both its pros and cons.
Whether you’re looking to diversify your investment portfolio, secure a stable income, or simply wish for a tangible asset you can bequeath to your loved ones, real estate in retirement is an option worth considering. After all, retirement is about comfort and security, and what better way to ensure both than through the brick and mortar of real estate?