‘It is a diversifier that helps retirement portfolios withstand significant swings in valuation during tough economic times.’
It’s hard to go anywhere these days — a restaurant, the office, a hair salon — without overhearing conversations about real estate. Although the market is adjusting, stories still abound about bidding wars for available homes and the payoffs of investing in commercial real estate.
If you’re putting together a portfolio for retirement, it may be tempting to dip your toe into the world of investment real estate. But if you’re not already a professional investor, should you?
“Real estate should be in all retirement portfolios,” said Ken H. Johnson, a real estate economist at Florida Atlantic University in Boca Raton. “It is a diversifier that helps retirement portfolios withstand significant swings in valuation during tough economic times.”
Johnson said his research found that a mixture of stocks, bonds, and real estate will outperform other portfolios. His optimal mix in a retirement portfolio: 50 percent real estate, 30 percent stock, and 20 percent bonds, a formula he said would be sufficiently diversified to provide stability in retirement.
Yet, according to a survey released in November 2021, just 15 percent of full-time workers the Transamerica Center for Retirement Studies surveyed had real estate other than their primary residence in their retirement portfolio, while 64 percent had money stashed away in bank accounts or CDs.
Not to worry. It’s not too late to start investing in real estate, as opportunities for long-term investors remain available. Here’s what to consider.
· Before investing, determine both your risk tolerance and how hands-on you want to be with respect to your investment. Those who seek passive income with little management responsibilities may want to invest in individual company stocks or real estate investment trusts (REITs), both of which are publicly traded. You can hone either investment based on your favored sector. Bullish on home building? Consider stock in companies like Lennar Corp. or Toll Brothers. A fan of the single-family rental market? Consider Invitation Homes. There are REITs that specialize, too, whether that’s the self-storage sector or triple-net-lease properties, such as freestanding drugstores or fast-food restaurants.
· Invest in what you know, which for most mom-and-pop investors is residential real estate. “When you’re starting out, it’s easier to start with a single-family home or small multifamily building under five units because one of the hardest parts is managing the property,” said Daren Blomquist, vice president of market economics for Auction.com, a platform used by investors. The advantages of investing in residential rental property: passive income, tax benefits, and the opportunity for appreciation. The disadvantages: dealing with tenants and managing and maintaining the buildings. If the thought of getting a phone call at 3 a.m. about a leaky toilet makes you cringe, you might want to avoid residential rentals — or at least hire a manager to oversee the properties. But bear in mind that professional managers, who often charge 10 percent of your rent, will cut into your cash flow.
· More sophisticated investors seeking diversification may want to consider other types of commercial real estate. Industrial property, such as self-storage facilities and warehouses, is a sector that’s benefiting from economic trends, such as e-commerce. According to a first quarter report the National Association of Realtors released in May, the industrial vacancy rate in the Boston metro area was 3.9 percent, compared with 4.1 percent nationally, with rents up 10.5 percent in the period. Medical office buildings are also a relatively stable investment because these properties often have long-term leases and creditworthy tenants, an attractive combination for a landlord.
· Those seeking alternative investments with perhaps a higher return might consider buying distressed homes, rehabbing them, and then either flipping or leasing them. Blomquist said distressed Boston homes listed on Auction.com usually sell for 63 percent of the market value of the properties. “They typically need work, so that’s not recommended for everybody, but buying distressed can accelerate your profits,” he said.
Morgan Franklin, a real estate agent with Coldwell Banker Global Luxury in Boston, said he’s seeing a lot of investors buying parking spaces, which he said can go for more than $400,000 in Beacon Hill and Back Bay and may generate up to $650 a month in rental income. “Parking is worth as much as gold in Boston,” Franklin said. “There’s very little upkeep on it, and the expenses are low. It’s a very safe investment.”
Whatever you decide, be sure to do your due diligence, brush up on the financial principles that govern real estate transactions (do you know how to calculate NOI or cap rate?), and consult your financial adviser to confirm that your potential investment will provide you with the tax benefits and returns best for you.
Robyn A. Friedman has been writing about real estate and the home market for more than two decades. Follow her @robynafriedman. Send comments to [email protected].
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