Passive Real Estate Options in Retirement

Real estate can be a great investment. Most real estate investments increase in value, especially over a longer period of time, and owning a property and renting it out can bring you regular income. However, managing the property can be stressful and time consuming. 

You need to find tenants and manage these relationships, you need to make sure that you’re keeping up with property maintenance and repairs, and you need to deal with potential unexpected costs. A lot of the time, these aspects of real estate investment aren’t a big deal when you’re young. You’re used to running around, making decisions, and getting things done despite a busy schedule. However, as you age, you may want to slow down.

You might be looking for something more passive because you no longer have the energy or the desire to be directly involved in every part of the real estate management process. This could be because you no longer have the energy, because you’re out of the working world so you’re not interested in staying as busy, or because you’d rather devote your retirement years to something else. Whatever the reason, there’s often a time in life when people look to transition into passive real estate options. 

Understanding Passive Property Management

Being an active property investor is what you probably think of when you think of owning a property and renting it out. You’re responsible for maintaining the property, finding tenants, ensuring that they’re paying on time, and handling legal compliance and anything else required. Property upkeep, emergency maintenance calls, and even dealing with difficult tenants can take up a lot of your time. It can often feel like a second job. Once you’ve left the working world, you may not be interested in this financial and physical stress.

An option for passive investment could be working with a property management company. Professional property management lets you keep the properties you already have, but it cuts down on the amount of management required. You work with a management company, and they become responsible for the daily operations. This means they’re responsible for finding, screening, and dealing with tenants. They also handle the repair calls and rent collection as well as general property maintenance. Of course, a possible downside to this type of arrangement is that they charge for the work they do. Most property management companies will take something in the range of 8-12% of the rental income as a fee. One of the main benefits to doing things this way is that you can keep the properties that you already own.

If you’re interested in potentially selling some properties, another option might be to sell the properties that are farther away or that require more maintenance. For example, some retirees may own homes in various locations since they inherited them from relatives over time. Selling some and consolidating your assets into properties that are in more convenient locations can help. However, if this is the route you choose to take, you might end up paying real estate fees and other fees and taxes associated with selling the properties.

Real Estate Investment Trusts

Holding individual properties isn’t the only want to invest in real estate. In fact, there are passive options available such as becoming involved in a Delaware statutory trust (DST). This is a legal entity that is created under Delaware statutory law for the purpose of holding commercial real estate. The trust owns the properties, and you own a fraction interest in the trust. 

Typical DST investments range between $25,000 and $100,000. Investor eligibility is limited to accredited investors (usually those who have more than $200,000 in yearly income or a net worth over a million dollars, excluding their primary home). Your investment in a DST is usually locked up for 5-10 years. 

Real Estate Investment Trusts (REITs) are also an option. Most are open to all public investors. They trade on major stock exchanges, and you can buy and sell them just like stocks. While they have a low entry barrier (you can often buy a share for as little as $100 or even $50), they are subject to stock market volatility. 

There are, however, non-traded or private REITs. These aren’t listed on public exchanges and usually require a larger minimum investment. You can purchase them through a broker or dealer. Non-traded REITs have less volatility and are designed to generate steady, rent-backed income. However, there are often higher fees associated with these trusts.

Both DTS and REITs are passive options that don’t require you to actually manage any properties. However, with a public REIT, you’re able to vote on major corporate matters. Non-traded REITs provide less control over property decisions while DSTs are completely passive. You cannot vote on decisions, force a sale, or change management. 

When comparing DSTs to REITs, one of the most important things to consider is that a DST is directly eligible for 1031 exchanges while REITs are not. Since they are considered an investment in real property, you are able to swap one real estate investment property for another while deferring capital gains tax. 

How to Handle the Transition

If you’re handling multiple real estate properties yourself, you might be thinking “how am I going to make this more passive?” The first step is to review what you already own. 

If you already have several real estate investments, think about what they are costing you. This doesn’t just mean how much you’re spending on taxes and fees, but also the amount of maintenance you need to do and all the other work associated with the property. Then think of what costs may come up in the future. For instance, if you have owned and rented out a single-family home for the last 20 years, are there major expenses (such as a new roof) coming up in the near future? Factor these costs into your calculation. 

Then look at the other options available to you. A DST or REIT can be a good investment but make sure you understand everything about the trust before you invest. Pay specific attention to any fees that may be charged. In some cases, these amounts can be quite high. 

Liquidity matters as well. If you need access to your investment funds sooner rather than later, you may not want to tie them up in a DST for the next decade. However, if you are in a financial position to place the cash in a long-term investment and live off the income it generates, such an investment might be a good idea for you. 

Balancing your assets is always a good idea. You don’t want to rely completely on one type of investment, if you can avoid it. Doing so exposes you to potential downturns that can drastically alter the quality of your retirement lifestyle. Pairing real estate investments with other types of retirement investments, like 401(k)s or IRAs can give your portfolio more balance. 

By understanding your options and your financial situation, you’ll be able to make the right choice for your financial future and manage your real estate investments responsibly.