Real Estate Rentals for Retirement Income and Building Wealth

For people at various stages of retirement, the demands of work-life may have abated, but that doesn’t mean they don’t have many important decisions to make. With years, even decades, of life still ahead of them, they must plan assiduously for their future. That’s where experienced, savvy financial advisors like you come in, for this cohort of individuals will turn to you for insight on how to build and protect their wealth throughout late-stage life.    

While some retirees believe they can live a comfortable life on Social Security, a pension, a 401(k) or other retirement plans, it’s no longer enough. In order for retirees to maintain their lifestyle, hence their cash flow, multiple sources of income are necessary. (For more from this author, see: 8 Questions to Ask Before Managing Rental Properties.)

As an advisor, it’s your job to help clients understand why real estate should be incorporated into their portfolio, and for retirees who’re unfamiliar with the concept of alternative assets, real estate investment may be completely foreign to them. If their investments consist solely of stocks and bonds, they’re vulnerable to market swings and volatility. Alternative assets can add essential balance to an investment portfolio and the diversification that real estate provides is key to reducing risk.

One of the most effective strategies for long-term, passive wealth can be found in real estate rental properties, and advising your clients on this strategy includes the following:

It’s important for your client to understand that investing in real estate isn’t just about buying any property - it’s about finding the right property. Advise clients to identify real estate with an 8% or greater per year return on equity (ROE), based on cash flow and debt reduction.

Another tip is to buy real estate in a market that is likely to appreciate over the next 20 years, based on the economy of that market. Choose correctly and your client will likely do better than the historic national average of 4-5% appreciation. Further, the rents they receive on the property will grow over time as well.

Rental real estate may be new territory for many of your clients, so don’t let them navigate it alone. Suggest that they seek a real estate professional who actually owns a lot of real estate him/herself, as first-hand experience in rental real estate is essential. An experienced real estate professional will be able to identify a property that promises positive cash flow after paying for all expenses, including the mortgage, insurance, taxes, maintenance, turnover costs, vacancy and property management. (For related reading, see: 5 Mistakes Real Estate Investors Should Avoid.)

Advise clients to finance their new rental property on a fixed-rate mortgage. The timeline for the mortgage can be determined by a client’s preference. It’s standard to start with a 30-year fixed-rate, but you may want your client to consider a 15-year fixed-rate instead, depending on their stage of retirement planning.

Over the years, renters will pay down the mortgage and your client’s cash flow will grow as the profits from rents grow. The property will be paid off, and your client will have made at least 8% per year along the way. Better yet, if property continues to appreciate in the United States at the rate it’s been growing over the past 50 years - approximately 4-5% per year - your client will have a fully-baked return of 12-13% per year or more.

To maximize their investment, clients should find and utilize a property management company - there is no need for them to invest their money and recreational time in managing their rental assets.

To echo my advice on finding the right broker, I suggest that your clients work with a property management company that actually owns and manages numerous properties, as this will ensure an invaluable level of expertise and experience.

Rental real estate doesn’t just provide your clients with a source of income; it also provides them with tax breaks and benefits. When filing taxes, clients can write off any interest they’ve paid on their mortgage for the year, as well as depreciation. Moreover, if clients sell their investment, they can do a 1031 exchange into another piece of real estate while deferring any taxes owed on the transaction.

Most importantly, rental real estate can give your clients peace of mind. Real estate is a tangible asset; it has real value and owners (your clients) have influence over its performance. Further, rental demand in the United States will continue to surge over the next decade and beyond. According to a study by the Joint Center for Housing Studies at Harvard University, renting (as opposed to buying) has increased among all ages, household types and income groups in the United States

As opposed to investing in stocks, real estate rental success does not rely on companies performing well. Investing in real estate puts control in your clients’ hands.

Rental real estate produces passive income, tax benefits and long-term gain, so to help your clients live a more worry-free life as they approach or traverse retirement, rental real estate investing is an ideal solution. (For more from this author, see: Seasons Impact Real Estate More Than You Think.)

Ryan Boykin is co-founder of Atlas Real Estate Group, a Denver-based full-service realty firm.