We have all heard it before: real estate is a great wealth building vehicle. Few platforms, if any, offer savvy investors so much upside while simultaneously mitigating risk. And it’s that same potential that has encouraged many investors, not unlike yourself, to look to real estate as a viable retirement vehicle. Why wouldn’t they? Real estate is entirely capable of supplementing some rather comfortable golden years, provided the right steps are taken and the appropriate systems are followed. That said, nothing is more important to investors looking to pad their coffers than a diversified retirement portfolio.
I maintain that the best way to build wealth for retirement is to diversify your retirement portfolio. The proper aggregation of assets can simultaneously increase your bottomline and reduce your risk exposure; two things you must prioritize the closer you get to retirement. Consequently, younger individuals can increase their exposure to riskier investments because they have the time to make up for any setbacks. Those on the verge of retiring, however, aren’t awarded the same luxury. That said, the closer you get to retirement, the less risk you will want to take. That’s why I highly recommend a diversified retirement portfolio.
That’s not to say you shouldn’t strive to find and take advantage of a budding opportunity. It is, in fact, entirely possible for a single investment to result in a very respectable retirement fund. Just ask those who invested in Apple just after the turn of the century. While risky at the time, a mere $100 investment in the innovative tech company back in 2002 would have turned into $5,000 as recently as last year; that’s about fifty times the original investment. Now, consider what your retirement fund might look like if you put in a modest $10,000. You could be looking at upwards of $500,000 without so much as lifting a finger; not a bad if you ask me.
It’s worth noting, however, that investment opportunities like Apple are generally considered the exception, not the rule. So while you can certainly make an argument that it’s possible for one investment opportunity to supplement your golden years, I would advise against it. If for nothing else, saving for retirement has more to do with diversifying your portfolio than putting all of your proverbial eggs in one basket. Remember a diversified retirement portfolio is less susceptible to risk, which is what those looking retirement square in the eyes should prioritize.
While everyone has their own opinion on building wealth for retirement, general consensus suggests that a diversified retirement portfolio is the safest, most dependable option. But what does a properly diversified retirement portfolio really look like? What should you be investing in if you want to see to it that your golden years are as comfortable as you would like them to be?
Fortunately, the answer isn’t as intimidating as many would assume. And to make a relatively complex topic a little more digestible, let’s break down two of the investment options a properly diversified retirement portfolio needs to have.
1. Rental Property
Rental properties, otherwise known as buy and hold assets, are exactly what their names suggest: properties from which the owner receives payment from occupants (tenants) in return for occupying or using the property. It’s worth noting, however, that rental properties are more than a way to make money from month to month; with a property management company they can turn into the ultimate wealth building assets. With a competent property management company on your side, rental properties actually help homeowners two-fold: they allow owners to pay down mortgages with tenants’ money and collect rent passively. With the right pieces in place and a little work upfront, it’s conceivable to collect rent checks without lifting a finger. At the very least, a truly great property management company will take care of everything from finding tenants to collecting rent. Sure you might need to intervene every now and then, but the proceeds from a good rental property can be almost entirely passive.
Of course, most of the rent you receive will go towards the mortgage for the duration of the loan, but you are essentially building equity with little to no money out of your own pocket. What’s more, all of that rental income will be yours to keep once the mortgage is paid in full. Now, there will be some expenses to account or like maintenance, HOA fees and miscellaneous expenditures, but — for the most part — you will be able to keep most of the money that comes your way. Better yet, that money will be made passively if you hire a property management company. And, last but not least, the presence of a property management company makes it possible to acquire more than one property. With their help, you could implement the same passive strategy for multiple properties (all without having to act as a landlord).
By the time you retire (provided your mortgages have been paid in full), there is no reason to believe those properties won’t continue to produce cash flow to supplement your golden years.
What is a properly diversified rental portfolio if not for diverse? That said, a diversified retirement portfolio must consist of more than rental properties. And, as far as I am concerned, nothing compliments a rental portfolio quite like real estate investment trusts (REITs). For those of you less familiar with this particular investment vehicle, a real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. It’s also worth noting that their designation as an REIT means they are publicly traded on major market indices like the New York Stock Exchange.
Or, perhaps more specifically, REITs resemble something more people are familiar with: mutual funds. According to REIT.com, they “provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.”
Not unlike their rental property counterparts, REITs offer investors long-term benefits. It’s worth noting, however, that the benefits associated with REITs aren’t exactly the same as rental properties. Whereas rental properties result in direct cash flow, REITs offer something unique: a hedge against inflation and dividend yields.
Dividend yields are simple to comprehend and understand; they are a lot like returns in the stock market. However, those looking to pad their retirement coffers may be more interested in hedging against inflation. And since rents and values tend to increase when prices do, REITs can do just that. When rents and home values increase, REITs tend to gain more value. As REIT.com so eloquently puts it, “REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last twenty years.” What’s not to like?
I want to make it abundantly clear: it’s never too late to start saving for retirement. It’s worth noting, however, that the sooner you can start, the better. Rental properties, in particular, offer savvy investors who start early a great opportunity to not only compliment their diversified retirement portfolio, but pad their retirement coffers with one of the best cash flowing investment opportunities out there. REITs, on the other hand, are a great way to hedge against the inflation that is likely to occur over between now and the time you do in fact retire.