Real Estate Instead of a Traditional Retirement Plan?
People normally think of IRAs or 401ks when they are considering their retirement plan. However, for many people, real estate has long been a component of their post-work plan. Why? Simple. There’s a lot of money to be made in real estate, it adds another layer of diversity to an investment portfolio, and it’s flexible enough to allow investors to be as active or as passive as they like.
But can real estate replace a traditional retirement plan?
That’s the question I’m going to answer today. And the short answer is, yes, I suppose for some, it could. But I wouldn’t recommend it. Here’s why:
One of the most important features of any good retirement plan is that diversity I mentioned earlier. That saying “don’t put all your eggs in one basket” certainly applies here. If you depend solely on real estate investment to fund your retirement years, you’re taking an unnecessary risk. Real estate can – and will, if you do it right – make you a lot of money. But it’s never a good idea to rely on a single asset type. Including other assets, such as stocks, bonds, or mutual funds, reduces your risk and vulnerability to market fluctuations. Just ask anyone who was heavily invested in real estate in about 2008 or so. When the housing bubble burst, those folks suffered major losses, especially those who had everything tied up in real estate.
Another factor to consider is liquidity, or rather, the lack thereof with real estate. It’s always good to have some liquid reserves in your retirement plan, and real estate is far less liquid than other types of assets. Depending on the market you’re invested in, along with other factors such as the condition of your property, it can be difficult and time-consuming to unload a property when you need to. Real estate’s lack of liquidity can pose problems, and highlights another reason why it’s unwise to rely on real estate alone for your retirement plan.
Finally, investing in real estate is a big commitment, and it’s one that takes time, patience, and skill, especially if you’re using a buy-and-hold strategy. Most people who invest in properties don’t make their money all at once, or really quickly. Sure, there are some house flippers out there who can net thousands in a just a few weeks’ time, but this doesn’t represent the average investor. Instead, the average investor is focused on regular, sustained cash flow, and hoping for a nicely appreciated property when they’re ready to sell. Over the course of their ownership, they’ll encounter problems and expenses, along with plenty of hard work. It’s true that you can hire a property manager and thus be involved very little with the day-to-day operations of your property, but at the end of the day, you’re still the owner and you’re still responsible.
Don’t get me wrong. I love real estate, and it’s my favorite type of investment by far. But it’s naive to think that investing in real estate alone can sustain your later years. It’s much smarter to include a variety of asset types that will ultimately reduce your risk and, hopefully, pay off handsomely so you can enjoy your retirement to the fullest.