It is rare to see any advice about building a retirement fund from real estate investments. Yet, many of us heard from our parents that real estate was a good investment because it was tangible, durable, and provided income in your old age. Some of us grew up in families that owned several “rentals” that provided family income. Yet, we rarely see the advice our parents dispensed appearing in print. To be sure, a version of this advice is sold by many real estate investment gurus teaching how to become rich through real estate…but they don’t fully address how ordinary people with average incomes can use real estate investments as retirement income.
So, here are some tips, for those who have decided residential real estate might be a better investment for one’s old age than stocks, bonds, or mutual funds.
Make your money when you buy, AND when you sell. In other words, buy below the market! Buy below the median price for the area you’re buying in and buy at least 15% below the market for that area. You’ll have instant equity if you have to sell quicker than you originally planned. (Your Realtor can help you find these bargains.)
- Don’t fall into the trap of buying a money pit. No matter how good the price, if the property is going to require extensive renovation or repair…or if you see problems you can’t explain with a visual inspection, our advice is… RUN AWAY! At the same time, don’t require that the property be up to your living standards, unless you’re buying a luxury home to rent to movie stars (which we don’t recommend..see number 3)
- Buy what is likely to be easy to sell. Here in the greater Albuquerque area, the most homes sold are in the price range between $100,000 and $200,000. Therefore, a home in that price range will have more potential buyers than a more expensive home. Every investment needs an exit strategy and this is part of yours.
- Be open to all financing alternatives. Sometimes obtaining financing for investing in real estate is challenging. Be open to paying a higher interest rate if the end goal will still net you a nice profit. Consider partnering with one or two other investors, just to get started. Look at alternate financing options like “sandwich leasing” if you’re short on investment capital.
- Make a long-term plan and stick to it. Decide how much income you’ll need to retire on and when you want to retire, and work backwards to determine your plan. As an example, our personal 10 year plan will provide about 25 properties producing $7,000 to $10,000 per month in residual income. We’ll get there by starting with what we’ve got, and over time, reap our profits and re-invest them in more properties until we reach our goal. Each time we sell a home, we’ll be able to buy two more. Our retirement fund, therefore, will grow exponentially.
There are other more passive forms of real estate retirement income, for those who prefer a less “hands on” approach. One we like in particular at this point in our country’s real estate history, is to buy into pools of REOs (foreclosures) that are being sold by entities like Fannie Mae and HUD. There is a minimum investment of at least $50,000 to get into these pools, so they may not be appropriate for everyone. The pools we have researched are holding their properties right now, and renting them out. So, they are either paying or reinvesting dividends (from the rents) now, and when the market is right, they will sell. These have typically been bought for cents on the dollar and will sell at a tidy profit when the time is right.
