Investing in real estate syndications, such as multifamily assets, hotels, or self-storage, can be an attractive option for retirement income.
Real estate syndications allow investors to pool their money to purchase and manage larger real estate properties that might otherwise be out of reach for individual investors. However, investing in real estate syndications also comes with unique benefits and challenges that investors must consider when planning for retirement spending.
In this article, we'll discuss how to retire with investments in real estate syndications including:
What types of income are typically used in retirement?
How to select a deal for retirement income?
How to leverage real estate syndications in retirement?
Why is it important to create an exit strategy for real estate investments in retirement?
Types of Income In Retirement
Real estate syndications are just one type of income-producing asset that investors can use to fund their retirement spending. Other common sources of retirement income include Social Security benefits, pensions, annuities, and retirement accounts.
Of course, no one can be sure if Social Security will be available when they need it. Pensions and annuities are nearly a historical concept, and retirement accounts require contribution throughout the life of a retiree.
When creating a retirement income plan, investors should consider how to create a diversified mix of income-producing assets that can provide reliable income during retirement. Additionally, investors should consider their risk tolerance and investment goals to create a retirement income plan that aligns with their needs.
How to Select a Deal For Retirement Income
Real estate syndications offer different types of cash flow for investors, such as preferred returns and equity appreciation. Preferred returns provide a fixed return on investment that is paid out to investors before any other distribution. Equity appreciation provides potential returns based on the property's appreciation over time.
However, all preferred returns are not created equal. Depending on where an investor sits in the capital stack, they may not be the first to receive cash flow distributions. Retirees may prefer to sit first in the capital stack, which often gets paid out first.
The capital stack, or structure of the deal, may also provide for an investor class with a higher preferred return but a lower split of the sale profits. This can be appealing for retirees who value income now and not potential for future appreciation.
When planning for retirement spending, investors should consider their cash flow or income needs and risk tolerance to determine which type of real estate syndication investment is best for them. Additionally, investors should assess the risk and potential return of different types of real estate syndications to ensure they are investing in properties that align with their investment goals.
Which Real Estate Investments to Leverage First in Retirement
When it comes to real estate investments and retirement, it's critical to have a diversified portfolio. This means owning a variety of investments or assets with different income potentials, appreciation potentials, and levels of liquidity.
A diversified portfolio will decrease the risk of a single market factor changing the value of your entire retirement savings. If one asset is outperforming others, then you have the flexibility to allow other assets time to build equity and provide a return.
When planning for retirement spending, it's important to assess which real estate investments to leverage first. In general, it's a good idea to sell properties that are less liquid or have lower income potential. For example, if you own rental properties, you may want to sell properties that have high maintenance costs or low occupancy rates. On the other hand, if you own commercial properties, you may want to sell properties that have low rental rates or are in areas with declining property values.
With a portfolio of real estate syndications, retirees may begin to reposition their capital to assets that cash-flow from day 1 or have a shorter projected hold time such that they can redeploy or use that capital for their daily expenses.
Creating An Exit Strategy For Real Estate Investments in Retirement
When investing in real estate syndications during retirement, it is important to look for a well-defined exit strategy. An exit strategy is a plan for how and when the operator team plans to sell or refinance an investment.
This can be important in a changing market or when an investor needs to access cash for retirement expenses. Evaluating different exit strategies can be based on the current market conditions, investment goals, and the expected returns.
Retirees should look at the projected hold time and exit strategy presented in the investment offering summaries of potential deals. If a deal has a longer hold time, or a poorly defined exit, then the deal may not suit a retiree who may not be able to use the sale proceeds in the longer time frame.
Conclusion
Ultimately, the key to a successful retirement income strategy is to have a diversified portfolio that includes a mix of income-producing assets. This can help ensure a steady stream of income throughout retirement, while also minimizing risk and protecting against inflation.
It's important to work with seasoned sponsorship teams with a proven track record when evaluating real estate syndications. Additionally, legal and tax professionals can support an investor in developing a retirement income plan that is tailored to their unique needs and goals.