Most often, real estate investors are the ones who think ahead and have a vision for the long term that can recognize the importance of planning for their retirement. They also know that they cannot rely on Social Security for their retirement income. It simply is not sufficient and, by retirement age, who knows how that program will have altered?
Unless you have an superbly generous retirement program, you will need to plan for the long term. You will responsible for your financial freedom in your retirement years. It may turn out that real estate is one of the most excellent ways to plan, for 5 reasons:
1. Tax benefits encourage equity growth. The tax code encourages investors to use real estate to encourage equity growth. The like-kind exchange rule helps investors hold their capital invested and prefer cash flow over capital gains. None of your equity has to be relinquished in the form of taxes. Your rents are further sheltered by depreciation. In comparison with other retirement plans, such as individual retirement accounts (IRAs) and pensions, in which income is taxed as it is withdrawn, real estate is much more flexible, allowing you to borrow based on invested equity and enabling you to manage your capital without the rules of other plans restricting access.
2. You can time your debts. You have several control over the timing of mortgage debt. You can pay off a mortgage in coordination with a planned retirement date, and the longer you have to plan, the easier it is. With mortgage acceleration, you can calculate so far ahead that you can have your debts repaid in the exact year you want to retire. And you do not need to refinance. Simply calculate the payment you have to make each month to prepay your mortgage by the planned date.
3. Real estate values have surpassed inflation. With the exception of a few economic downturns, real estate surpasses inflation most of the time. On average, real estate is certainly ahead of the cost of living. The consistency of the long-term record is reassuring. The historical increase in prices, when compared to other popular ways to invest such as the stock market, has been predictable and stable. Inflation is a force that erodes an investment portfolio's value, often producing losses in real spending power above and beyond after-tax profits. Real estate, with its combined solid market performance and annual tax benefits, overcomes this chronic problem faced by many investors.
4. Real estate is a secure investment. Buying real estate is one of the most secure ways to use and protect your capital. Market and investment risks are slight compared to other long-term investments. Cash flow risks can be mitigated with larger down payments, or through seeking properties that produce positive cash flow. And the higher your tax rate, the better your tax benefit, meaning that after-tax cash flow is affected directly. Real estate is also safe because it can be insured. Homeowner's insurance is not only required, it is one of the ways that your investment is protected from risk.
5. Real estate can be used for retirement housing. Your investment can be maintained over the years with tenants paying your mortgage while you benefit from the annual tax advantages; and then, on retirement, with your mortgage paid off, the same property can be converted to a primary residence. Thus, you can live mortgage-free in your retirement.
You will probably not find any investments offering high safety and low risk that compare with all of the advantages of real estate. This point - valid comparisons of safety and risk - often is overlooked by investors and almost always ignored by financial planners. Whenever you hear the advice to forget about accelerating your mortgage and instead put the money in to some higher-yielding investment, always make sure the comparison is a fair one that includes relative risk levels. Make valid comparison before taking advice.
