Investing in Real Estate as Part of Your Retirement Plan (Part 1)

(Part 2 is coming in December- Crunching the numbers/Day to day life of being an investment property owner)

Real estate should be part of your retirement plan and here’s why…..

Pensions and Social Security aren’t what they used to be.

Stocks can be unpredictable and are not guaranteed.

Real estate over the long term is a safe way to get a large return on your initial investment and unlike taking money out of an IRA, collecting monthly dividends (rent) does NOT diminish your asset!

Sound interesting? I guarantee it’s worth the read!

Experts say that if you are currently 55 years old you will need approximately $1 million to retire (in a traditional sense).  Are you on track?  What’s that you say?  You are only 40 years old? You have plenty of time to figure something out?  Sorry to say experts predict if you are around the age of 40 you will need about $3-$4 million to retire! Do you think your pension and social security will be able to dish that out? Don’t think so.

In fact according to a Northwestern Mutual study in 2018

21% of Americans have NOTHING at all saved for retirement

16% have saved $75k-$200K

25% have saved over $200k

Let’s take a quick look at counting on a Pension for retirement.

What is a Pension? It’s a regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life.

They are disappearing and here’s why.

People are living too long after retirement! According to the Social Security Administration a 65 year old American male is expected to live another 19.2 years and a 65 year old American female is expected to live another 21.6 years.

There has not been enough money contributed to pensions, benefit promises were too large, annual returns are too low and many company’s pension plans are going bankrupt or will do so in the future.

PERA is a great example of this. If you are new to Colorado you may not know what PERA is so let me back up a moment. PERA summed up is a pension for Colorado public employees to supplement social security in the future. PERA currently has an unfunded liability of roughly $30 BILLION (nearly equal to CO state’s annual budget).  As we continue to live longer this liability grows.  Tax payers will continuously be faced with voting to increase taxes to fund the retired workers’ pension checks or to pay current teacher, police and fire, etc.  Who do you think will get the tax payers money? Probably not the retired folk.  This money is expected to run lower and lower as we age. It is NOT guaranteed PERIOD.

Too make matters worse let’s take a look now at Social Security.

Looking forward to retiring and collecting your monthly check? The average check for SS right now is $1,400/month with max full benefits at $2,788. This is expected to decrease 25% by the year 2037 and could potentially be bankrupt at some point in the future if a complete over haul of the program is not set in place.

SS was never designed to be your retirement fund. It was supposed to be a supplement to your retirement.  Does this still sound like something you can rely on?

NOW LETS TALK ABOUT SOME MORE HAPPY OPTIONS- There is hope and the key is to start as early as possible!

Option 1-IRA contribution and option 2-Real Estate!

What is an IRA? Individual Retirement Account is a form of “individual retirement plan” provided by many financial institutions that provides tax advantages for retirement saving in the US.

There are two types of IRA’s:

Traditional IRA (roll over from a qualified retirement plan)- A traditional IRA allows you to contribute up to certain amount each year and  deduct your contributions from you income taxes. The money grows tax free until you withdraw it, usually at retirement. Then you pay taxes in the year you withdraw money.

ROTH IRA- uses post-tax money and allows you to later withdraw your contributions and earnings tax free.

An IRA is not the same thing as a 401k which a type of employer pension plan. Not getting into that here.

An IRA is powerful due to the magic of compound interest! Depending on the method of funding for an IRA (stocks, mutual funds, bonds, or index funds) generally you will earn a return over 6%. Best to talk to you accountant or wealth management adviser regarding the best option for you.

Check out this example of how compound interest works:

Example #1 Let’s just say you plop $1,000 in an IRA making a 10% annual return. By age 67 you will have the following amounts if you started at the age mentioned:

25 years old $54,763

30 years old $34,003

40 years old $13,109

50 years old $5,054

60 years old $1,948

Example #2 Automated monthly savings- watch your money grow! Assume you invest $100/month into an IRA beginning at these ages, you will have saved by 67 at a 10% annual return-

18 years old- $1,567,087 (keep in mind if you are 18 right now chances are you are going to need more than $4 million to “retire”)

25 years old- $774,429

30 years old- $465,982

40 years old- $164,570

50 years old- $53,226

60 years old- $12,095

THE KEY HERE IS STARTING EARLY! Help your children start early!

You don’t have $100 to put into an IRA each month?  What do you do?

• The dreaded “B” word BUDGET! Penny pinching isn’t just for grandma anymore! Some of the easiest ways to save: Pack a lunch, stop eating out, stop buying expensive coffee, and stop buying STUFF that you really do not need! I looked back at my last credit card statement and estimated I spent $138 on eating out and coffee! It can be hard when it’s SO convenient especially when you are working around crazy schedules and kid’s sports/activities.
• Do not spend more than you make- seems smart right?  According to CNBC over 78% of Americans are living paycheck to paycheck.

CONGRATULATIONS!! If I haven’t lost you yet, you are about to find out about the most exciting way to secure your future!

INVESTING IN REAL ESTATE! ..and I can help with this one!

The idea here is a long term investment.  You buy a property with the plan that renting it will bring in enough money to cover all its expenses and more. Year after year it continues to appreciate.  As the years go by your property is worth more, your mortgage is getting paid off and the rent coming in is going more to your pockets than expenses.  How would it sound to have a property’s mortgage paid off by retirement, and each month you receive a check for $2,500.  Now let’s say that you have three properties paid off. That is $7,500/month. That is going to be WAY more than a pension or SS will ever be able to promise you for retirement!

Benefits of Investing in Real Estate

The income from the property by way of the rent check comes monthly (like dividends) and that rent check does NOT diminish the value of the underlying asset.  Compare that to removing $3,000 from your $500k IRA, you now have only $497,000 left. Therefore your risk of running out of money during your retirement is much smaller when investing in real estate.

The Denver market has had one of the highest appreciation rates in the country at an average of 6.3% a year since 1971. On average homes double every 12 years. Safe and dependable investment.

Leverage and OPM. You can use other people’s money (renters and lenders) to make you money! You buy a home for $350,000 with 20% down ($70,138) and your home appreciates 6%, your home increased in value by $21,000, a ROI (return on income) of 30% ($21,000/$70,000)!!

Control, stability and predictability– The point here is that people will always need a place to live. Colorado’s economy is predicted to continue to grow at an exponential rate into the future.

Metro Denver Economic Development Corporation is predicting that the metro Denver area will add 290k jobs between 2016 and 2026 an increase of 20%.

According to the Bureau of Economic Analysis personal income in CO is up 5.3% this year and the state’s average weekly earnings are up 8.4% this year!

In case you need ONE more startling statistic we are still at a shortfall of available units for sale in Denver. Experts say that a balanced market in Denver has between 18,000-25,000 active homes for sale. I know what you are thinking…didn’t the market just make a shift? I thought inventory went up!  IT DID but it is still not enough.  Statistics show that in October the Denver Metro area topped out at 5,403 single family units for sale, which is up 1,393 units from October 2017 (4,010 units). This increase in inventory with the decrease in sold units and rising interest rates slowed down our market a bit early this fall.  Experts say that it could be 2030 before hour housing market is back in balance. By then who knows what other factors could be driving up our population growth.

HUGE TAX ADVANTAGES (disclaimer- I am not an accountant, please contact a tax adviser to find out if these advantages can apply to your particular situation)

Depreciation often wipes out your net income making your passive cash flow tax free possibly. Wait a minute, did you say a home that is appreciating in value can be depreciated for tax purposes? YES!

Interest is deductible on rental properties, along with property taxes, homeowners insurance, HOA dues, repairs, management fees, maintenance, marketing, legal and accounting fees.

You can access your home’s equity by refinancing or a home equity loan and receive cash without paying any income tax on your withdrawal. You cannot do that with stocks. (Again ask your tax adviser if this works in your situation)

Defer paying capital gains tax and depreciation recapture tax when you sell a rental property if you do a 1031 Exchange properly. Your heirs or beneficiaries could inherit your properties at your death and then immediately sell them and pay no capital gains tax or depreciation recapture tax. (But may have to pay estate taxes)

So now I’ve convinced you to invest in real estate but you’re wondering how in the heck do I come up with a down payment?

In the Denver Market a good rule of thumb due to the average home price you should plan 30%-35% down to immediately cash flow. That is $90k-$105k on the purchase of a $300,000 property. That is why it is crucial to talk with the experts and come up with a plan. This down payment can be found in equity of a current home or other investments that are not making you enough money.

Together a lender and a real estate consultant can help you come up with a plan for your FUTURE!

I will leave you with a quote by Franklin D Roosevelt.  Please fee free to reach out with me if you have any questions or need a real estate consultant on this journey to financial freedom!

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full and managed with reasonable care, it’s about the safest investment in the world.”

Click on this link to read Part 2: How to Finance and Acquire Properties