Is Real Estate Income A Smart Retirement Investment?

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Hunter discussing real estate investments.
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TRANSCRIPT:

Your real estate portfolio is doing spectacular. You’re making hand-over-fist money monthly with no work involved. Picture this: retirement is going great. You live a happy, fulfilled, peaceful life with your spouse, and then you get a phone call at 3:00 a.m. You tell your spouse you’ll be back as you grab your cane and your hand tools and head out the door to go shut off the water main that just broke at your rental property before it’s completely flooded, calling any plumbing shop or rental place along the way, begging them to open their doors and get you a pump.

Hi, I’m Hunter Brockway, founder of Boer Retirement Strategies, here to help set you up for a successful, stress-free retirement while spending more and avoiding being killed in taxes. Today’s topic focuses on the stress-free portion of retirement. When we work with our clients, often the conversation doesn’t revolve around investments; if we even have time to make it to investments, retirement planning requires deeper conversations about what retirement means to you, retiring to something and not from something.

So with that said, if someone said to me that they plan on funding their retirement with real estate rental income, my first question would be, “What are your goals?” Is this something that brings you joy or something that you heard and it sounds like a good idea? If you get joy out of managing property, rentals, tenants, then great, let’s work that into the plan. But if you’re not so sure, then what other reasons would you consider doing that as a strategy?

I’d love to preface this conversation by saying that I’ve personally owned multifamily properties in the past and rented them. In fact, I lived in one of the units while I remodeled it before moving and renting out the entire property, so I’ve been there and done that. Often times when I speak with friends or clients about real estate, they don’t incorporate the cost of operation into their return of monthly rent: interest rates, taxes, possibly utilities, regular maintenance, other repairs like our leaking roof or a busted window which Murphy’s law says is bound to happen, landscape plowing if you live up north, and the list goes on. Those all need to be calculated into your rate of return when considering rental income. You need to incorporate your time spent managing, fixing, and other yearly miscellaneous tasks and headaches that pop up as part of the cost, even if you pay someone else to do the work. Contractors aren’t always sitting by the phone waiting for your phone call to jump into action, and when you do get a good contractor, there is still time spent managing.

So, add up all of your costs and expenses across the year, subtract your costs from your cash flow, divide that by the costs; that’s a quick and simple way to calculate your rate of return on cash flow when initially considering rental income. Keep in mind, this cash flow you receive is likely taxable as well, and unlike your money in a qualified retirement account, you don’t have as much leeway to decide when your money is taxed and how much. Also, consider your legacy goals. If you wish to split your legacy between beneficiaries, how might you accomplish that with real estate? You could put that in a trust to be sold upon your passing and then the proceeds from the sale divvied up, but it is another consideration and something to plan for.

Another question to ponder is diversification. If all of your retirement egg is wrapped up in real estate, you run the risk of poor economies where renters can’t pay or real estate dips. And I understand how the monthly check sounds great, but you can also generate and plan out monthly cash flow from a retirement portfolio of investments. With our guardrails approach to retirement income, we know exactly how much we should be withdrawing from our portfolio, how much of a raise we should take should our portfolio grow, and how much of a cut we should take should we encounter bad markets, and the monthly check from real estate isn’t quite a sure thing.

I had quite a dry spell of vacancies for a while; at one point, I had a fire in my property that displaced everyone. I still had to pay the mortgage while the house was being remodeled but with no cash flow coming in. A proper retirement income plan should be designed to pay you, regardless of markets or where you live or your ability to manage it, like our guardrails and buckets approach designed to secure your retirement income without running out of money even in down markets. Now, I’ve kind of been bashing real estate for a minute, so I’d like to say I think real estate can be a good play, but think it through. Consider all the costs: financial, time, and stress. Your retirement portfolio doesn’t have to necessarily be one or the other; you can also invest in real estate on paper inside your investment accounts. I evaluate paper real estate holdings for many of our clients. In fact, you have more opportunities

to invest in real estate on paper with health care properties, large residential groups, commercial properties, etc. Action items: make sure your retirement income is diversified and working for you, even if you are unable to work. Build a retired life that you enjoy and subscribe to our YouTube channel so that you can stay up to date. I’m Hunter Brockway, founder of Boca Retirement Strategies. If you’d like a personalized retirement income strategy to get the most out of retirement without running out of money, you can book a simple 10-minute phone call on our website at BocaRetirement.com or email us at contact@BocaRetirement.com. We are based in South Florida, Western Massachusetts, and work with clients scattered throughout the U.S. Enjoy your successful retirement, and thank you for watching. Bye.

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