Real estate is a great source of income for retirement. These days, fewer people have pensions they can rely on, social security benefits are expected to be limited, and retirees find themselves returning to work. With some solid planning, real estate can make up for all of these deficiencies.
Methods
Here are some ways you can use real estate to generate income for retirement:
- Rental income: One of the most common ways is to become a landlord. You can purchase separate rental properties or convert your old houses into rentals when you move out of them. As a landlord, you can collect rent from your tenants. This rent can be used to cover all the expenses associated with the property, while leaving some extra in the bank for you every month.
- Cash-out refinances: When you have owned a rental property for a long time, it becomes possible to pull money out with a cash-out refinance. Essentially, you are refinancing your mortgage for more than you currently owe and taking out the difference in cash. The major benefit is that you don’t pay taxes on the money you pull out because it is considered a loan. If the property is expected to continue to generate enough rental income to cover expenses even after the refinance, the money should be free to use with relatively little risk.
- Seller financing: This is an arrangement in which you sell your house to a buyer and allow them to make payments over time. You can live off of the payments, which typically include interest, while spreading out your tax liability.
- Reverse mortgage: A reverse mortgage is a loan that allows you to borrow against the equity in your house. Instead of making payments to the lender, the lender makes payments to you. But, unlike with a traditional mortgage, the amount you owe goes up over time. This method can be a good option for retirees who want to stay in their house but need additional income.
- Sale-leaseback: A sale-leaseback is when you sell your property and then lease it back from the buyer. This gives you access to all of your equity while allowing you to continue living in your house.
- Self-directed IRA: This is a retirement account which you can contribute to regularly, and then use the funds to invest in real estate. Read more here.
- Real estate investment trusts (REITs): REITs are a passive way to invest in real estate. You invest in a fund comprising a portfolio of properties and then receive periodic income distributions based on how well the properties do.
Synergies
Using more than one of the above methods can provide a steady stream of income while giving you options to address unforeseen circumstances and to balance risk. For example, you can use rental properties for income until they build up a significant amount of equity. At that point, you can do cash-out refinances to pull the equity out while still making sure that the properties cash flow. Over time, the monthly income will increase, your equity will increase, and you repeat the cycle. For larger income streams, paid-off rental properties are great. For larger lump sums and reduced risk, selling properties is great.
Many of the above methods require planning, so it is best to learn about them and begin implementing them as early as possible.
If you have some real estate that you want to turn into income, for example via seller financing, reach out to us to see what we can do for you!