Mixing Real Estate and Retirement

Laura Kelly Mance
CRB, REALTOR® / President
Long Realty


This month’s Journal theme gives me yet another opportunity to write about something I know little about. Well, I know enough to stay out of trouble anyway. The topic is “building real estate into retirement plans.” My husband happens to be a financial planner, so I took him out to dinner last night and interviewed him for my article.

The first thing everyone in the restaurant learned is that the key is “building real estate into the plan.” The plan has to be a pie and needs different pieces. Shouldn’t be all real estate or all Apple or all anything. (Does everyone’s spouse talk louder when being asked about something they’ve done for 40 years?) I was then reminded that to a certain degree, real estate is part of everyone’s retirement plan if they own their home. That house will provide shelter for your retirement or the equity from selling it will finance shelter in another way. In our case, we actually have a small one-story home just down the street from the 3 story home we live in. It’s a rental now but eventually it will be where we live. It’s part of our retirement plan. That’s the simple version but there are more complex options out there.

You can also purchase an investment property in your SEP IRA and I know REALTORS® who have done so. You won’t learn how to do that from me or the guy who sits next to you at the office though. For that you need a good tax advisor. Your asset will need to be owned in a custodial account and there’s a limit to what you can put into it each year. At age 72 the IRS forces you to start making distributions from your IRA and paying taxes on the asset. I haven’t a clue how one goes about splitting real estate into separate assets. Your tax advisor will.

I know REALTORS® because I am one. A property comes along that seems like a good investment and you have to jump on it or miss the chance. We all have a tendency to go “ready, fire, aim.” Then you find yourself with a square peg you need to fit into a round hole. It won’t be easy. If you think that buying real estate in your IRA might be in your future, start doing research into self-directed IRA’s with a competent tax advisor. Here’s what a friend told me about his SEP-IRA real estate purchase:

“We bought property through the SEP-IRA and put it into XYZ Trust. There is an option with that particular company to control the check book from collecting rents to paying bills with a credit card and/or check from a local bank. May cost a few more dollars quarterly but I wanted all control. I can pay all bills (utility, cable, HOA dues, taxes, and insurance fees) myself. Even furnishings, etc. We did have to hire a lawyer to set up the Articles and the corporation itself before we could open up a bank account. A lot of paperwork, time, and some aggravation but we muddled through it. A real estate background didn’t really make the process any easier.” My friend has been in the business nearly half a century and he says it’s complicated. Get professional help.

The other way to make real estate part of a retirement plan that I’m familiar with is buying what I call an “equity toehold” property in a community you’d like to retire to well before retirement time. It may not be the dream house you want to retire to, but it will follow the market in terms of value. When the time comes you can use the equity in that property toward the acquisition of the one you really want.

Yet another way to make real estate part of your retirement plan is to identify an agent or agents who will take over your business, nurture your contacts, and create a pension for you out of referral fees. There are a lot of good models out there. I know of one where the agent turns the expense and effort of maintaining contact with former clients over to a team but the agent helps with the introductions and transitioning. In one case the agent who is no longer “working” has had an income of over $40,000 a year for the past 3 years from referral fees. Makes it worth continuing to pay dues and take CE doesn’t it?

My financial planner husband has another sage piece of advice. Save. Pay yourself first. Along with that monthly car payment and house payment there should be a payment that goes toward your retirement. There are great programs available that will help you figure out what you need and it isn’t too soon to start. As someone who has been paying into a 401k for nearly 40 years I can attest, it does add up.

There are many ways that real estate can be a part of your retirement plan but like most things, they require good planning. This good market is the perfect time to start.

Laura Kelly Mance, CRB
President, Long Realty Company
(520) 918-3846