The case for income-producing real estateArticle added by Michael McNamara on March 8, 2013
Ranked: #178 (270 pts)
For most financial professionals, the idea of recommending a strategy of buying income-producing real estate to complement other financial products has been off the radar.
While immediate and deferred annuities can solve part of the problem of creating another source of retirement income, the rates of return on these types of products are usually low. Additionally, there are problems with liquidity and the fact that an annuity is a depreciating asset as distributions are taken.
Cash value life insurance can also provide a tax-advantaged income stream in retirement, but those policies can create the circumstance of potentially depleting the value of the asset as income is taken or borrowed from the policy.
Rather than looking at income producing real estate as an alternative to insurance-based products, it should be viewed as a complement to them. In fact, any positive cash flow created from rental income can be applied towards premium payments of those insurance products. This strategy can be implemented until such time that the client/investor is ready to retire or begin taking income from their investments.
The argument in favor of owning real estate, and specifically, income-producing rental properties, is compelling. Income-producing real estate is very unique in that it can accomplish four primary goals:
Many large hedge funds have been active in the acquisition of single family rental properties, especially in bubble markets such as Phoenix, Las Vegas and different areas of Florida. You can read about some of the players in those markets in this recent Bloomberg article.
- Monthly income
- Tax benefits
- Asset growth
- Attractive rates of return
- Inflation Hedge
But what about the individual who would just like to own a few properties titled in their name, create a legacy, collect the rent and have the properties add to their portfolio of assets? Many people planning for retirement are ultimately looking to replace their “earned” income with non-earned or passive income. Owning income producing real estate and having a strategic plan to rapidly eliminate any debt against the property can provide a reliable source of income that can be used to supplement other retirement income sources. Additionally, rents can be a hedge against future inflation, as housing costs, as measured in both value and rent, will typically keep pace with the cost of living.
Many people have avoided real estate investing for several reasons:
For the real estate neophyte, the path to becoming a successful real estate investor can be a bumpy one, and most investors avoid it.
For the advisor, the path is also uncertain; it can be unclear how to monetize it for themselves, and they frankly don’t where to start unless they have personal experience in the transactions and processes involved.
- They don’t know how to acquire the property
- They don’t know how to finance the property
- They don’t know how to fix up the property
- They don’t know how to find good tenants
- They don’t know how to maintain the property
- They are afraid of being a landlord
For some individuals who have experienced little if any growth in their Roth and traditional IRAs, putting an income producing property into a self-directed, qualified plan can make a lot of sense. There are certainly rules to follow and using the right team will provide guidance and assurance that the investor is in compliance with all of the rules surrounding this strategy.
Until recently, there really hasn’t been a turnkey solution to the problems that sometimes outweigh the benefits of owning real estate. There are companies that do offer an entire “package” for the novice real estate investor, providing them with the resources they need to add real estate to their portfolio. Some even have an affiliate program allowing any producer to earn a referral fee (if they are allowed to) in the transaction without having to have a real estate license to do so.
For the independent producer looking to add another dimension to their financial practice, having a proven, turnkey real estate option can be beneficial for them and their clients.
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