Real estate: A retirement gold mine?

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Published Date 8/2/2024

Is real estate truly a path to wealth as you age? Realtor’s Julie Gerstein says Americans’ retirement plans typically include a 401(k), IRA, pension, or some other account with appreciating assets like stocks and bonds. But given how much home values have risen over the past few years, investing in real estate doesn’t sound like a bad idea to fund one’s retirement. “Some might even forgo their 401(k) and funnel money into a growing property portfolio instead,” says Gerstein.

However she warns that while real estate is a tried-and-true path to building wealth, putting all your eggs in this basket and ignoring retirement vehicles such as a 401(k) can come with huge downsides. She offers some pros and cons.

The first pro of investing in real estate is that it’s tangible. Unlike other investments, you can use it for shelter or rent it out — an asset that not only appreciates over time but also provides a roof over your head. “Real estate (other than in times of a major housing crisis, of course) is generally more insulated from volatility than the stock market,” says Gerstein. There are also tax advantages if you decide to rent out your property.

The pitfalls for those using real estate to fund their retirements? Liquidation of assets is not necessarily quick and easy in the case of an emergency. Even tapping equity takes time. Add to that rental properties come complete with headaches in terms of dealing with tenants, housing repairs, and the whims of a shifting and mercurial market. Short term rentals come with even more risks, as local jurisdictions can pass rent control laws or zoning changes that have the potential to affect property values as well as income.

Experts agree that real estate as an investment requires players that are both sophisticated and diligent. Risks such as getting burned by a malignant tenant, squatter, or any number of problems are issues that don’t plague a 401(k).

So financial experts usually suggest that while investing in real estate can be a piece of someone’s retirement plan, it shouldn’t be their entire retirement plan. Risk is automatically increased by having all your eggs in one basket.

But renting out a property isn’t the only way to make real estate holdings work for retirement. “Those who own even just one house, even if it’s where they live, can tap into their own equity in various ways to fund retirement,” says Gerstein. “One option for retirees to tap into home equity is a reverse mortgage. A reverse mortgage allows homeowners over the age of 62 to borrow against the value of their home.”

This type of mortgage does come with some catches, however. For instance, you can take out a reverse mortgage only on a home you’re actually living in. And if you were to leave that home for 12 months or more, like, say, an extended hospital stay or a trip around the world, you automatically default on the mortgage.

By contrast a home equity loan allows homeowners of all ages to get a loan based on the equity they’ve built. You’ll need a high credit score, a maximum debt-to-income ratio of 43%, and a demonstrated proof of payment. And while these loans are typically offered only on primary residences, you can get them for investment properties. In some cases, you’ll likely pay a higher interest rate because of the additional risks involved in lending on a rental property.

HELOCs (home equity line of credit) allow homeowners to borrow funds as they go and as needed. “During the period of the HELOC, you need to pay back only the interest on the loan,” says Gerstein. “But a HELOC typically comes with variable interest rates, meaning you could end up paying much more in interest than you planned for.”

TheSpruce, TBWS

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