Daily Gains Letter

Why There’s Life in Real Estate for Retirees

By for Daily Gains Letter | Mar 20, 2013

200313_DL_whitefootIn the aftermath of the housing bubble that ran from 2000–2006, U.S. real estate tanked, plummeting almost 35% percent from its peak levels. If you lived in Florida or Las Vegas, it was even worse.

For retirees looking to supplement their retirement investments, pensions, and Social Security with their real estate holdings, the housing crash was a brutal blow.

Hopefully, times have changed.

After years of holding the economy back, housing has been rebounding on the heels of nearly record-low interest rates, attractive prices, and lower inventory levels. In December 2012, U.S. housing prices rose to their August 2004 level. In January, 2013, sales of new single-family homes climbed to a level not seen for over four years. (Source: “New Residential Sales in January 2013,” U.S. Census Bureau web site, February 26, 2013, last accessed March 19, 2013.)

While the U.S. housing market continues to be one of the few bright spots, thanks to weak underlying economic indicators, the outlook remains uncertain. For a long-term, sustained pickup in housing, the U.S. will have to experience stronger jobs growth, fewer foreclosures, and easier access to credit. So it’s hard to say whether housing is going to move upward, downward, or sideways.

Regardless, the silver lining around the industry means retirees can, for the first time in years, look to their real estate as a legitimate source for additional retirement income. If the increases can be sustained over the long term, retirees could be the ones that benefit the most.

One of the easiest and most obvious ways for retirees to generate additional income is to leverage currently held real estate by renting it out for commercial or residential purposes.

Despite the influx of monthly income, there can be disadvantages to being a landlord, including: increased insurance costs (changing status from “occupant” to “investor”); cleaning, care, and maintenance; and increased taxes on investment properties. Hopefully, the monthly rent offsets any additional costs, but you can never be 100% prepared for the unexpected. Still, if the house is paid off, the idea of becoming a landlord and collecting a steady stream of additional retirement income can be alluring.

If you have enough equity in your home and you want to add to your real estate portfolio, you can always consider leveraging this income into an investment property. Even though the housing market has rebounded, it is still far from having recovered. In fact, it’s possible, depending on where you live, to acquire property that is still significantly undervalued. This means that it’s possible to buy a rental property that could generate near-term income streams and significant medium- and long-term growth.

Before the housing market collapsed, reverse mortgages were increasingly popular among retirees, allowing them to tap into a portion of the home’s equity and receive a lump sum, monthly payment, or line of credit. You don’t need to pay anything back until you move out or die. Your heirs are responsible to repay the bank at that point—which usually comes from the sale of the house.

Nothing is perfect. There are potential drawbacks to a reverse mortgage. The amount you can borrow is based on a number of factors: current interest rates (you can borrow more, when interest rates are lower), home equity, and the age of the younger spouse (the older they are, the more you get). On the other hand, retirees who take out a loan too soon or spend too quickly could end up without a source of income and could lose their homes.

Using real estate as an income stream can be a great way to supplement your retirement cash flow. You just have to decide if you want to use your home equity to build wealth or sustain your standard of living. The question then is: what role does home equity play in your retirement plans?

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