Real estate can be an incredible tool to help you prepare and build wealth for retirement or provide consistent income during those years, but certain asset classes within real estate are better suited for investment during retirement than others. Most people entering retirement are looking to achieve a certain lifestyle, one that requires minimal management or active work while still allowing them to earn reliable passive income and reduce their risk and tax burden.
Below are four of the best real estate investments for retirement that provide passive income, adjusting for risk, and require minimal active management.
Real estate investment trusts (REITs) can be a wonderful investment opportunity for those looking for a hands-off investment that still provides a reliable income. REITs are publicly traded companies that invest in commercial real estate, paying up to 90% of their taxable income in the form of dividends to shareholders. Participating investors can gain access to real estate in a variety of sectors across multiple industries and markets, all without any active management of the real estate themselves. Before investing in a REIT, do your due diligence on REIT taxation and speak with a professional to see if the income you would earn from a REIT would negatively affect you in retirement or not.
2. Mortgage notes or private lending
It's fairly common practice for experienced and veteran landlords heading into retirement years to offer their investment properties for sale with owner financing. Owner financing means the property owner holds a mortgage on the property for the buyer and receives installment payments over time. This offers tax advantages to the seller, reducing their capital gains burden at the time of sale.
While this method of selling real estate may not be advantageous for all investors in retirement, because there's always a risk the buyer stops paying at one point or another during the life of the loan, it can be a viable option for producing consistent cash flow without any active ongoing management, especially when utilizing a third-party servicing company.
Another option available to investors, especially those who have large retirement accounts such as a solo 401K or individual retirement account (IRA), is to become a private lender offering short- or long-term loans to investors and home buyers who are in need of alternative financing solutions. Private lending makes up a large portion of the investor marketplace and can provide consistent cash flow and above-average returns (10% or higher) -- but again, not without risk.
There is always a chance the borrower stops paying, which would require you to foreclose or seek legal action to regain title to the property. Additionally, this method of lending also requires more ongoing management, especially with short-term loans, as you need to vet each lending opportunity and borrower.
3. Own a third-party managed investment
While many investors in retirement choose to minimize their real estate holdings to simplify their estate and reduce their active participation in managing the rental properties, there can be benefits to owning a rental property in retirement, especially if it's managed by a third-party company. Rental real estate, whether it be single-family rental properties or commercial rental property, provides cash flow and a number of tax advantages and deductions.
A third-party manager can handle all of the day-to-day tasks, including leasing, collecting rent, coordinating repairs and improvements, and more. However, this investment will still require you to monitor and manage the management company or property manager. Monthly, quarterly, or annual reviews will still be required to ensure the investment is operating as it should be unless you hire an asset manager to do this for you.
In order for this to work and for you to truly achieve passive income without active participation while adjusting for risk, your real estate portfolio should include a variety of rental investments across multiple markets, which can be difficult to accomplish if your investments have been in one primary market for the past few decades.
4. Transition your current investments into a diversified portfolio
If you own real estate but have the desire to sell, you can transition your wealth to more tax-advantaged retirement income. Realized is a firm that helps those entering retirement or of retirement age who currently own property reallocate their wealth by utilizing a 1031 exchange, placing qualified investment funds into a diversified portfolio of institutional quality investment properties.
While no two retirement situations are alike, there are certain investments that work well for many retirees. Speaking with a professional such as a financial advisor, estate planning attorney, or accountant can help you adjust your real estate holdings to meet your exact portfolio requirements.