Real Estate Income in Retirement

There are many different ways you can support yourself in retirement, and one method is to own real estate that generates a steady stream of income.

A lot of people are wary of investing in the stock market due to the volatility of the last few years, and the same individuals may be reluctant to put their money into bonds due to existing low yields. In such a market, these people are looking to alternative investments, like real estate, to generate returns.

If you take the right steps when investing in real estate, you have the potential to generate substantial passive income. In a recent Gallup poll of 344 retired people, 19 percent indicated that they received some money from rental properties or similar types of retirement income.

This strategy looks appealing because rents don't seem to be getting lower. In fact, many market experts have predicted strong inflation in rental costs as a result of significant decreases in home ownership rates.

Pros and Cons

It is possible to use real estate to generate consistent income, but doing so will require due diligence on your part. Real estate prices have declined substantially in the last five or six years, and mortgage rates are also hovering around all-time lows. If you take the time to do your homework, you may be able to find an investment that will appreciate over time and provide significant rental income during retirement.

It is important to note that the current real estate market is much different than during the peak of the real estate bubble. Purchasing property that you don’t plan on inhabiting, or making ‘fast money’ through a buy and flip system, may require more effort than during the housing boom.

Given the current environment of low prices, however, it is still possible for you to generate steady cash flow through effective property management. Doing this could lead to more responsibility and commitment if you decide to take on the role of landlord, however, many retirees hire property managers to take care of any issues that may arise.

A large perk of owning real estate is that the federal government provides homeowners with tax incentives. Depreciation tax deductions allow you to offset gains with losses caused by wear and tear on your property. You can also utilize losses created by depreciation to offset other compensation you have. We encourage you to discuss this and other tax advantages of owning rental property with an accountant.

Self-Directed IRA Use

You can use a self-directed IRA to purchase real estate, which will provide tax benefits on the rental income created by the tenants. For as long as the self-directed, tax-advantaged savings account owns the property, the IRA will need to pay all expenses and collect all rental income.

If the house is financed using a mortgage, collecting rent in the IRA could generate unrelated business income tax liability. It is important to consult the right professionals if you want to invest in this way.