Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Saving For Retirement: Real Estate Vs. Traditional Methods

Written by Than Merrill

It’s never too early to start saving for retirement, and the sooner you realize that, the better. Instead of putting off a retirement strategy until the day you quit working draws closer, start saving for retirement immediately. That said, nothing prepares someone for retirement more so than real estate. I maintain that real estate trumps other retirement savings vehicles, and it’s not even close in my opinion. While a Roth I.R.A. and a 401(k) have their place in any portfolio, they don’t come complete with the added benefits real estate exhibits.

Saving For Retirement With Real Estate

Let’s take a look at some of the reasons I favor saving for retirement with real estate over traditional methods:

Retirement strategy

Hedge Against Inflation

Inflation, as we have all come to know it, simultaneously coincides with an increase in prices and a decline in the purchasing power of capital. It’s the same reason the cost of living is nearly double that of 20 years ago: the money people have doesn’t go as far in the face of increasing inflation rates.

Fortunately, all is not lost; a number of strategies can hedge against inflation, and real estate isn’t the exception. In fact, it’s ability to hedge inflation is one of the reasons I favor real estate over traditional retirement plans. I maintain that real estate is one of the best ways to protect your money from inflation rates well into the future, which begs the question: why isn’t real estate affected by inflation in the same way most consumer goods are? The answer is simple: the fixed-rate mortgage.

If for nothing else, a fixed-rate mortgage is just that: a fixed rate. By definition, a fixed-rate mortgage will maintain the same interest rate over the duration of the loan. As a result, those paying the note off benefit from a consistent, single payment every month over the course of the loan. No surprise there; inflation can’t weaken a payment that doesn’t change.

But how can a fixed-rate mortgage hedge against this phenomenon? It’s worth noting that both home prices and rental rates have historically increased in the face of inflation. So when the purchasing power of the market tends to slip, home prices tend to increase; some would argue enough to offset the initial inflation. So while the amount you pay into your mortgage every month remains unchanged, there is a good chance you will see the equity in your home increase. And what is equity if not a glorified savings account? That said, few things help those saving for retirement more than equity in a home; it’s just an added bonus that the same asset can hedge inflation at the same time.

Those intent on investing in a 401(k) may very well benefit from the same hedge real estate provides, but traditional equity investments are not as directly linked to inflationary measures as physical real estate assets. While nothing is guaranteed, real estate is much more likely to hedge against inflation than a traditional 401(k).

Tax Incentives

Overlooked more often than not, tax incentives are an integral component to a viable real estate investment plan, and compliment the perfect retirement strategy.

Note this, however: not all taxes are bad for homeowners. While property taxes may be a burden when it comes time to pay your mortgage, they are a small price to pay for the subsequent advantages tax incentives offer homeowners over the duration of ownership. For what it’s worth, taxes are one of the most attractive benefits that coincide with real estate, and can drastically improve one’s outlook when saving for retirement.

Passive income real estate investors, in particular, are awarded one of the greatest opportunities to save for retirement that I am aware of: deductions. Otherwise known as depreciation losses, these deductions allow you to write off the cost of the house over a predetermined amount of time.

The I.R.S. defines depreciation losses as “allowances for exhaustion, wear and tear (including obsolescence) of property.” According to their website, “You begin to depreciate your rental property when you place it in service. You can recover some or all of your original acquisition cost and the cost of improvements by using Form 4562, Depreciation and Amortization, (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make improvements or add furnishings.”

As their name suggests, depreciation losses permit the owners of rental properties to write off the cost of the home over a predetermined period of time. The subject property is essentially a business expense, and therefore can be written off — not unlike your typical business lunch or even office supplies.

It’s worth noting that you can’t write off the entire cost of the property in the same year. Instead, the IRS will spread the deduction out over the predetermined life of the home, which — according to the powers that be — is 27.5 years. That means passive income property owners can deduct a portion of of the cost of the home every year for nearly 28 years.

But what does any of this have to do with those saving for retirement?

While homes may depreciate in value in the eyes of the IRS, properties actually appreciate more often than they depreciate. The loss the I.R.S. accounts for rarely actually occurs. Therefore, it’s entirely possible for some homeowners to take advantage of deductions without their asset actually depreciating. In accounting for a perceived loss in value that rarely actually occurs, homeowners are able to offset many expenses and essentially save a considerable amount of money.

Capitalizing on tax incentives alone won’t pad your retirement savings enough to avoid subsequent strategies altogether, but they are the perfect compliment to any retirement strategy. Saving for retirement will be made that much easier for those that choose real estate over traditional methods. If for nothing else, stock holders are subject to tax consequences in the event they receive dividends from REITs. They will also be required to pay capital gains on any profits they make from selling said assets.

Maintain Control

Unlike the stock options that accompany a traditional 401(k), those saving for retirement with real estate have more control over their assets. For better or for worse, it’s safe to assume you make every decision on a real estate transaction. That means if you want to raise rents, cut costs, find better tenants or whatever the case may be, you have the power to do so. At the very least, managing your own assets gives you more flexibility to maximize your earnings potential.

It’s worth noting, however, that with more power comes more responsibility. It’s not enough to simply control your assets, you have to manage them accordingly. If for nothing else, an investment property is only as good as the person running it. Fortunately, it’s also within your power to educate yourself. Mind due diligence and take the appropriate steps to ensure your asset preforms how it is supposed. In fact, those that take the time to educate themselves before buying into a property are more likely to mitigate risk and maximize profits; how many traditional retirement plans can boast that?

Saving for retirement is a lengthy and drawn out process; a lot can change over the course of a career. And the closer you come to retiring, the more important your decisions will become. You will want to remain flexible to adjust for any unforeseen circumstances that may arise, and real estate gives you the power to do so — at least more so than traditional retirement strategies.

Leverage The Money Of Others

I maintain that leverage is one of the best kept secrets of looking to real estate as a means of saving for retirement. If for nothing else, investing in real estate requires none of your own money up front. In fact, there are plenty of hard money lenders and private money lenders waiting for someone like you to bring them an opportunity to lend. It’s really a win-win scenario for everyone involved: the lender makes interest for doing nothing more than writing a check and the investor is able to capitalize on a deal.

It’s worth noting, however, that when you leverage the money of others, you remain liquid: not all of your capital is tied up in one deal. That means it’s entirely possible to take on another deal, perhaps even two. When you leverage other people’s money, you are not stuck working on one project, and taking on another investment is a very real possibility provided you are minding due diligence. That means you can increase your bottomline exponentially by simply remaining liquid.

Real estate retire

Above all else, remember this: it’s never too early to start saving for retirement. Those intent on investing in real estate should do so sooner rather than later, as the profits can be compounded over time and make achieving your dream of financial freedom a reality.