Unlock Steady Retirement Income: Top Real Estate Investment Spots Revealed

Fact checked by Vikki VelasquezReviewed by Andrew SchmidtFact checked by Vikki VelasquezReviewed by Andrew Schmidt

Real estate can be an important part of a retirement portfolio, both for its potential to generate income and because it offers portfolio diversification. However, investing in real estate for retirement also carries other considerations, which will vary depending on how and where you choose to invest. 

For instance, if you choose to purchase a rental property, you will be responsible for taxes and maintenance costs, while if you opt for a real estate investment trust (REIT), you will need to consider market fluctuations and potentially complex tax treatments.  We’ll look at various ways of investing in real estate for retirement income and discuss the risks and benefits. 

Key Takeaways

• Real estate can offer retirement savings benefits, including passive income and diversification.
• Understanding risk tolerance and retirement goals is crucial before investing in real estate.
• There are various strategies for real estate investment, each with its own set of considerations.
• Geographic location and tax implications play a significant role in real estate investment success.

Where To Invest in Real Estate

A recent Southern Living survey found that 58% of those looking to retire prefer living near the beach, while 35% prefer a small city. While this data may fit nicely into an ideal vision for retirement life, successfully investing in a property for retirement income might look completely different.

A common type of income-generating property is residential, including apartments, condos, townhouses, and ranches. Real estate investors should not overlook business properties, too. These include commercial spaces, mixed developments, retail centers, warehouses, and technology parks.

Depending on the capital or borrowing power available to an investor, some options may be more suitable. Additionally, each location offers unique opportunities and challenges, so understanding local market dynamics, economic trends, and regulatory environments is crucial for successful real estate investments.

Urban Areas

The Census Bureau defines urban areas as densely developed territory with at least 2,000 housing units or a population of at least 5,000 people. Urban areas can include residential and commercial properties, as well as non-residential urban lands, such as parks. 

Popular investment properties in urban areas include residential apartments and condos, dedicated commercial spaces, and mixed-use developments comprising a combination of housing, retail, office, medical, or other spaces. Ursula Rouse, a Realtor at Compass in Greater Philadelphia, said that “inventory is higher and homes are sitting for longer in many urban markets,” making them a prime opportunity for investors.

El Paso, Texas, is an example of an urban area popular among investors looking to protect retirement income. El Paso has a population approaching 900,000, placing it in the top 25 U.S. cities. A combination of rapid growth, increased demand for housing and new commercial offerings, and comparably modest prices make El Paso a strong choice for urban real estate investors. 

Suburban Areas

Suburban areas are close to urban centers while also being less dense and skewed toward residential properties. Consequently, popular types of investment properties in suburbs include single-family homes, townhouses, and retail centers.

Popular suburbs for real estate investment include areas within commuting distance of cities like Phoenix, Boise, and Kansas City. These and other suburban areas offer a mixture of strong demand and, in some cases, low property upkeep costs. On the other hand, Rouse pointed out that many suburban real estate markets are at all-time highs.

Rural Areas

Rural properties are those that are not considered to be within an urban area. With more open space and fewer developments, rural properties, including farmland, vacation rentals, and ranches, may have lower prices than their urban counterparts. However, they may have increased maintenance requirements and may be less popular among renters.

Rural areas exist throughout the country and include small towns such as Coos Bay, Oregon, as well as some housing subdivisions, and remote areas.

Industrial Zones

Industrial areas are those set aside through zoning for industrial applications such as warehouses or manufacturing facilities. Investing in these properties may require specific knowledge of the tenants or industries involved. A popular area for industrial real estate investment is Fairfield, Connecticut.

Special Economic Zones

Special economic zones are designated areas with unique economic regulations designed to facilitate rapid growth and direct investment. Some examples include free trade zones and technology parks, such as those found within New Jersey’s Urban Enterprise Zone program. While there are regulatory incentives to doing business in these spaces, investing in them will require additional knowledge about these regulations.

Tax Implications and Benefits To Consider

Property Taxes

Property taxes vary widely based on location and should always be a factor when looking at different areas for a potential real estate investment. At the same time, higher property taxes may reduce net rental income.

Note

Property taxes are deductible in some cases.

Income Taxes

David Flores Wilson, CFP, CFA, Managing Partner of Sincerus Advisory, points to a host of tax benefits for real estate investors. “Most real estate income goes on Schedule E, which isn’t subject to payroll taxes,” he said. Expenses, including insurance costs, repairs, and homeowners association fees, “become deductible when owning a real estate investment property,” he added.

Deduction of depreciation of the property against real estate income is another benefit. Wilson notes that investors may target shorter depreciation periods and, in turn, bigger upfront deductions. Further, depreciation is “recaptured” when the property is sold, incentivizing a longer time horizon for ownership. Wilson adds that “investors may even want to consider passing real estate to the next generation…as inherited property avoids depreciation recapture and capital gains taxes.”

Many real estate investors can also see tax benefits when selling real estate. However, tax laws differ on how losses from real estate can be used to offset other income depending on whether the investor is considered actively or passively involved.

How To Invest in Real Estate for Retirement Income

Rental Properties

As the owner of a rental property, you have control over the usage and rental of that space. On the other hand, you must familiarize yourself with appropriate real estate law when interacting with tenants, and the responsibility to maintain the property falls on you.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are publicly traded companies investing collectively in real estate, providing investors with access to the space without the obligation to fully fund a real estate purchase or take care of upkeep, taxes, and other considerations.

Real Estate ETFs

ETFs trade throughout the day like stocks and offer investors a simpler way to access real estate. They address risk by focusing on a broader section of the market than would be available to most investors. Steve O. Oniya, CFP, ChFC, MBA, Chief Investment Officer of OM Investments in Houston, pointed to tax benefits for real estate ETFs, including “less of a hit from property taxes” and deduction opportunities on losses.

Real Estate Crowdfunding

Real estate crowdfunding platforms allow investors to contribute toward real estate investments in the hopes of benefiting from passive income or capital appreciation. Like ETFs and REITs, these platforms remove barriers, including management responsibilities.

Fix-and-Flip Properties

Flipping properties entails buying a property in need of repair, making necessary renovations, and then reselling at a higher price. A benefit of this approach is the potential for significant profit in a short timeframe. However, flipping properties is inherently risky and requires significant capital to buy a property and complete renovations, know-how, and manual labor. 

Vacation Rentals

Some individuals approaching retirement may own vacation homes that they do not use all of the time. These properties may be rented out when not in use for additional income. Considerations such as upkeep and cleaning remain a factor in these cases. However, losses may sometimes be written off against rental income from other properties.

Real Estate Partnerships

Real estate partnerships allow groups of investors to pool money toward a property investment. Partnerships represent a pass-through, in which income is reported by the partners separately. Additionally, partnerships provide the benefit of distributed liability, with a general partner accepting primary liability and other partners only carrying liability related to their contributions.

Real Estate Notes

Real estate notes, also known as mortgage notes, are legal documents representing the debt owed on a property. They can be traded, allowing a new owner to collect payments. These notes provide stable, predictable passive income opportunities related to real estate without the investor needing to buy real estate directly.

What Is the Most Popular US State for Real Estate Investing?

One of the most popular states for real estate investing is Florida, where properties offer high returns on investment and demand, and several parts of the state are growing rapidly. Florida also has no individual income tax. On the other hand, the risk of adverse weather events is high.

What Percentage of My Portfolio Should Be Allocated To Real Estate?

There is no single answer to this question, although a common range of total net worth dedicated to real estate, including your home, is 25% to 40%.

How Can Retirees Manage Real Estate Investments if They Are Not Physically Close to the Properties?

A common way for landlords to manage rental properties from afar is to hire a property manager. This removes the need to be on-site to perform maintenance, though it can reduce profits due to additional expenses.

Can a Retiree Secure a Loan To Buy an Investment Property?

Yes. Still, investors may find it more difficult to secure a loan without a regular income source. It may be beneficial to secure a loan and invest in a property prior to retirement when possible.

What Are the Risks of Real Estate Investing for Retirement Income?

Real estate is an unpredictable market, particularly for those new to the space. Vacancies, poor location choice, property damage, unfavorable tax scenarios, and shifts in the market are all potential risks.

The Bottom Line

Investors might divert some of their assets from stocks and bonds to real estate to generate retirement income, diversify a portfolio, gain passive income, reap tax benefits, and more. Still, real estate markets can be fiercely competitive, and participating often requires knowledge of tax implications, capital up front, and maintenance and management work. Ultimately, deciding to invest in real estate may come down to finding the right location.

Read the original article on Investopedia.