Retirement plans look a little different today than they did a few decades ago. It used to be that you could work a simple 9-5 job, retire at 60 or 65 and live off your pension (from stocks, securities and bonds) for the next two or three decades. The global economy, however, has made that a very different prospect. While most pension plans put money into stocks, securities and bonds, today, real estate is an equally good—if not better—solution.
Table of Contents - How to Develop a Pension Plan with Real Estate Investments
- Diversification is key
- An adaptable plan for life’s curveballs
- Long-term investment prospects
- How to make a good investment
- Look for growth potential
- Is Real Estate A Good Investment For Retirement?
Whether you’re a real estate entrepreneur or you’re looking for a creative way to start your own pension plan, real estate investment can provide a steady income stream. If you’re someone with a flexible schedule, capitalizing on real estate rentals is a smart way to make sure you always have cash flow to supplement your lifestyle.
Are you ready to create your own pension plan? Read on for an overview of what it takes.
Diversification is key
Whether you’re just starting out in the working world, or you’re reaching retirement age, you’ll want to make sure that your pension plan is as diversified as possible. The first thing to consider is what kind of benefits you’ve already accrued. Stocks and bonds often make up the bulk of a pension plan or retirement fund, but real estate is becoming increasingly popular. The goal is to invest money in multiple “asset classes,” which can include real estate. Some experts suggest that you invest about 15 to 20 percent of your pension in commercial real estate; whether through public or private market sales.
Public market sales typically mean REITs or real estate investment trusts. Private market sales include direct investments in property, private commingled accounts and some separately managed accounts.
As Investopedia describes, a real estate pension plan’s goal “is to create a portfolio of properties that combine equity appreciation with a rising stream of inflation-adjusted income to balance the ups and downs of the markets.” In other words, if you’re developing your own private market pension plan, you need to pick properties that will earn enough rental income—and appreciate in value—to support you in your dotage.
An adaptable plan for life’s curveballs
Here’s the problem and the benefit of real estate investment: it is a tangible piece of property that you can own, as opposed to stocks and bonds. Since we’ve experienced multiple stock market crashes past the year 2000, many investors are wary of sinking their hard-earned cash into something that they can only comprehend on paper. Real estate investment allows investors to see, visit and touch their property, which goes a long way toward making them feel more secure. Anyone who has watched their $500 turn into $250 on the stock market knows this particular pain. Generally, even when the stock market crashes, real estate retains a good deal of its value—hence the appeal.
However, keep these statistics from Money Sense in mind: “Data from the Canada Real Estate Association show that from 2004 to 2013, the national average appreciation of a home was 5.4 percent per year. The comparable average return from stocks during the same time period was just under 8 percent per annum.” While you might not lose a lot of money like you could with stock investments, you also won’t necessarily hit it big.
If you’re looking to make big money from your pension plan, real estate may or may not be right for you. On the other hand, if you’re looking to diversify your portfolio with an asset that will retain its value over the long term, real estate is an excellent choice.
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Long-term investment prospects
Speaking of the long term, remember that using real estate as your investment plan is a long-term prospect, not a get-rich-quick overnight scheme. You’ll need to tie up a significant chunk of your money in your properties, not to mention the time and money it takes to oversee them and keep them well-maintained.
Being a landlord isn’t for everyone—and there’s no shame in that. If you don’t want to oversee your own property, you can either hire a property manager, which cuts into your investment profits, or you can invest in passive real estate funds like REITs. Whichever you choose, make sure that you’re familiar with
How to make a good investment
Choose a high-value area
Naturally, if you’re trying to make enough money to support your month-to-month living expenses, you need to own a rental property where people actually want to rent a home. In many cases, city centers are prohibitively expensive. Instead, look for suburban growth near major hubs, especially if there’s a burgeoning market where you can get in on the ground floor.
Look for growth potential
Speaking of getting in on the ground floor, growth is key. Major cities like Toronto and Vancouver are always going to be expensive, but think about the areas nearby that are starting to flourish. As more people immigrate to Canada, urban sprawl will continue. Pick a location near a major urban center that’s showing promising growth.
Situate yourself near transit lines and hotspots
When you find the right cities, your next step is to find a property near transit lines, freeways and other hotspots, like hospitals, universities and major industries. People move where the jobs are: make it easy for them to find your property.
Be prepared to make renovations
Sometimes the perfect property isn’t move-in ready. For example, you might want to convert a single-family home into two units or make a multigenerational space for large families. Set aside money in your budget for major renovations—but try to find a property that only requires minor ones, if possible.
Determine where your income will go
If you already have retirement assets and savings available, you might want to cash them out to invest in your real estate property. Just make sure that you have a plan—and plenty of interested tenants at a fair market rate—to support that. Doing the math ahead of time can save you a lot of grief down the road.
Real estate investment can make for a great pension plan if you play your cards right. If you need help, be sure to talk to your trusted real estate mentors, agents and mortgage brokers for help.
Is Real Estate A Good Investment For Retirement?
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