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Investing in Real Estate for Retirement Income

How to find the most suitable and reliable properties

Is real estate a good way to generate strong returns for retirement? Absolutely. Having a reasonably steady, and a mostly predictable, income stream is the Holy Grail for retirees. This is why investors love real estate.

You’ve heard it time and time again: Cash Is King. It’s most certainly a cliché, but its resonance becomes reality with real estate, particularly with this simple modification: Cash In Hand Is King.

Here’s why:

Protecting Your Principal

One of the most important goals for generating retirement income is lowering risk while protecting your invested capital. This is called principal protection. Companies that produce consistently high and growing levels of free cash flow for investors (who realize income on a quarterly or monthly basis) are much less likely to go bankrupt and take all of your money with them.

While cash flow is not the end-all-be-all to flawless investing, the greatest investors in the world candidly agree that there are times when they will be wrong, so they must plan for that possibility. Cash is that backstop.

Currently, real estate investments in emerging, secondary, or tertiary markets can provide an 8 percent return if done correctly.

Real estate opportunities offering current “cash on cash” returns (a metric used to describe the return you are generating on your initial capital contribution annually) should have enough cash to pay timely distributions and to pay all the expenses of operating and growing the bottom line.

Rental income — say, from an office, retail, or multifamily property — is one of the best sources of passive income (called that when you’re not actively managing a property; someone else is) and it’s rivaled by strategically investing for dividends.

The theory is simple: the property owner diligently sifts through applicants to find great tenants, and as a result, the investor can more often than not expect to receive current payments.

Buildings Make Sense

No one really knows for certain what actually drives a stock price up or down. But investing in real estate provides a greater degree of control over potential appreciation because there are things the owner can do to boost a property’s value and its income.

A good real estate investment starts with these qualities: a solid structure, an advantageous location, creditworthy tenants, ordinary (not excessive) repairs, annual or scheduled rental rate hikes and the ability to pay the mortgage every month.

There are various ways to invest in real estate. My personal preference: private placements, which are offerings that accredited investors can participate in through investment firms. (The Securities and Exchange Commission defines an accredited investor as someone who is financially sophisticated — typically with earned income over $200,000 or $300,000 jointly or a net worth over $1 million alone or with a spouse, excluding the value of a primary residence.)

Work With an Adviser

In order to invest in real estate for retirement with the least risk and the potential to generate the highest returns, you must tap into specialized knowledge and skill. I believe for the novice accredited investor, the best way to do this is to speak with a Registered Investment Adviser (RIA) with experience investing in real estate.

An RIA is a fiduciary for you, doesn’t take an upfront fee and is dedicated to guiding you through the jungle of real estate options, which include private placements, private real estate investment trusts (REITs), limited partnerships and other securities. Each of these comes with its own set risks and rewards, as well as terms for participation, such as the required minimum investment or the duration of the investment.

Don’t be afraid to tell your RIA what you want to get out of a real estate investment. Outlining your goals will help put you on the path to identify the best strategy for your retirement.

For instance, you could ask your RIA: “Can I still get to an 8 percent return per year on my money after fees?” The answer is yes. Currently, real estate investments in emerging, secondary, or tertiary markets (think of areas like San Marcos, Texas or Columbus, Ohio), can provide an 8 percent return if done correctly.

Here’s another tip: If you have personal access to the actual owner/operator or the professional investment manager of a property, you will put yourself in a position to potentially get superior returns after fees.

Talk Taxes, Too

In my experience, strategic tax planning is one of the most overlooked topics for investors new to the real estate landscape. So be sure to consult with your CPA to discuss the various tax benefits specifically suited for retirement.

Talk about things like whether to invest through your IRA and how depreciation can help you keep more of the rental income you collect after taxes.

Key discussions with an investment adviser and a tax adviser can go a long way toward finding the most appropriate real estate investments for the retirement income you desire.

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