Should You Add Real Estate to Your Retirement Portfolio?

Whether it’s a physical property like an apartment building or an investment in a real estate fund or mutual fund, many financial planning experts say that high-yielding real estate is an essential part of a well-functioning retirement portfolio. However, while 75% of retirees have their money parked in bank accounts or CDs, only 12% own real estate other than their primary residence for investment, according to a survey by the Transamerica Center for Retirement Studies between November 2020 and December 2020.

“In our research, we found that portfolios with a mix of stocks, bonds, and real estate outperform other portfolios,” said Ken. H. Johnson, Ph.D., Florida Atlantic University real estate economist. “You get a better risk-return profile by owning real estate.”

Dr. Johnson said the “optimal mix” in a portfolio is 50% real estate, 30% stocks, and 20% bonds. That formula, he said, would be seen as diversified enough to ensure stability in retirement. The real estate component can include your personal home, investment property, or a mix of both.

But what kind of real estate? And should you be investing directly in income generating hard assets like residential or commercial real estate, or making more passive investments like a REIT by buying publicly traded stocks or investing in a mutual fund?

Joe Pelayo, a Fort Lauderdale commercial real estate agent who works with retail investors, recommends warehouse properties to clients looking to invest for retirement as these typically require little active management. Similarly, medical buildings have long-term tenants and often have triple net leases where the tenants pay the expenses and take on the administrative duties of the building. Housing investments require more work.

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“When you invest in residential real estate, you need to have some management skills,” said Pelayo. “But with commercial real estate, the leases are long – five to ten years – so you don’t have to look for a new tenant every year or two.”

Despite the challenges, many retirees are investing in residential property, for example in single-family houses.

Jim Cheeks has been a construction worker in Atlanta for about 20 years and has always sold what he built. But he realized about five years ago that this was not the way to build long-term retirement wealth. For example, Mr. Cheeks, 53, now keeps about 25% of what he builds as a rental property. His goal is to have a portfolio of investment properties in retirement. This portfolio currently consists of eight apartments that he rents out, but expects to own 29 within a year. His investments vary, but a typical three-unit property – a maisonette and an annex – brings in about $ 8,000 a month in rental income, which he believes is an “above average” return on its investment.

One of Jim Cheeks’ investment properties, a maisonette with an additional residential unit.

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At 28, Josh Pankratz shares the same investment strategy as Mr. Cheeks. Mr. Pankratz, a medical sales rep from Hattiesburg, Miss., Bought his first investment property in 2018 and currently owns two three bedroom, two bath houses that he rents out. Each provides rental income of approximately $ 1,500 per month.

“I didn’t want my money in a bank account to stagnate and not grow,” he said. “I have a 401 (k) and a Roth IRA, but real estate diversifies your risk as people need a place to live even in times of crisis. And it not only offers cash flow, but is an appreciative asset. “

But real estate is not an investment for every retiree. Single-family homes, for example, require active management. And which pensioner would like to be woken up in the middle of the night by a tenant who tells them that their toilet is leaking?

A three bedroom, two bath home in Memphis owned by Josh Pankratz. It rents for $ 1,500 a month.

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Josh Pankratz

You can avoid this hassle by hiring a property manager. This will certainly reduce your return on the property, but many investors consider the costs – which vary depending on the market, but usually the first month’s rent plus 10% of the monthly rent thereafter – to be worthwhile, especially since the management company will also find and examine future tenants .

Here are some things to keep in mind when considering adding income generating real estate to your retirement portfolio.

Consider secondary, less expensive real estate markets. It can be tempting to buy investment properties near where you live to keep a close eye on them. But depending on where you live, real estate can be so expensive that the return is low. Mr Pelayo said investors from New York, Chicago and California are flocking to South Florida, pushing prices up and yields down. He recommends looking in less expensive markets to maximize returns. Jacqueline Ready, broker at Berkshire Hathaway HomeServices Panoramic Properties in Biloxi, Miss., Said she frequently works with overseas investors looking for real estate for their retirement portfolios. “You can take your portfolio in Arizona, liquidate it, and buy two or three times as much property in South Mississippi,” she said. “Your money goes much further in the smaller markets, not just for the property itself, but also for maintenance, improvements and management fees.”

Diversify both product type and geographic area. “A diversified portfolio will more smoothly weather the ups and downs that occur during the economic cycle,” said Michael Silver, a certified financial planner based in Boca Raton, Florida. “If you invest in all asset classes – stocks, bonds, real assets, and cash or cash equivalents – some of them will zigzag while others will zigzag and you will get a more consistent, stable, and predictable return over time.” Investors should also diversify geographically and not concentrate assets on a single market. “Commercial real estate can be risky, especially if you are only looking in one geographic area,” said Jamie Hopkins, managing director, Wealth Solutions at Carson Group, a national wealth management and coaching company.

Learn the language. While investors should always rely on professionals to pre-screen their deals – including lawyers and accountants who can check the numbers and confirm that the property’s return on property is what was advertised – you know commercial property only is about numbers. And to understand the numbers, you need to master the jargon, i.e. brush up on the formulas for NOI (Net Operating Income), cap rates and other applicable funding terms.

If you pick just a few stocks to add to your entire portfolio, then don’t invest – you trade. WSJ’s Telis demos explain the benefits of diversifying your investment portfolio. Photo: story blocks

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