How Some Landlords “Retire”
You might have read last week’s Wall Street Journal article titled Here’s What Retirement Looks Like When Real Estate Is Your 401(k). It featured four retirees whose primary nest egg is rental real estate. Retirees who choose real estate investments over marketable securities to fund their retirement often take advantage of market conditions, leverage experience, and are driven by a fondness for property.
Historical Conditions
Many older individuals benefitted from decades of real estate appreciation, low mortgage rates, and tax deferral strategies like 1035 exchanges. While some of these benefits still exist, others, like historically low rates, do not.
Experience:
The retirees in the WSJ piece have strong backgrounds in real estate, which they believed gave them an edge or “alpha” in the market. Some were especially skilled at renovations. For example, a former construction manager used his network to renovate homes cost-effectively and rented them out. Others were adept at house flipping. One retiree bought the worst properties in the best neighborhoods, fixed them up, and flipped them for a profit. Lastly, two of the retirees specialized in restoring historic properties, benefiting from federal and state tax credits.
Passion for Real Estate:
A ‘landlord’ retirement is best suited for those who genuinely enjoy it. It requires patience for tenants, emergency calls for urgent repairs, and vigilant management of rising maintenance costs. Property management services lessen the burden but eat into profits.
Should you be a landlord in retirement?
There are a few considerations. Real estate can be a great investment if built over time with significant liquidity for those who are not solely relying on rental income. It’s difficult to give a hard estimate of how much liquidity is necessary because significant liquidity is based on the circumstances. Leverage, such as from home equity, can count as a source of liquidity. However, the value of a property can fluctuate with market conditions.
Landlords should consider the risk of losing rental income due to demand or a ‘crippled’ property—a property that is not earning income due to unexpected repairs and weather-related events. If cash flow from properties covers property expenses, including loans, and a portion or all of lifestyle expenses, that’s ideal.
However, if cash flow from the properties is just breaking even, a landlord might have home equity but not enough profit to justify holding for the long-term. Unless properly prepared, landlords may be taking on a lot of risk and find themselves in a liquidity crunch.
Please reach out to your Wealth Manager with questions about investing in rental real estate.
Weekly Commentary
July 1, 2024 – Wealth Planning Commentary
How Some Landlords “Retire”
You might have read last week’s Wall Street Journal article titled Here’s What Retirement Looks Like When Real Estate Is Your 401(k). It featured four retirees whose primary nest egg is rental real estate. Retirees who choose real estate investments over marketable securities to fund their retirement often take advantage of market conditions, leverage experience, and are driven by a fondness for property.
Historical Conditions
Many older individuals benefitted from decades of real estate appreciation, low mortgage rates, and tax deferral strategies like 1035 exchanges. While some of these benefits still exist, others, like historically low rates, do not.
Experience:
The retirees in the WSJ piece have strong backgrounds in real estate, which they believed gave them an edge or “alpha” in the market. Some were especially skilled at renovations. For example, a former construction manager used his network to renovate homes cost-effectively and rented them out. Others were adept at house flipping. One retiree bought the worst properties in the best neighborhoods, fixed them up, and flipped them for a profit. Lastly, two of the retirees specialized in restoring historic properties, benefiting from federal and state tax credits.
Passion for Real Estate:
A ‘landlord’ retirement is best suited for those who genuinely enjoy it. It requires patience for tenants, emergency calls for urgent repairs, and vigilant management of rising maintenance costs. Property management services lessen the burden but eat into profits.
Should you be a landlord in retirement?
There are a few considerations. Real estate can be a great investment if built over time with significant liquidity for those who are not solely relying on rental income. It’s difficult to give a hard estimate of how much liquidity is necessary because significant liquidity is based on the circumstances. Leverage, such as from home equity, can count as a source of liquidity. However, the value of a property can fluctuate with market conditions.
Landlords should consider the risk of losing rental income due to demand or a ‘crippled’ property—a property that is not earning income due to unexpected repairs and weather-related events. If cash flow from properties covers property expenses, including loans, and a portion or all of lifestyle expenses, that’s ideal.
However, if cash flow from the properties is just breaking even, a landlord might have home equity but not enough profit to justify holding for the long-term. Unless properly prepared, landlords may be taking on a lot of risk and find themselves in a liquidity crunch.
Please reach out to your Wealth Manager with questions about investing in rental real estate.
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