Advantages of Using Real Estate to Accumulate Retirement Wealth

Traditional Wealth Building Vehicles

The two traditional vehicles Americans use to develop retirement wealth are real estate and the stock market. Most financial advisors suggest having 50% of your assets in each in order to be adequately diversified. Rarely are both the stock market and real estate down at the same time.

Advantages of Real Estate Investments

Real estate provides advantages over the stock market because many factors that affect real estate values are more easily understood and controlled, for example location and highest and best use.

Advantages of 1031 Exchanges over IRA's and 401k's

The advantages of investing in real estate are even greater when 1031 exchanges are used. Like-kind 1031 exchanges are the "IRA/401k" for real estate investments - only better!

1031 exchanges have fewer restrictions.
More flexibility - buy and sell as you please and you make the decisions, rather than a fund manager.
Capital gains tax can be tax deferred.
You can "cash out" your investments at any age without a penalty. For example, if you do a 1031 exchange and want to set aside $10,000 for your daughter's wedding it's not subject to an early withdrawal penalty, as with an IRA. You simply pay capital gains tax on the money you take out.
You can enjoy your wealth before you reach age 70.
The top tax rate on property gains is lower than the top income tax rates on money taken out of an IRA or 401k.

Gifting

Few ordinary Americans take advantage of gifting as part of their estate planning. Gifting has wonderful tax benefits. As long as you stay within the annual limit, you can move real estate equity year by year to your kids with NO tax liability. The annual limit is $11,000 of equity value to each of your children, each of their spouses and your grandchildren. This is generally done using a quit claim process. But it's like flossing your teeth...you can't floss for three hours before your annual dental appointment to catch up. A little every year is best. Make use of the excellent tax advantages gifting offers.

The 5-3-5-15 Real Estate Investment Plan

Most real estate investors start with a hands-on, leaky toilette rental when they're young and willing to do whatever it takes. The only problem is you can't manage and maintain much more than five properties without help. Have you heard of the 5-3-5-15 Plan? Some people call it the simplest retirement plan in real estate: buy five three-bedroom houses, all within five miles of where you live, hold them 15 years before the date you want to retire. Why three bedrooms? They're often the most rentable, stable and easy to sell for the highest price later. They'll rent for $1,500 a month today. Five of them create $7,500 a month (or $90k annually). Why 5 miles? So they are easy to manage yourself. Why 15 years? Because if you keep the rents at market value and put all rental increase dollars over expenses towards the principal on the mortgages, they'll be free and clear in 15 years. Then all the rent will be yours plus the equity. It's a plan to begin with. Having a workable plan is important. It can always be changed.

When you're closer to retirement you probably won't want to manage five houses - you'll want to be in Arizona six months of the year. Now what? When you started buying the rental houses, Arizona wasn't even on the radar screen. Life changes. Just like the stock market, when successful stock investors retire they elect to move their money into something safe and secure, like Treasury Bills or municipal bonds. Real estate offers similar secure investments. Most Blue Chip companies we might pick to buy stock in are also somebody's tenants. The buildings they rent are owned by real estate investors. Today there are an array of institutional properties offered by sponsors as securities. You can sell your five rental houses on a 1031 exchange and purchase a percentage deeded interest in these properties. These properties are well managed and provide a nice secure 10 to 20 percent return. Properly structured, this type of financial investment qualifies for a 1031 exchange. Imagine owning 10% of a property with a Safeway store as the anchor tenant. They have a 30 year lease with rent increases scheduled each year and they pay all the expenses on a NNN (Triple-net-lease). Every month you get a check for your share. Read about Marvin's experience.

Prime Time Investing

When Microsoft is down it is down all over the county. But real estate can be appreciating rapidly in several areas of the country while other areas are stagnating. In any ten year period of owning a property there is usually a two year period when it did 90% of its total appreciation. Many successful investors use the 1031 exchange process to move their investment dollars to higher appreciating areas every few years.

All communities repeat the same cycles: appreciation, expansion, over expansion, decline high vacancies, and then recovery. Watch for recovery but don't buy until there is clear evidence that the appreciation cycle is underway (new building permits being issued, rents going up, new employment in the area).

Most investors restrict themselves by insisting on managing their own property. Good local, professionally contracted property management can make it possible to buy outside ones' management area in a community that is appreciating where rental apartments might be selling at $40,000 a unit and renting for $500 a month. This is better than buying at $100,000 a unit and renting it for $700 a month.

Path of Progress Investing

This strategy involves doing research to learn in what direction a community is growing, where the next freeway interchange will be built and buying raw land out past the current appreciation area and waiting for the community to grow in your direction and then sell via a 1031 exchange and repeat the process.

A Goal to Consider

During your working years build up to the point of generating half your annual income from NON work activities. When you reach retirement you'll already have half of your income in place. Real estate is a proven path to wealth.