How to Use Passive Real Estate to Fund Retirement

 Passive real estate could be used to help fund your retirement years. However, while there are some benefits that come from owning or selling property, there are also risks involved. If you plan to use real estate as part of your retirement income, you’ll want to do your research upfront and have a plan in place before getting started.

Some ways to generate passive real estate income to fund retirement include:

Rent your residence.

Use a self-directed IRA.

Invest in a real estate fund.

Purchase rental property.

Sell properties.

Rent Your Residence

If you purchase a duplex in retirement, you can live in one of the units and rent out the other. This provides an ongoing source of income, provided you have a tenant who stays and pays every month. You will be responsible for taking care of the maintenance and managing the place. Besides a multi-unit complex, you could renovate your home or current property to make part of it into a separate apartment.

For those in retirement who have a main residence and a vacation home, there could be other passive income opportunities. “Recently, we’ve seen more retirees do short-term rentals and Airbnbs,” says Shri Ganeshram, CEO and founder of Awning.com, a real estate brokerage for investors, based in the San Francisco Bay area. They might own two homes, such as one in the north and one in the south. “During the off-season in each place they rent out the home via Airbnb, generating more than enough income to cover the expenses of the home and to fund their travel and retirement,” Ganeshram says.

Use a Self-Directed IRA

Standard traditional and Roth IRAs typically do not allow you to invest in real estate. However, if you open a self-directed IRA, you’ll be able to invest in a broader range of assets, including real estate. A self-directed IRA can be traditional or Roth in nature and arranged so that you pick and manage your own investments. You’ll need a custodian for the account, and there are often additional fees.

If you have extensive knowledge of properties and an investment strategy, you could use a self-directed IRA to put your plan into action. “Using a self-directed IRA to invest in private real estate maximizes compounding because of tax benefits," says David Scherer, co-founder of Origin Investments, a real estate investment firm in Chicago. "Investors distribute gains back to the IRA and reinvest profits on a tax-deferred basis, exponentially increasing the power of compounding and their balance."

Invest in a Real Estate Fund

Real estate investment trusts are companies that own, finance or manage properties. Individuals can purchase shares in the fund and then receive income from their investments.

“REITs, particularly non-listed institutional funds, can provide an attractive mix of lower volatility and steady quarterly income,” says Ryan Shuchman, an investment advisor representative and partner at Cornerstone Financial Services in Southfield, Michigan. “This income can generally range from 5% to 8% annually of the amount invested.”

Investing in a fund like a REIT could bring tax benefits as well. However, there are some drawbacks, including a lack of liquidity. “Depending on the specific investment, there may be requirements to wait, sometimes a month or potentially longer, if you wish to withdraw principal,” Shuchman says. The returns can also vary depending on the type of property. Office buildings could perform differently than medical institutions or industrial areas.

Purchase Rental Property

If you have sufficient funds, you could finance a piece of property and then rent it out. For instance, you might take out a loan to buy an apartment complex. You’ll need to have a down payment and then pay the mortgage each month. When the units have tenants, you’ll be able to collect rent. You could also hire a property manager to help you operate and maintain the place.

“If you make a smart purchase, then hopefully your rental income each month exceeds the cost of the mortgage payment and all monthly expenses and anticipated ongoing estimated periodic repairs and maintenance costs,” says Ryan McClung, a real estate investor, certified public accountant and financial planner in Lake Oswego, Oregon. “This is money that could be used to live on.”

As you pay down the mortgage, your net worth in the property could increase. In addition, over time the property could appreciate in value. However, there are potential drawbacks to consider. “There are a lot of landlord tenant laws, and you need to know and follow them to stay out of trouble,” McClung says. If there are tenants who don’t pay, you could end up losing money.