How to Include Real Estate in Your Retirement Portfolio

·4 min read

Stock market making you nervous? Depressed by bond prices that, after inflation, offer negative returns? Do Bitcoin and all the other cryptocurrencies seem like financial roller coasters that may or may not be missing a stretch of tracks somewhere in the foggy distance?

You might need a change of pace, or, as financial pros put it, an alternative asset. A great one can be real estate, though no investment is a guarantee at any given time. But the returns on real estate can be strong, and there are different ways to get into it.

If you remember the financial crash of 2008, real estate might seem scary. Prices can get pushed up by factors like high demand and low supply; they can also get a lift from speculation and bubbles—and come crashing down when least expected.

But real estate—including not only houses but also the broad landscape of commercial buildings such as warehouses, medical offices, and more—can be a lot steadier than many people realize.

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Invest in real estate the old-fashioned way.

Traditionally, investing in real estate means buying property—a house, small apartment building, a retail store, restaurant, even a warehouse—and leasing it to someone who needs it.

Deb Cleveland, who has more than 32 years of experience in real estate, is a local scale tycoon. She tried retiring for a year "and thought this was not a good idea for me," she says. "I didn't realize how much I loved it until it was gone."

She started her new career as an empty-nester in a four-bedroom house. "I ended up taking in roommates for four years," Cleveland says. "I attracted awesome tenants. They were professionals;[I] literally rarely saw them because they were so busy." For someone who doesn't mind sharing space with the right person as a tenant, this can be a good way to begin building savings, she says.

Cleveland then began buying homes and flipping them. At one point, she owned 127 rental units, including single-family houses and apartment buildings. After an in-state move to a new town, she started again, and currently has 84 rental units, including 14 single-family houses.

She's made plenty of money and taught a lot of women how to do the same through a program called Small Town Dynasty. The idea is to create a movement to revitalize small towns, buying and flipping homes, one at a time. "There are so many people wanting nice places," Cleveland says.

Of course, there can and will be setbacks, such as bad tenants. Marina Vaamonde, a real estate investor and founder of PropertyCashin, which connects commercial real estate owners with cash buyers, suggests working with a real estate management firm.

"A management company mitigates a lot of potential problems by vetting tenants thoroughly, a task not every landlord is willing to take on," she says. And if there's a problem with a tenant, the eviction process can take nine months or more in some states.

REITs are a great gateway.

If you aren't in the position to buy property, look at real estate investment trusts, or REITs. These companies invest in real estate in various ways: either by owning and leasing out commercial or residential real estate (equity); lending money for mortgages or buying mortgage-backed securities (mortgage); or doing a combination (hybrid). Equity REITs are like stocks, mortgage REITs are similar to bonds, and hybrid REITs are like a combination of both.

One attractive feature is the high dividend potential. Any REIT, by law, must "distribute a minimum of 90% of annual income as dividends," says Robert Johnson, a professor of finance at Creighton University's Heider College of Business. And historically the returns on REITs are roughly like those of the stock market.

"You never get a call in the middle of the night that the roof is leaking or you need a new furnace," Johnson says. "Then there's the expertise factor; I'd be a lousy real estate owner. I'm not handy. There's complexity in taxes. The convenience [of a REIT] to me would be overwhelming."

Plus, REITs usually offer diversification, either across types of properties, geographic areas, or both, "a big advantage over a single piece of property," he says. If you have one or a few properties and something goes wrong with one—a tenant not paying rent or a necessary big repair—the impact on your extra income can be significant. REITs are big enough to have resources for an issue and still many properties left that are generating income.

Finally, REITs are liquid because you can buy or sell shares as you wish—even get into the REIT game through exchange-traded funds, or ETFs, that might own shares in a variety of REITs.

However, you will have homework to do. "REITs range from very risky speculative ventures to relatively low-risk steady income-producing assets," Johnson says. Also, be sure to talk to your financial advisor.

Whether you go the REIT or owner and operator route, real estate isn't a get-rich-quick scheme. "Whoever invests in real estate, it's a long game," Cleveland says. "That's how you're going to make it."

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